IRS revokes a carbon-offset organization's section 501(c)(3) exemption

View official IRS release (PDF)

Plain-English summary

The IRS revoked a carbon-offset organization's section 501(c)(3) exemption, effective January 1 of the redacted year. The determination concluded that the organization was not operated exclusively for exempt purposes because its primary activity was trading carbon offsets and building infrastructure for a voluntary cap-and-trade market. It also found substantial private benefit and a nonexempt commercial purpose, including payments and profit-sharing arrangements involving insiders, related companies, consultants, and private landowners. The IRS required the organization to file Form 1120 for years beginning on or after the effective date.

Ruling snapshot

• Question: Did the organization operate exclusively for section 501(c)(3) exempt purposes, without a substantial nonexempt commercial purpose or private benefit?
• Outcome: Revocation
• Key authorities: IRC §§ 501(c)(3), 503, 509, 6104, and 7428; Treas. Reg. §§ 1.501(c)(3)-1 and 1.509(a)-4

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

1100 Commerce Street 501-03-00

Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: September 12, 2011

Release Number: 201203020
Release Date: 1/20/2012

LEGEND Person to Contact:
ORG - Organization name Badge Number:
Contact Telephone Number:
Contact Address:
ORG Employer Identification Number:
ADDRESS

CERTIFIED MAIL
Dear

This is a final notice of adverse determination that your exempt status under section

501(c) (3) of the Internal Revenue Code is revoked. Recognition of your exemption under
Internal Revenue Code section 501(c)(3) is revoked effective January 1, 20XX for the following
reason(s):

You are not operated exclusively for an exempt purpose as required by Internal Revenue Code
section 501(c)(3). You are not and have not been engaged primarily in activities which
accomplish one or more exempt purposes. You are not a charitable organization within the
meaning of Treasury Regulation 1.501(c)(3)-1(d); rather, your activities further a substantial
nonexempt commercial purpose and serve private rather than public interests.

Contributions to your organization are no longer deductible effective January 1, 20XX.

Since your exempt status has been revoked, you are required to file Form 1120, U.S.
Corporation Income Tax Return, for all years beginning on or after January 1, 20XX.

Income tax returns for subsequent years are to be filed with the appropriate Service Center
identified in the instructions for those returns.

It is further determined that your failure to file a written appeal constitutes a failure to exhaust
your available administrative remedies. However, if you decide to contest this determination in
court, you must initiate a suit for declaratory judgment in the United States Tax Court, the
United States Claims Court, or the district court of the United States for the District of Columbia
before the (ninety-first) 91st day after the date that this determination was mailed to you.

Contact the clerk of the appropriate court for rules for initiating suits for declaratory judgment.
To secure a petition form, write to the following address: United States Tax Court, 400 Second
Street, NW, Washington, DC 20217.

Please understand that filing a petition for a declaratory judgment under IRC section 7428 will
not delay the processing of subsequent income tax returns and assessment of any taxes due.

You also have the right to contact the Office of the Taxpayer Advocate. However, you should
first contact the person whose name and telephone number are shown above since this person
can access you tax information and can help you get answers. You can call 1-877-777-4778,
and ask for the Taxpayer Advocate assistance or you can contact the Advocate from the site
where this issue was determined by writing to:

Taxpayer Advocate assistance cannot be used as substitute for established IRS procedures,
formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically
correct tax determination, nor extend the time fixed by law that you have to file a petition in
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.

This letter should be kept within your permanent records.

If you have any questions, please contact the person whose name and telephone number are
shown above.

Sincerely,

Nanette M. Downing
Director, EO Examinations
Enclosures:
Publication 892

Internal Revenue Service Department of the Treasury
TE/GE Exempt Organizations Examinations Division

915 Second Avenue, M/S W540
Seattle, Washington 98174

Taxpayer Identification Number:

Date: June 3, 2011

Form:

ORG

Tax Year(s) Ended:
ADDRESS

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 (Rev. 11-2003)
Catalog Number: 34809F

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

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

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

Thank you for your cooperation.

Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination
Form 6018

Form 4621-A

Letter 3618 (Rev. 11-2003)
Catalog Number: 34809F

Schedule number or exhibit

Form 886-A

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

ORG EIN December 31, 20XX
and 20XX

LEGEND

ORG - Organization name XX - Date City - city State - state Country -

country website - website President - president DIR-1 - 1st DIR ACC-1 &

ACC-2 - 1st & 2nd ACC RA-1 through RA-7 - 1st through 7th RA CO-1 through CO-34 -

1st through 34th COMPANIES

ISSUE:

Whether the ORG (herein referred to as “ORG”) is operated exclusively for exempt purposes
within the scope of section 501(c)(3).

e Whether there is a substantial nonexempt commercial purpose served by the
organization in that the organization is also providing significant private benefit to the
organization's insiders, recipients, or contributors?

FACTS:

The ORG was incorporated on December 6, 20XX, as a non-profit corporation in the state of
State. Previously, ORG was known as the ORG-1, a for-profit organization. The ORG-1 had the
same purpose and goal as the ORG.

