IRS revokes an organization's § 501(c)(3) tax-exempt status

View official IRS release (PDF)

Plain-English summary

The IRS issued a final adverse determination revoking an organization's exemption under IRC § 501(c)(3), effective January 1, 2005. The IRS stated that the organization failed to segregate its revenue, expenditures, and assets from insiders and did not establish that it operated exclusively for exempt purposes rather than for private interests. The determination also stated that part of the organization's net earnings inured to the benefit of its president and founder. Contributions to the organization were therefore not deductible under IRC § 170, and the organization was required to file federal income tax returns.

Ruling snapshot

• Question: Does the organization continue to qualify for exemption under IRC § 501(c)(3)?
• Outcome: Revocation.
• Key authorities: IRC §§ 501(c)(3), 170, 6104(c), 7428, and 6110(k)(3).

Full text (IRS public release)

Internal Revenue Service _ Department of the Treasury

Appeals Office
1000 South Pine Island Road Person to Contact:
Suite 350
Plantation, FL 33324 Employee ID Number: a
Tel:
Rel Number: 201049048 a8
elease Number: .
Release Date: 12/10/10 Refer Reply to:
Date: September 13, 2010 In Re:
A EIN:
UIL: 501.00-00
B Form Required to be Filed:
Tax Period Ended:
Certified Mail
7 Last Day to File a Petition with the
year United States Tax Court:
DEC 12 2010

This is a final adverse determination as to your exempt status under section 501(c)(3) of
the Internal Revenue Code (IRC). It is determined that you do not qualify as exempt
from Federal income tax under IRC Section 501(c)(3) effective January 1, 2005.

Our adverse determination was made for the following reasons:

Because of your failure to maintain appropriate segregation of your
revenue, expenditures, and assets from insiders of your organization, we
have determined that you failed to operate exclusively for purposes
enumerated in Section 501(c)(3) of the Code. You have failed to establish
that you are operated exclusively for exempt purposes rather than for the
benefit of private interests thereby violating the proscription against private
benefit. You have also violated the proscription against private inurement
in that a part of your net earnings inured to the benefit of your president
and founder, D. ;

Contributions to your organization are not deductible under Code section 170.

You are required to file Federal income tax returns on the form indicated above. You
Should file these returns within 30 days from the date of this letter, unless a request for
an extension of time is granted. File the returns in accordance with their instructions,
and do not send them to this office. Processing of income tax returns and assessment
of any taxes due will not be delayed because you have filed a petition for declaratory
judgment under Code section 7428,

If you decide to contest this determination under the declaratory judgment provisions of
Code section 7428, a petition to the United States Tax Court, the United States Court of

if you decide to contest this determination under the declaratory judgment provisions of
Code section 7428, a petition to the United States Tax Court, the United States Court of
Claims, or the district court of the United States for the District of Columbia must be filed
within 90 days from the date this determination was mailed to you. Contact the clerk of
the appropriate court for rules for filing petitions for declaratory judgment. To secure a
petition form from the United States Tax Court, write to the United States Tax Court,
400 Second Street, N.W., Washington, D.C. 20217.

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 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,

Charles Fisher
Appeals Team Manager

cc:

DEPARTMENT OF THE TREASURY
Internal Revenue Service Tax Exempt &
Government Entities 450 Golden Gate
Avenue, MS 7401

TAX EXEMP7 ANO 9
COED TH EWES San Francisco, CA 94102-3412

OINISION

October 27, 0° °%

Taxpayer Identification Number:

ORG Form:
ADDRESS

Tax Year(s) Ended:
Person to ContactllID 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

tt

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

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

Vicki Hansen

Vicki L. Hansen

Acting Director, EO Examinations
Enclosures:

Publication 892
Publication 3498
Report of Examination

Letter 3618 (04-2002)
Catalog Number 34809F

Form 886A Department of the Treasury - Internal Schedule No. or
Revenue Service Exhibit
Explanation of Items
Name of Taxpayer: EIN: Year/Period
Ended
ORG
20XX12
20XX12
LEGEND
ORG = Organization name XX = Date Address = address City = city
State = state County = county RA-1 & RA-2 = 1% & 2" RA President
= president VP = VP Secretary = Secretary Secretary-1 = Secretary-
1 Treasurer = Treasurer DIR-1, DIR-2, DIR~-3, DIR-4 & DIR-5 = 157, 2,
3®, 4™ g 5™ DIRECTORS CO-1 THRU CO-14 = 1%" THRU 14™ COMPANIES
I. ISSUE

Is the ORG operating exclusively for charitable and educational purposes described in Internal
Revenue Code (IRC) § 501(c)(3)?

II. FACTS
A. Organizing Documents
i. Articles of Incorporation

The ORG (“Organization”) was formed on May 28, 20XX. Its Articles of Incorporation state the
Organization’s specific purpose is:

to assist City youth who have economic disadvantages due to: lack of adequate
education, lack of job skills and teen pregnancy. The program(s) will serve the
westem most part of County, which includes the cities of City and City. The
primary programs will consists of: Operation On time — Stratagies [sic] for setting
a life pattern for punctuality. GPA Tutorial Program — This program is
designed to increase study skills and raise GPA score through various seminars
[sic] and class based training. The After School Basketball Clinic covers
nutrition, fundamental skills and develops leadership and sportsmanship.

ii. Form 1023

On December gt 20XX, ORG applied to the Service for exemption under IRC § 501(c)(3). The
Form 1023 application states:

“All of the activities will be available at no charge to the public. In the future, we
may charge a nominal fee for some of the programs and services to cover a
portion of the cost of the activities... Youth Development Programs — We will
present workshops, classes, and athletic basketball clinics for youth to help build
their personal, health, professional, and athletic skills and feelings of self-worth
We will ask children, adults and families from local neighborhoods to work with
us to design and develop programs that meet the needs of youth. The activities

Form 886- Acrev.+68) Department of the Treasury - Intemal Revenue Service
Page: -1-

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

ORG
20XX12
20XX12

will take place at various locations, including the City City and nationally. We
will ask participants to invite other community residents to participate in our
programs. Our hope ts that we can contribute to community building by offering
youth from different backgrounds programs that will strengthen their chances of
being successful and productive CO-9s. Community Resource Center — In the
Future, we plan to acquire space to build a community resource center. In this
space we will provide youth and the general public with resources such as a
library, educational materials, and employment and social service information.
Annual Awards Dinner — At the end of the year, we will present awards to youth
in the community who have made outstanding personal progress and contributions
to their neighborhoods. The dinner will be free to the general public and give
community residents an opportunity to meet and share ideas. We will invite

residents and other community organizations to participate and help with the
development programs.”

For Part II, Question 2 of Form 1023, the organization stated that its sources of financial support

would consist of: ‘Foundation Grants $$”; “Gifts and Donations $$”; and “Annual Awards
Dinner $$”,

As for Question 3 of Form 1023, the Organization described that its fundraising program
consisted of:

Foundation Grants — Submit proposals to four local foundations — 2/20XX —
Board of Directors; Gifts and Donations — Solicit small contributions from
supporters — 1/20XX —- Board of Directors; Annual Awards Dinner — sponsor an
annual fundraising Dinner — Board of Directors solicit financial support on an
ongoing basis with the help of volunteers and other supporters.

Furthermore, in page 3, the Organization revealed that its governing body consisted of President,
President, Address, City, State; Secretary, Secretary, Address, City, State; Treasurer, Treasurer,
Address, City, State; DIR-1, Address, City, State, DIR-2, Address, City, State. The Organization
also listed that the officers’ annual compensation was ‘‘-0-”.

The Organization added that it did not own any assets that are used in the performance of its
exempt function.

Part IV of the Form 1023 application contained financial information for the initial year May 22.
20XX, through December 31, 20XX, and proposed budgets for the two subsequent years 20XX
and 20XX. Part IV Financial Data stated:

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

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

Revenue Service Exhibit
Explanation of Items
Name of Taxpayer: EIN: Year/Period
Ended
ORG
20XX12
20XX12
O52 'xx -
12-31 xx bbxx- 1230 'xx LL xx - b2/3Lxx Total

|. Gifts, Grants, and Contributions

8 Total

15. Contributions, Gifts,
    Grants

16. Total expenses

iii. Form 4564

In a response to Form 4564, IDR 2, the Organization stated that it was formed as a charitable
organization to provide educational services and assist youths by providing guidance and
instruction in personal development, academics, and athletics to improve socio-economic
conditions for them and their neighborhood. The Organization conducts public discussion
groups, Forums, panels, lectures, and other similar educational events.

iv. Determination Letter

The Organization received its determination letter on February 13, 20XX. The Service
recognized the Organization as a tax exempt entity described in IRC § 501(c)(3), and classified
as a publicly supported organization as described in section 509(a)(1).

B. The Organization and Affiliated Entities

The Organization’s officers are President, President; VP, Vice President; Secretary-1, Secretary;
DIR-3, Board of Director, DIR-5, Financial Officer. The Organization’s activities are
indistinguishable from CO-1, a for-profit entity wholly owned by President. The Organization
does not have any bank accounts in its name. The organization commingles all of its financial
transactions with the for-profit, CO-1’s bank account or President’s personal bank account. The
Organization and the for-profit share common offices, President and Secretary. The
Organization’s activities and expenditures are indistinguishable from the for-profit’s and
President’s personal expenditures (see Activities section below).

C. Form 990 Filings

The Organization did not file a Form 990 for the 20XX or 20XX tax year. The 20XX Form 990
was filed in May of 20XX and the 20XX form, was filed June 25, 20XX. The Form 990 reported
the Organization’s address as Address, C ity, State. Note this is a residential address in which
DIR-4 was listed as a resident in 20XX,

Form 886- A(rev.+48) Department of the Treasury - Internal Revenue Service
Page: -3-

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

Revenue Service Exhibit
Explanation of Items
Name of Taxpayer: EIN: Year/Period
Ended

ORG
20XX12
20XX12

Yeat 20XX 20XX

Contribulions
Interest on savings & temporary cash
Investinents

Dividends & Interest
Plus:
Gross Amount of Sale (Sec)

Less Cost/Expense

Gain (Loss) on Securities

Other investment income

Total Revenue

Program Services
Management and General

Other Expenses

Total Expenses

Excess (Deficit) for Year

Net Assets BOY 0

Other changes in Net Assets 0

Net Assets EOY

D. Activities

The provided a response to an information document request on October 14, 20XX claiming that
the organization, over the past five years, has supported numerous projects and activities:

An Annual Celebrity Basketball Game at City High School (to solicit funds for uniforms for the
basketball team), the President provides workshops (as a volunteer) for various schools,
universities and faith based organizations focusing on tutorial programs, afterschool programs,
athletic events, and recruitment of volunteers. Several publications have been written and can be
ordered online (since 20XX) in which the funds go to paypal account of corporation - CO-1 The
organization claims the funds from this account are subsequently spent on foundation activities.
Note that monies donated to the foundation from the website go into the paypal account of the
for-profit — CO-]

Form 886- Avrev.+o8) Department of the Treasury - Internal Revenue Service
Page: -4

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

ORG
20XX12
20XX12

The organization claims that it partnered with non-profit organization's and churches to make
cash and noncash donations in the area to provide food, clothing, water, and other
supplies for in 20XX. The organization also claims that it provided free
workshops to CO-2, CO-5, CO-3, a CO-4, and numerous others.

The Organization did not verify these activities for the audit years of 20XX and 20XX.
Substantially all documents submitted to the Service relating to the organization’s activities

pertained to speaking engagements, and could not be distinguished from the for-profit’s
activities.

E. Revenues

The organization stated that during 20XX, 20XX, 20XX they received funding from governing
body. A 990 was not filed in 20XX because the receipts were no more than $$.

The Organization stated that as a result of the movie “Coach President,” President had become
known worldwide and schools, colleges, nonprofits all across America wanted him to come and
take part in discussion groups, forums, panels, and lectures with the youths, parents and staff.
Due to his successful speaking engagements to large youth audiences all over the country, he and

the Directors decided to allocate monies from those engagements to the Organization to see the
mission of the Organization become real.

F. Per Examination

i. Bank Accounts

The Organization does not have its own bank account. Rather, all financial transactions were
conducted from four accounts:

• CQ-6 account under “CO-1”

• CO-7 account under the name, “President’s”

• CQO-8 account under the name, “President”

• CO-9 account under the name, “President”

ii. Talent Agency Payments

The Organization did not receive any financial support. Rather the support claimed on the Form
990 was actually 1099-MISC payments to President (individual) for services he personally

performed (public speaking/ motivational speaking)’. According to a statement made by CO-10.

• & k

See Exhibit A

Forn 886- A(Rev.t-68) Department of the Treasury - Intemal Revenue Service
Page: -5-

Form 886A

Department of the Treasury - Internal
Revenue Service
Explanation of Items

Schedule No. or
Exhibit

Name of Taxpayer: EIN: Year/Period
Ended
ORG
20XX12
20XX12

President is a non-exclusive client of CO-10 (“CO-10"Y, a speaker's bureau that books his
speaking engagements. President and Andrew Roth, President of CO-10, have an understanding
regarding President’s speaking fees, and he normally nets anywhere from $ to $$ for speaking
engagements. President began working with CO-10 in 20XX. He is an independent contractor
and not an employee of CO-10. In 20XX, fifty-four checks were issued to President totaling $.
In 20XX, twenty-three checks were paid to President by CO-10 totaling $. All checks were
endorsed / cashed by President:

Payer

CO-10
CO-10
CO-10
CO-10
CO-10
CO-10
CO-10
CO-10
CO-10
CO-10
CO-10
CO-10
CO-10
CO-10
CO-10
CO-10

CO-10
CO-10
CO-10
CO-10
CO-10
CO-10
CO-10
CO-10
CO-10
CO-10
kx kk

° CO-10, Address, City, State

Payee Amount Date Check Number

President $$ 1/25/xx
President $$ 2/15/xx
President $$ 2/28/xx
President $$ 4/25/xx
President $$ 5/09/xx
President $$ 5/16/xx
President $$ 5/31/xx
President $$ 6/27/xx
President $$ 9/29/xx
President $$ 10/17/xx
President $$ 10/21/xx
President $$ 10/21/xx
President $$ 10/25/xx
President $$ 11/21/xx
President $$ 12/12/xx
President $$ 12/13/xx
$$

President $$ 1/24/20XX
President $$ 2/6/20KX
President $$ 2/27/20 XX
President $$ 3/5/20KX
President $$ 3/14/20XX
President $$ 3/20/20XX
President $$ 3/31/20KX
President $$ 4/4/20XX
President $$ 5/2; 20XX
President $$ 5/8, 20XX

Form 886- A(rev.+68)

Department of the Treasury - Internal Revenue Service

Page: -6-

Form 886A Department of the Treasury - Internal Schedule No. or
Revenue Service Exhibit
Explanation of Items
Name of Taxpayer: EIN: Year/Period
Ended
ORG
20XX12
20XX12
CO-10 President $$ 6/20/20XX
CO-10 President $$ 7/10/20XX
CO-10 President $$ T/A9/20KXK
CO-10 President $$ 8/4/20XX
CO-10 President $$ 8/11/20KX
CO-10 President $$ 8/21/20XX
CO-10 President $$ 9/6/20XX
CO-10 President $$ 10/4/20XX
CO-10 President $$ 10/13/20KX
CO-10 President $$ 10/24/20XX
CO-10 President $$ 11/7/20XX
CO-10 President $$ 11/7/20XX
CO-10 President $$ 11/27/20XX
$$

20XX & 20XX Total $$

CO-10 sent the original 1099 for 20XX totaling $$ to President on January 17, 20XX. The
recipient’s ID number was erroneously recorded. A corrected 1099 was sent on Apnil 23, 20XX
ascribing the full amount ($$) to President. In March, 20XX, DIR-5 requested that CO-10
submit a corrected Form 1099-Misc dividing the payment - $$ under President’s Social Security
Number and $$ under the Foundation EIN. DIR-5 stated to CO-10 that the division was a result
of her tabulating what is considered educational outreach (e.g. when President speaks to college

students, these payments are for the foundation versus when he addresses corporate entities, this
revenue is ascribed to his Social Security Number.)

CO-10 sent the original 1099 for 20XX $$ in February 20XX, with the recipients identification
number being President’s Social Security Number. In May 20XX, DIR-5 requested that CO-10
issue a corrected 1099 for 20XX, ascribing the full amount to the ORG. CO-10 issued an
amended 1099 on 5/11/20XX. The State Franchise Tax Board garnished ~% of one payment
due to President in the amount of $$ and then % of the subsequent fees remitted to President.

CO-10 also stated that the sponsoring organization or CO-10 would pay for travel, i.e. airfare,
hotel, rental car cte for President for his speaking engagements.

iii. Expenditures

The disbursement journal for 20XX reported $$ in expenditures. The Form 990 reported $$ in
expenditures. President’s personal bank statements and cancelled checks revealed a total of $$ in
expenditures. Within the $$ expenditures, $$ was directly distributed to President, personally. in

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

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

ORG
20XX12
20XX12

the form of checks payable to President, bank and ATM withdrawals, and checks made payable
to cash. $$ in the form of bank debits (store, rental cars, airlines, etc). The $$ expenditures ($ +
$) to President are unsubstantiated payments:

Direct Payments —- Checks payable to President / Cash

Date Amount Payee # Purpose Authorizing
sig/ or Source
4/N4/20XX Business President
5,9.20XX youth program Source: Disbursement Journal
71,.20XX
9/T/20XX Business President
1V/21,/20XX Business President
11.29/20XX sic Source: Disbursement Joumal
14/29/20XX school Source: Disbursement Journal
11 29/20XX Uniforms for... Source: Disbursement Journal
11,29/20KX Source: Disbursement Journal
12, 13/20XX . school Source: Disbursement Journal
Total Direct Payments to President for 20XX $
Withdrawals
2/23/20XX withdrawal
$/23/20XX withdrawal
6/1/20XX withdrawal
17,.20XX withdrawal
8/2,20XX withdrawal
96,20XX withdrawal
915,20XX withdrawal
9/27 20XX withdrawal
10;18;20XX withdrawal
10.24,20XX withdrawal
11,.7;20XX withdrawal
11 14,.20XX withdrawal
12, 8/20XX withdrawal
12:27 20XX withdrawal
Total ATM / Counter Withdrawals for 20XX $

Bank Debits

| 28 20XX print publication
22 20XX south west
223 20XX Hotel
4:14, 20KX store
Form 886- Acrev.+-68) Department of the Treasury - Intemal Revenue Service

Page: -8-

Form 886A Department of the Treasury - Internal Schedule No. or
Revenue Service Exhibit
Explanation of Items
Name of Taxpayer: EIN: Year/Period
Ended
ORG
20XX12
20XX12
4 18 20XX hardware
4:27, 20XX Air
5,2;20XXK store
§ 25.20XX
6/20/20XX school
6/28/20XX gas
TAi20XX air
V25/20XX
8.3/20XX renaissance
8,10/20XX hardware
8/22/20XX Intemet
8/31/20XX Air
9/13/20XX car
9/15/20XK
10/12/20XX gas
11/21/20XX hotels
1L,.25/20XX
12/2/20XX Store
12/12/20XX Air
12/13/20XX Store
12,22/20XX Store
12/28/20XX store
1/xx - I I/xx Telephone

Total ATM / Debits for 20XX $$

Total 20XX distributions to President $$.

Profit and loss statement for 20XX initially reported $$ in total expenses. The Organization
provided a subsequent profit and loss statement with the 2™ form 4564, Information document
request. The second profit and loss reported $$ in expenses. This information provided was
recreated from bank statements. The cancelled checks provided by the Foundation totaled $$.
Note that the Profit and Loss statements were under CO-1 and Foundation accounts were
commingled with the “Corporation” and “Individual” accounts.

Within the $$ expenditures, $$ was distributed directly to President in the form of checks, checks
made payable to cash, and withdrawals. $$ was distributed to President in the form of bank /
ATM transactions. The $$ expenditures ($$ + $$) to President are unsubstantiated payments:

Checks to President, C ash, and Withdrawals

Date Amount Payee Bank Account # Authorizing Signature
| 23 20XX $00 President
Form 886- A(rev.+68) Department of the Treasury - Internal Revenue Service

Page: -9-

Form 886A

Department of the Treasury - Internal
Revenue Service
Explanation of Items

Schedule No. or
Exhibit

Name of Taxpayer: EIN: Year/Period
Ended
ORG
20XX12
20XX12
1/30/20XX
1/30/20XX COo.-7
2/14/20XX
2/14/20XX CO-7
3/3/20XX CO0-6
3/6/20XX co-9
3/13/20XX co-9
3/20/20XX
3/3 1/20XX
4/22/20XX
5/12/20XX CO-6
6/12/20XX co-9
6/20/20XX CO-6
TAN/20XX
TAT/20XX Co-9
TAT/2OXX
W/25/20XX
8/4/20XX C04
8/15/20XX Cco-9
8/15/20XX Co-9
8/21/20XX
8/25/20XX :
9/5/20XX
9/5/20XX
9/18/20XX
9/18/20XX
9/18/20XX COo-7
9/18/20XX CO-6
9/25/20XX
9/29/20XX co-9
10/13/20XX
10/23/20XX C04
10/23/20XX CO-6
10/23/20XX C0-6
10/25/20XX C04
10/25/20XX CO-6
11/6/20XX CO0-6
1t/7/20XX Cc0-6
12/18:20XX
12/18/20XX
12/19/20XX CO-7
12/20/20XX $$
12,29, 20XX $

Total Direct payments and withdrawals to President for 20XX $$

Form 886-Ajrev.+-68)

Department of the Treasury - Intemal Revenue Service

Page: - 10-

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

Name of Taxpayer: EIN: Year/Period
Ended
ORG
20XX12
20XX12

Date Amount Payee Bank P & L Trans #
2/6/20XX CO-6
2/7/20XX CO-6
2/14/20XX CO-6
2/21/20XX CO-6
2/28/20XX CO-6
3/1/20XX CO-6
3/23/20XX CO-6
4/18/20XX CO-6
5/30/20XX CO-6
6/15/20XX CO-6
6/15/20XX CO-6
6/16/20XX CO-6
6/23/20XX CO-6
6/27/20XX CO-6
7/19/20XX CO-6
7/26/20XX CO-6
8/2/20XX CO-6
8/4/20XX CO-6
8/4/20XX CO-6
8/4/20XX CO-6
8/14/20XX CO-6
8/14/20XX CO-6
8/14/20XX CO-6
9/7/20XX CO-6
9/8/20XX CO-6
9/8/20XX CO-6
9/8/20XX CO-6
9/8/20XX CO-6
9/18/20XX CO-6
9/18/20XX CO-6
9/18/20XX CO-6
9/18/20XX CO-6
9/21/20XX CO-6
9/22/20XX CO-6
9/25/20XX CO-6
9/27/20XX CO-6
9/27/20XX CO-6
9/28/20XX CO-6
9/28/20XX CO-6
10/2/20XX CO-6
10/5/20XX CO-6
10/10/20XX CO-6
10/12/20XX CO-6
10/16/20XX CO-6

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

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

Revenue Service Exhibit
Explanation of Items
Name of Taxpayer: EIN: Year/Period
Ended

ORG
20XXK12
20XX12

10/16, 20XX CO0-6

10 16 20XX CO-6

10: 16/20XX CO-6

10/16, 20XX CO-6

10:18 '20XX C0-6

10/20/20XX CO-6

10/25/20XX CO-6

11/3/20XX CO-6

11/6/;20XX CO-6

11/6/20XX CO-6

11:6/20XX CO-6

11/6/20XX CO-6

Total ATM / Debits for 20XX $$

Total 20XX distributions to President $$.
Total 20XX and 20XX distributions to President $°.

Funds distributed to President was not compensation for the performance of services. The
Organization stated that all of President’s work with the Foundation has been as a volunteer from
20XX to 20XX. Furthermore, the organization did not file any information returns (1099-Misc,
Form W-2, etc) for any individual during 20XX and 20XX.

On Part V-A, page 5 of the 20XX Form 990 it is reported that President received $0 in
compensation. Part V-A, page 5 of the 20XX Form 990 also reports $0 in compensation to
President, however, it lists $$ in expense account and other allowances for President and $$ in
the same category for Secretary-1.

The Organization is unable to substantiate any payment. In response to the Service’s request for
expense receipts and contemporaneous substantiation (Form 4564 Information Document
Request 2), The Organization stated that the office located at Address was vandalized and
burglarized in May of 20XX and all records (including receipts) for clients were destroyed or not
usable. The offices was the address of a separate organization Innovative Behavioral Services*
(IBS), however the books and records were purportedly in the care of IBS. The Foundation
provided a copy of the police report.

xt ke k €

\n the form of checks payable to authorized by President or Bank withdrawals by President
DIR-5 is
Form 886- Acrev.+-08) Department of the Treasury - Internal Revenue Service

Page: - 12-

Form 886A Department of the Treasury - Internal Schedule Mo. or
Revenue Service Exhibit
Explanation of Items
Name of Taxpayer: EIN: Year/Period
Ended

ORG
20XX12
20XX12

The Organization stated that monies were disbursed for renovations to transform the old CO-11
(see below) into a school in the midst of a location with severe academic problems and failures
and socially and economically deprived [sic]. This location was perfect to accommodate socially
economically disadvantaged youths. The school was to be open to the general public and
minimum fees would be charged to accommodate acquiring the most talent resources in teachers.

The Organization could not explain nor substantiate any disbursement. Listed below are more
Foundation expenditures that could not be substantiated:

20XX Miscellaneous
5,9/20XX
5/25/20XX
/22/20XX
/25/20XX
5/3/20XX
10/21,20XX
4125/20XX
5/16/20XX
12/26/20XX
8/23/20XX
10/16/20XX
11/22/20XX
12/16/20XX
10/8/20XX
10/17/20XX
2/1/20XX
8/3/20XX
9,28/20XX
11/27/20XX
6/6/20XX
3/14/20XX
6/5/20XX
12/26/20XX
8/3/20XX
Total

Form 886- A;rev.+68) Department of the Treasury - Internal Revenue Service
, Page: - 13-

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

ORG

20XX12
20XX12

20XX Miscellancous

1'8/20XX
V/12/20XX
2/6/20XX
2/20/20XX
3/8/20XX
3/17/20XX
3/3 1/20XX
4/8/20XX
5/29/20XX
6/3/20XX
6/3/20XX
6/6/20XX
6/27/20XX
6/28/20XX
7/19/20XX
8/1/20XX
8/1/20XX
8/8/20XX
8/8/20XX
8/21/20XX
8/25/20XX
9/7/20XX
9/7/20XX
9/8/20XX

9/14/20XX

10/6/20XX
10/14/20XX
11/6/20XX
11/8/20XX
1/1S/20XX
12/1/20XX
12/15/20XX
12/15/20XX
12/21/20XX
Total Mise

Form 886- Acrev.4-c8) Department of the Treasury - Internal Revenue Service
Page: -14-

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

Revenue Service Exhibit
Explanation of Items
Name of Taxpayer: EIN: Year/Period
Ended
ORG
20XXK12
20XK12

Note that payments to DIR-4 is President’s brother. And Payments to DIR-9 is President's son.
There is a significant amount of expenditures for construction. In addition, note that President
and/or his for-profit own the following properties:

• Address, President

• Address, City, State, Corporation

• Address, State, Individual

• Address, State, Individual (used to be owned)

• Address, State, Corporation

• Address, State, Corporation

• Address, State, Corporation

• Address, State, Individual

The Service asked the Organization to provide documentation to substantiate these expenditures
on Form 4564 IDR #2 on May 8, 20XX. The Organization could not substantiate any of these
payments nor could it explain why it made a payment for $$ to President’s brother and $$ to
President’s son. The Organization could not explain nor show how large and questionable
transfers and withdrawals such as an $$ cash withdrawal by President on 9/18/20XX or a $$
bank transaction made by President on 11/07/20XX furthered an exempt purpose. The
organization could not show how an expenditure totaling $$ to CO-13 (CO-13) a wholesale
distributor of pre-recorded DVD’s (a distributor to retailers) furthered an exempt purpose
rather than the private interests of President .

The Organization stated in Form 4564, IDR 2, that the

Foundation provides scholarships to youths who are in college and to those who
are excelling in athletics. The Foundation provides incentives for youths
including tee-shirts, coach President Videos and autographs free to keep and
attract their interest in education. Storage space is used in State to store personal
and old printing equipment used to make tee-shirts for give a-ways all over the
country as President travels and speaks to youths.

There was no evidence that any student received a scholarship after analyzing the bank
statements, cancelled checks, and disbursement journals. The Organization could not
substantiate these claims nor could it show the Service that any payments furthered an exempt
purpose.

iv. President Store

The Organization stated that the reason it moved from the City to City, State is as follows:

Fonn 886- Ajrev.+68) Department of the Treasury - Internal Revenue Service

Page: -15-

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

Revenue Service Exhibit
Explanation of Items
Name of Taxpayer: EIN: Year/Period
Ended
ORG
20XX12
20XX12

[President] moved to City, State to start production for a second movie. While he
was there he wanted do something because the area is depressed with low
economic standards and low producing schools. While in City, he met RA-1, who
also has a non-profit organization called CO-13,° and they discussed working
together. RA-1 owned a building, CO-11, At the End of 20XX President’s

brother bought rental property in City, State and then President relocated to get
some solace.

The School named the President Store, was suppose to open in April 20XX, then
it moved to June 20XX. DIR-5° stated that she started to inquiring about source
of revenue needed to run the school, and for RA-1 to provide accounting for the
payments she had received from the Foundation. Soon after DIR-5’s request, RA-
1 dissolved the President Store (July 5, 20XX). DIR-S5 stated she called RA-1,
sent her a letter, and went to Texas to meet with RA-1 as discussed. RA-1

initially agreed to meet with DIR-5, however RA-1 did not show up for the
meeting.

DIR-5 stated that the school was going to house kids from all over. Payments to
RA-1 were for the house located on Address in City, State, however, the house
remains in RA-1’s name (according to DIR-5).’

There is no contract between President and / or the ORG and RA-1, accept for the
certificate of formation of the for-profit entity, the The certificate of
formation for the store shows that President is an Organizer and Director with a
corporate ownership that is % and physical property ownership that is %. RA-lI,
Organization, Director, Chief Financial Officer, has '% corporate ownership and %
physical property ownership.

The proposed school never opened.

DIR-5 stated that President is suing RA-1. On April 23, 20XX, an article titled “
the City Democrat, stated:

President is suing CO-13, Inc., the nonprofit business ran by Chief Executive
Officer RA-] of City, for breach of contract - seeking more than $$ in

x k & €

: CO-13 - address. A non-profit 501(c)(3) controlled by RA-1

• CO-14 - Address. A non-profit 501(c)(3) controlled by Financial Officer, DIR-S.
  “ Public records confirm that RA-1 is the owner of the house at Address, City, State

Form 886- Acrev.+08) Department of the Treasury - Intemal Revenue Service
Page: - 16

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

ORG
20XX12
20XX12

construction costs he "loaned" to RA-1 for the creation of a new school for area
children... President claims in the lawsuit that the "proposed school never opened
and (President) has been prohibited from entering the property." According to the
lawsuit, the was "terminated on July 5, 20XX by the filing
of a Certificate of Termination of a Domestic Entity with the Secretary of State of

Office" which was signed by RA-1. As of Friday, the chain-link fence
surrounding the property was secured by padlocked gates. "Beware of Dog" and
"Private Property" signs guarded the Boarded up brick building and freshly cut
grass near the building was littered with chairs and a few loose construction
materials. There was still high grass and piles of wood on the property. "He lent a
lot of money and provided a lot of funds to improve the building," said RA-2, who
is representing President. On Mar. 3, RA-1 filed a response to President's lawsuit
denying "each and every allegation" and demanding "strict proof thereof."

PICTURE DELETED

Checks made to individual RA-1

9/6/20XX RA-1I
3/8/20XX RA-I
3/23/20XX RA-I
4/6/20XX RA-1
4/6/20XX RA-!
4/30/20XX RA-!
5/26/20XX RA-I
5/31,20XX RA-1
6/13;20XX RA-1
T/S/20XX RA-I
7'6/20XX RA-1
T17120XX RA-1
8/1/20XX RA-1
8/29/20XX RA-1
9/25/20XX RA-]!
9/26:20XX RA-|!
10/6/20XX RA-1
10, 19°20XX RA-t
Vhel 20XX RA-!
11 2-20XX RA-I

The Organization could not show that the payments to an individual, RA-1, furthered an exempt
purpose even though they claimed some of the payments to RA-| were consideration for the
performance of particular services. The Foundation states in IDR 2 that each payment to vendors

Form 886- Avrev.+-08) Department of the Treasury - Internal Revenue Service
Page: - 17-

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

ORG
20XX12
20XX12

furthers the exempt purpose to provide a facility to conduct educational services through after
school enrichment, tutorial assistance, and provide a safe academic learning environment along
with providing Boarding for students within the neighborhood at rental properties in close
proximity to schools. Payments were made for upkeep or maintenance of lawns for school,
Boarding facility for students, electric payments for schools, repairs, cleanup, construction of
fence, painting, roof replacement, etc.

The Organization does not own any property. The properties for Boarding students do not
belong to the Foundation. All properties listed on page 9 are under President’s name personally
or The Foundation could not show that these Boarding facilities were used for an
exempt purpose.

The Organization could not substantiate any payment nor could it show the Service that the
payments were for the actually for school renovation. The School has never opened.

On May 23, 20XX KWTX.com, a Central news website, printed an article titled
It stated:

No one was injured Friday afternoon in the collapse of a detached gym at what
used to be CO-11 at address. in City. The school now houses the CO-13. The
center’s CEO, RA-1, said the gym was not in use and was closed to learning
center students because of concerns about its structural integrity. She said what
remains of the gym will be razed and said a basketball court could be built in its
place. The main building, which is fenced off and posted with no trespassing
signs, was not damaged in the collapse. CO-13 bought the school and property
for $$ in August 20XX, the City Democrat newspaper reported. According to the
newspaper, the center is in a legal dispute with the legendary high school
basketball President, who sued the center for breach of contract, claiming he lent
money for creation of the at the old middle school.
The suit alleges the store never opened and that President has been barred from
the property. RA-1’s response denies the allegations, the paper reported.

PICTURE DELETED

The organization provided a document on October 14, 20XX that states that the claims between
the two parties were settled between the two parties. According to the document, part of the
terms was that defendant, RA-1, would be paid $$ on or before October 15. 20XX. and defendant
will convey property as set forth in Exhibits “1” and “2” to ORG at the same time the plaintitf
pays the defendant. The Foundation did not provide Exhibits “1° and “2” to the Service.

Form 886- Acrev.+63) Department of the Treasury - Internal Revenue Service
Page: - 18-

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

ORG
20XX12
20XX12

v. Website

The Organization does not have its own website. Rather, it is a branch or link of President’s
personal site: Organization’s website. President's personal website consists of various personal
promotions such an advertisement for services for Motivational Speaking (including online
booking), a promotion for President: The Movie, Media Coverage, an online store for
books/CD’s (101 Ways to Earn a Higher GPA, Positive Self Image 101, etc.), and various other
links relating to and promoting President personally.

The Foundation’s website is commingled with President’s personal website. The website does
not detail any specific charitable activity conducted by the Foundation presently nor for the audit
year. The website, states that its mission is to: assist youth by providing guidance and instruction
in personal development, academics and athletics to improve socio-economic conditions for them

and their neighborhoods. The website also has a link to book President for speaking
engagements.

The Foundation commingles with President & for-profits via the “Support” link on the

Foundation’s page. The “Support” link allows a donor to donate any amount to CO-1 via paypal
account. The “Support” link states:

In an effort to share the same support with other young men and girls that he has
enjoyed throughout his life, has personally endowed “The ORG”
with a yearly grant. Together with personal friends and corporate partners, The
ORG will make financial gifts to deserving individuals and student-athletes who
apply and meet the Award criteria. You can help make a difference by making a
tax deductible donation online below. You can also support the foundation by
purchasing any of our educational materials.

The organization provided an internet link: in an attempt to substantiate the school renovation.

vi. Minutes

The minutes for the audit years were provided for October 1, 20XX, June 3, 20XX. The 20XX
minutes report that the president spent a large amount of his time overseeing the repair of the
school. The weather and other factors have slowed the process. Funds for the project have come
from services rendered by the president. No contributions by other donors at the time.

Minutes were provided for March 3, 20XX and state the tentative opening date is in April 20XX.

I. RULES

Form 886- Ajrev.+63) Department of the Treasury - Internal Revenue Service

Page: - 19-

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

Name of Taxpayer: EIN: Year/Period
Ended

ORG

20XX12
| 20XX12
A. Statutes

I.R.C. § 501(c)(3) provides for the exemption from federal income tax of organizations that are
organized and operated exclusively for charitable purposes, no part of the net earnings of which
inures to the benefit of any private shareholder or individual.

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

Treas. Reg. § 1.501(c)(3)-1(c)(1) provides that an organization will be regarded as ‘operated
exclusively” for one or more exempt purposes only if it is engaged primarily in activities that
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.

Treas. Reg. § 1.501(c)(3)-1(c)(2) provides that an organization is not operated exclusively for

one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private
shareholders or individuals.

Treas. Reg. § 1.501(c)(3)-1(d)(ii) states that an organization is not organized or operated for one
or more exempt purposes unless it serves a public rather than a private interest. Accordingly, 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, shareholders, or persons controlled,
directly or indirectly, by such private interests.

Treas. Reg. § 1.501(a)-1(c) defines a private shareholder or individual as those persons having a
personal and private interest in the activities of an organization. In general, a private shareholder
or individual is considered an “insider” with respect to the exempt organization.

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

B. Cases

Better Business Bureau v. United States, 316 U.S. 279 (1945), holds that the existence of a single
non-exempt purpose, if substantial in nature, will destroy the exemption under section 501(c)(3).

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

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

ORG
20XX12
20XX12

An organization will be regarded as operated exclusively for one or more exempt purposes only
if it engages primarily in activities that accomplish one or more of such purposes.

In Church of World Peace, Inc. v. Commissioner, 67 T.C.M. (CCH) 2282 (1994), aff'd, 52 F.3d
337 (10th Cir. 1995), the Tax Court held that a church did not operate exclusively for religious
purposes because the church facilitated a circular tax-avoidance scheme. The facts showed that
individuals made tax-deductible contributions to the church. The court found that the church
then returned the money to the individuals claiming that the payments were for housing
allowances and reimbursement of expenses. The court further found that such payments were in
fact unrelated to the church’s operations.

People of God Community v. Commissioner, 75 T.C. 127 (1980) decided that a portion of gross
earnings inured to the benefit of private shareholders or individuals. The court stated:

An organization will qualify under section §501(c)(3) only if (1) it is organized and
operated exclusively for exempt purposes, (2) no part of its net earnings inures to
the benefit of any private shareholder or individual, and (3) it devotes no
substantial part of its activities to political or lobbying activity...

Respondent argues that petitioner’s loan policies and ministers’ compensation
each demonstrate both private inurement of net earnings and prohibited private
purposes. While not necessarily identical, the prohibitions against private
inurement and private purposes overlap to a great extent ... we will confine our
discussion herein to the private inurement issue. ...

_..The burden falls upon petitioner to establish the reasonableness of the
compensation paid to Donhowe and petitioner’s other ministers. Bubbling Well
Church of Universal Love Inc. v. Commissioner [Dec. 36,999], 74 T.C. 531
(1980). Petitioner has failed to do so inasmuch as the record on this point
contains little more than conclusory assertions and the fact that Dowhowe’s
compensation was partly based on his personal needs. Moreover, the method by
which ministers’ compensation was determined shows clearly that a part of
petitioner’s net earnings was paid to private shareholders or individuals.

In Founding Church of Scientology v. United States, 412 F.2d 1197 (Ct. Cl. 1969), a wide variety
of devices were employed, including fees, commissions, excessive rental payments, loans and
excessive salaries, to divert the organization's funds to its founder, L. Ron Hubbard, and his
immediate family. The principle of inurement was summarized when the Court stated, "what
emerges from these facts is the inference that the Hubbard family was entitled to make ready
personal use of the corporate earnings.”

Form 886- A(rev.+08) Department of the Treasury - Internal Revenue Service
Page: -21-

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

Revenue Service Exhibit
Explanation of Items
Name of Taxpayer: EIN: Year/Period
Ended
ORG
20XX12
20XX12

Rev. Rul. 67-5, 1967-1 C.B. 123 held that a foundation controlled by the creator’s family was
operated to enable the creator and his family to engage in financial activities which were
beneficial to them, but detrimental to the foundation. It was further held that the foundation did
not operate a charitable program commensurate in scope with its financial resources, rather the
foundation was only able to carry out minimal charitable activities. The ruling stated that the
foundation was operated for a substantial non-exempt purpose and served the private interests of
the creator and his family. Therefore, the foundation was not entitled to exemption from Federal
income tax under ILR.C. § 501(c)(3).

In Rev. Rul. 59-95, 1959-1 C.B. 627, an organization previously held exempt from Federal
income tax was requested to produce a financial statement as of the end of the year and a
statement of its operations during such year. However, its records were so incomplete that it was
unable to furnish such statements. Section 6033 of the Internal Revenue Code of 1954 provides
that every organization, except as provided therein, exempt from taxation under section 501(a) of
the Code shall file an annual return, stating specifically the items of gross income, receipts, and
disbursements, and shall keep such records, render under oath such statements, make such other
returns and comply with such rules and regulations as the Secretary of the Treasury or his
delegate may from time to time prescribe. Held, failure or inability to file the required
information return or otherwise to comply with the provision of section 6033 of the Code and the
regulations which implement it, may result in the termination of the exempt status of an
organization previously held exempt, on the grounds that the organization has not established
that it is observing the conditions required for the continuation of an exempt status.

In determining the effective date of revocation, an organization may ordinarily rely on a
favorable determination letter received from the Internal Revenue Service. Treas. Reg.
§1.501(a)-1(a)(2); Rev. Proc. 20XX-4, §14.01 (cross-referencing §13.01 et seq.), 20XX-1 C.B.

123. An organization may not rely on a favorable determination letter, however, if the
     organization omitted or misstated a material fact in its application or in supporting documents.
     In addition, an organization may not rely on a favorable determination if there is a material
     change, inconsistent with exemption, in the organization’s character, purposes, or methods of
     operation after the determination letter is issued. Rev. Proc. 20XX-52, 20XX8-30, IRB 222.

The Commissioner may revoke a favorable determination letter for good cause. Treas. Reg. §
1.501(a)-1(a)(2). Revocation of a determination letter may be retroactive if the organization
omitted or misstated a material fact or operated in a manner materially different trom that
originally represented. Rev. Proc. 20XX-52, 20XX-30 IRB 222.

IV. ANALYSIS

Form 886- Ajrev.+68) Department of the Treasury - Internal Revenue Service
Page: -22-

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

Revenue Service Exhibit
Explanation of Items
Name of Taxpayer: EIN: Year/Period
Ended
ORG
20XX12
20XX12

A. Taxpayer’s Position
Is yet to be received.
B. Government’s Position

The ORG is not operating exclusively for charitable or educational purposes within the meaning
of IRC section 501(c)(3) during 20XX and 20XX.

The Government contends that the Foundation failed the operational test of IRC 501(c)(3) on the
following grounds:

• Unsubstantiated Expenditures / Inurement

• Commingling bank accounts/activities with insider, President’s wholly owned for-profit (also
  personal bank accounts) — Foundation Activities are indistinguishable from the for-profit’s
  activities

• Foundation’s lack of charitable/educational activity (activities inconsistent with the
  Foundation’s Application for Exemption, Form 1023) - The Foundation serves the President’s
  personal interest by allowing him to personally use funds purportedly for the Foundation. Private
  Benefit also exists by using the Foundation to promote President's for-profit entities.

i. Inurement/Unsubstantiated Payments

The Organization’s key officer and shareholder is President, as he meets the definition of such

under § 1.501(a)-1(c). President is a “person having a personal and private interest in the
activities of an organization.”

The Service asked the Organization to show how each expenditure furthered the organization’s
exempt purpose and the Organization was unable to show the Service any contemporaneous
substantiation or the purpose of these expenses. For instance, the Organization could not
substantiate checks written to President or checks to cash totaling $$, withdrawals totaling $$,
bank debits for Store, rental cars, airlines, etc totaling $$ for a grand total of $$ in direct
distributions to President for the 20XX tax year.

For the 20XX tax year, the unsubstantiated payments include checks payable to President,
payable to cash, and bank / ATM withdrawals total $$, $$ in various other expenditures such as

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

Form 886A Department cf the Treasury - Internal Schedule No. or

Revenue Service Exhibit
Explanation of Items
Name of Taxpayer: EIN: Year/Period
Ended
ORG
20XX12
20XX12

purchases from: Store, Whole foods, Hardware, PHONE, Store, Store, Store, Thrifty, various
airlines and hotels® etc. Total 20XX direct distributions to President was $$.

The 20XX and 20XX total direct distributions to President for personal use and private benefit
was $.

This amount was not compensation for services, nor was intended to be compensation because
the organization:

1. States that President’s role with the Foundation has been as a volunteer from 20XX
   through 20XX

2. The organization has not filed any information returns (1099-MISC/W-2 etc) to indicate
   this would be compensation

3. The Forms 990 for 20XX and 20XX report President as receiving $0 in compensation
   from the Foundation.

The Service asked the organization several times to substantiate these payments’. The
Organization was unable to explain or show the Service they served an exempt purpose.

4%! of purported Organizational funds that were supposed to be used for exempt purposes
were directly distributed to the Organization’s insider President for personal and private benefit.
The Organization’s earnings inured to President, a private shareholder by distributing a primary
portion of its funds back to President for personal use. President has sole signature authority on
his personal bank accounts. The lack of any necessary internal controls allows President to write
himself a check, withdraw funds, and make charges at his leisure. There is no distinguishing
theses expenditures from personal, for-profit ventures or if any Foundation activities. There is no
accountability on behalf of the ORG, its Officers, and Board members. All purported Foundation
transactions remain unaccounted.

Indirect payments to President that are used for personal gain and private benefit include
miscellaneous payments for 20XX totaling $ and $ in 20XX. These payments include $
payments to Secretary-1, who also works for President's for-profit, $ to DIR-4, President’s
brother, $$ to DIR-9, President’s son, $$ to a DVD distributor, $$ for the website (in which
substantially all the content is for the for-profit). President has complete control over the funds,
and is allowed full access to use funds for personal and private gain.

kok kk

• Note that CO-10 or Sponsor pay’s for the travel associated with a speaking engagement. Travel expenses are personal in
  nature,

“Asked in IDR | dated March 8, 20XX, IDR 2 dated May 8, 20XX, and during phone interview in June 20XX
Ing
$$$

Form 886- Ayrev.t-o8) Department of the Treasury - Intemal Revenue Service
Page: -24-

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

Revenue Service Exhibit
Explanation of Items
Name of Taxpayer: EIN: Year/Period
Ended
ORG
20XX12
20XX12

Also included in the above payments is over $$ in construction and supplies could not be

substantiated. The Foundation claims that these amounts were for the renovation of the proposed

school, in addition to $$ payments to individual RA-1. Additionally, The Organization claimed

that it made expenditures on properties in City, State!' near the proposed school. These rental

properties were purportedly to be Boarding facilities for students. Of the eight properties listed

on page 16, none are in the name of the ORG. The properties are in the name of President or
In fact, one property, Address, State, use to be in the name of RA-1.

The Service contends these expenses were for construction / renovation of the school / houses.
The School was to be opened in June of 20XX. As of October 28,20XX the school is not opened
and is still in need of repair because of misappropriated and mismanaged funds by President.
The Foundation could not show Service The payments totaling $$ to RA-1, an individual who
controls a CO-13, a 501(c)(3) was for construction of the School. The Service contends that
these properties were never assets of the Organization and never meant to be assets of the

Organization. Expenditures on these properties are for personal gain and private benefit and do
not further an exempt purpose.

All expenditures and payments are unsubstantiated and serve the Private Benefit of President.

Direct: $$
Indirect: $$

$$ or % of revenues for 20XX and 20XX

RA-1: $$
Total: $$ — All unaccounted.

ii. Commingling

All financial transactions of the Organization were conducted from (1) CO-6 bank account under
the name of CO-1; (2) CO-7 account under President’s name; (3) CO-8 account under
President’s name; (4) CO-9 account under President’s name.

The Organization could not distinguish for-profit’s activities from the Organization’s activities.
President engages in motivational speaking events under the for-profit CO-1 However in 20XX
and 20XX, the Organization considered its activities to consist of President's speeches to
colleges, universities, and high schools. President personally received % of the fees for the

speaking engagements. President was paid personally (not the Organization) by check and
x« *k& k *

'' See list of properties on page 16 of this report.

Form 886- Acrev.+-68) Department of the Treasury - Intemal Revenue Service
Page: -25-

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

Revenue Service Exhibit
Explanation of Items
Name of Taxpayer: EIN: Year/Period
Ended
ORG
20XX12
20XX12

President endorsed each check. The funds were deposited into President’s personal bank
accounts and never reached the Organization. In fact, the Foundation does not have any bank
accounts. Funds were distributed to President immediately. The Foundation is operating no
differently than a for-profit entity, and is not operating exclusively for 501(c)(3) purposes. Its

resources and cash are being used to further non-exempt activities. It is furthering the activities of
CO-1, a for-profit.

Moreover, the Form 990 reported $$ in 20XX and $ in 20XX on line 1(b) contributions, gifts,
and grants- Direct public support. This is incorrect reporting. The Organization did not receive
any outside support from the public. The Organization received zero support from President
since the funds never left his possession. All of the Organization’s funds inured to President.
The Organization was operated primarily to serve the private interests of President by allowing
him to use all its assets for non-exempt purposes — —_ % of the proceeds that were purportedly
for the Organization were distributed to President and unaccounted for. Because the
Organization is operated in this manner the Service concludes that the speaking engagements are

exclusive activities of CO-1, a for-profit entity. They do not constitute activities provided by the
Organization.

The Organization's website, is commingled with President’s personal website. The Personal
website promotes President including the DVD movie Coach President. The DVD is also sold
on the personal website along with other merchandise associated with President’s for-profit. The
Foundation portion of the website does not detail any specific charitable activity conducted by
the Organization presently nor for the audit years. The Foundation portion of the website’s
“Support” link deposits donations for the Foundation into the For-profits bank account, once
again allowing President immediate use of Foundation funds for personal use. President is using
the Foundation — through his personal website - in a manner to benefit and promote his for-
profit’s image and sales. The commingling of the personal and the Foundation website serves
President’s private interest and President personally benefits in this arrangement.

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

iii. Lack of Charitable/Educational Activity (Inconsistent with Form 1023)

Form 886- Acrev.+68) Department of the Treasury - Intemal Revenue Service

Page: -26-

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

ORG
20XX12
20XX12

The Organization’s application for exemption stated that it would assist City youth (cities of City
and City) who are at economic disadvantages. The application stated the primary programs
would be Operation On time, GPA Tutorial Program, and After School Basketball Clinic.
The Foundation was unable to show the Service that it conducts said activities.

The Organization could not show that any expenses were for the proposed school, the

in City, State. Newspaper articles (online) show that the proposed school between
President and RA-1 at Address in City, State, now housing the CO-13, an entity controlled by
RA-1, never came to formation. RA-1 terminated the Store on July 5, 20XX by the filing of a
Certificate of Termination of a Domestic Entity with the Secretary of State of The
newspaper describes the building as property: “the chain-link fence surrounding the property was
secured by padlocked gates. "Beware of Dog" and "Private Property" signs guarded the Boarded

up brick building and freshly cut grass near the building was littered with chairs and a few loose
construction materials”.

The Organization could not explain why it inconsistently classified its payments to RA-1. The
payments were classified as the Organization’s expenditures, however, in the lawsuit between
President and RA-1, the payments to RA-1 were classified as “loans”. The lawsuit is between
President (personally) and CO-13. The payments to RA-1 have been unsubstantiated. The
Organization was unable provide any contemporaneous substantiation such as receipts, invoices,
or contracts to show that any of these payments were used or intended for exempt purposes. By
the manner in which the Organization conducted its activity, it appears evident that the
Organization never meant for the to exists. Rather the expenditures

purportedly conducted for the Store were a series of financial transactions for the benefit of two
individuals: President and RA-1.

The website stated The ORG will make financial gifts to deserving individuals and student-

athletes who apply and meet the Award criteria. The Foundation was unable to show that it
made any grants.

President controls the Foundation and the use of its assets. President uses the Foundation as a
vehicle to promote his personal interests. President has sole signature authority over bank
accounts purportedly used by the Organization. By having sole signature authority, President is
able to use the Organization's assets without any Board approval.

A charity's assets must be irrevocably dedicated to charitable purposes. Treas. Reg. §
1.501(c)(3)-1(b)(4). The inurement prohibition serves to prevent the individuals who operate the
charity from siphoning off any of a charity’s income or assets for personal use. The Organization
breached the dedication requirement and its assets have inured to the benefit of President.

Form 886- Acrev.+68) Department of the Treasury - Internal Revenue Service
Page: -27-

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

ORG
20XX12
20XX12

Furthermore, all documents that the organization provided to validate its activities pertain to the
speaking engagements or do not relate to applicable audit years.

C. Effective Date of Revocation

As mentioned previously, while revocation of a determination letter is generally not retroactive,
revocation of a determination letter may be retroactive if the organization omitted or misstated a
material fact or operated in a manner materially different from that originally represented. In
cases where the organization omitted or misstated a material fact, revocation may be retroactive
to all open years under the statute. In cases where revocation is due to a material change,
inconsistent with exempt status. in the character, the purpose, or the method of operation,
revocation will ordinarily take effect_as of the date of the material change. In any event,
revocation will ordinarily take effect no later than the time at which the organization received

written notice that its exemption ruling or determination letter might be revoked. Rev. Proc.
20XX-52, 20XX-30 IRB 222.

In this case, the agent recommends retroactive revocation of the determination letter
because the Foundation operated in a manner inconsistent with its exempt status under IRC

501(c)(3), since its inception. Accordingly, it is recommended that revocation be effective as of
January 1, 20XX.

V. CONCLUSION

ORG’s recognition as an organization described under section 501(c)(3) should be revoked
effective January 1, 20XX, because it did not operate exclusively for 501(c)(3) exempt purposes.
The Organization’s income inured to, and served, the private interests of its shareholder,
President. A Form 1120 Income Tax Return should be filed for tax years ending December 31,
20XX and December 31, 20XX. Subsequent returns are due no later than the 15" day of the 3“

month following the close of the Corporation's accounting period. Returns should be sent to the
following mailing address: (Over)

Internal Revenue Service

Form 886- Ajrev.+-08) Department of the Treasury - Intemal Revenue Service
Page: -28-