The ORG Articles of Incorporation state the purposes of the organization as follows:

“The Corporation is organized and shall be operated not for profit but exclusively for the promotion of the
public interest by means of supporting charitable, educational, and scientific activities within the meaning of
Section 501(c)(3) of the Internal Revenue Code of 1986 as amended. In furtherance of this objective, the
Corporation shall have the following purposes:

a) As provided at Section 509(a)(3) of the Internal Revenue Code, the Corporation shall be organized and
operated exclusively for the benefit of, to perform the charitable functions of, or to carry out the charitable
purposes of publicly supported organizations described in Section 509(a)(1) and 509(a)(2) of the Internal
Revenue Code and Treasury Regulation Section 1.509(a)-4. Specifically, the Corporation shall be
operated, supervised, or controlled by the following State nonprofit public benefit corporations: CO-1, CO-2
and CO-3, CO-4, CO-5, CO-6, North CO-4, CO-7 (the “Supported Organizations”) and other similar
organizations identified as set forth by the bylaws.

b) The Corporation shall conduct activities and operations in order to improve communities, revitalize their
economies and protect and utilize the State of State’s natural resources.

c) In the event the Supported Organizations cease operations, dissolve, or lose tax exemption, the
Corporation’s Board of Directors may designate another Section 509(a)(1) or 509(a)(2) organization to
receive support, provided the designated organization is operated for charitable purposes similar to those
of the Supported Organizations.

Form 886-A (1-1994) Catalog Number 20810W = Page _1 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX

d) The Corporation shall have and exercise all rights and powers conferred on non-profit organizations
under Section 35-2-118 of the State Nonprofit Corporation Act; provided, however, that the Corporation
shall not engage in any activities or exercise any powers that are not in furtherance of the stated purposes
of the Corporation.

The Articles also states that ORG is governed by Board of Directors, appointed by the supported
organizations.

ORG’ bylaws state that all powers are under the authority of the board of directors and that all
business affairs are managed by the board of directors. They further state that the board of
directors shall not be controlled by a disqualified persons and that each member of the board of
directors shall have one vote.

The organization bylaws also state that ORG shall have as officers a President, Vice President,
Treasurer, and a Secretary, and that the board of directors elects the officers on an annual basis.

The president's duties are controlled by the board of directors. The president manages the
business affairs of the organization. The duties of the secretary shall be to create and maintain
books and to be a custodian of the corporate records. The treasurer is responsible for all funds
and securities of the corporation and shall receive and give receipts for moneys due and payable
to the Corporation from any source, deposit all moneys in the Corporation's name, and submit the
books and records to a Certified Public Accountant or other accountant for annual audit or review.

Additionally, the organization original bylaws also state that the organization will not have
members.

Form 1023, Application for Recognition of Exemption

In an application dated March 20XX, ORG applied for recognition as a tax exempt organization
under section 501(c)(3) as a 509(a)(3) Type | organization, “operated, supervised and controlled
by” one or more supported organizations.

ORG stated the following with regard to its past, present, and planned activities:

Applicant is organized to support the charitable activities of the following State nonprofit public
benefit corporations described in Code Section 509(a)(2) and determined to be tax exempt
pursuant to Code Section 501(c)(3) by the IRS: CO-15, CO-2 and CO-3, CO-4, CO-5, CO-6,
North CO-4, CO-7, and other similar organizations identified as set forth by the Applicant's
bylaws (the “Supported Organizations”).

Applicant will improve communities, revitalize their economies and protect and utilize the State
of State’s natural resources by assisting with forest conservation programs that promote the

Form 886-A (1-1994) Catalog Number 20810W = Page 2 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

a i — EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX

reforestation and management of forestlands which in turn helps to reduce soil, water and air
degradation, while providing for enhancement of wildlife and recreational opportunities.

One hundred percent of Applicant’s resources will be dedicated to conducting charitable
programs or providing grants to its supported organizations.

e The primary charitable program to be conducted on behalf of the Supported
Organizations is the development of incentive programs using “carbon offset credits” to
corporations and other large polluters to fund environmental projects that will result in
the replacement of forests and other similar natural resources that assist in cleansing
the “green house gases” produced by carbon emissions.

e Dedicated to providing the educational programs, technical assistance, and financial
support to the Supported Organizations for purposes of carrying out these
environmental programs

e Applicant’s employees and officers will be the primary agents responsible for conducting
the oversight of Applicant's programs

ORG stated the following with respect to the relationship tests with the publicly supported
organization its supports:

Applicant will be “operated, supervised, or controlled by” publicly supported organizations.
Because the organization’s articles and bylaws indicate that all of the members of the
Applicant's board of directors will be appointed by the Supported Organizations.

The ORG stated the following with regard to its fundraising programs:

Applicant expects to receive federal and private grants for purposes of supporting Applicant's
charitable programs. Additionally, Applicant expects to receive revenue from fees generated for
administering its charitable conservation programs.”

Based on the information provided in ORG’s exemption application, on April 25, 20XX ORG was
issued a determination letter advising the organization of recognition of exempt status under
Section 501(a) as an organization described in Section 501(c)(3) of the Code and classified as a
supporting organization described in Code section 509(a)(3).

As stated by President during the initial interview, the President of ORG is also a board member.
President further stated that the Vice President and Secretary/Treasurer are in name only with no
actual duties.

During the examination, it was disclosed that on October 18, 20XX, the organization amended its
bylaws. The amended bylaws state that the organization shall have affiliate membership. The
purpose of the affiliate members are as follows:

Form 886-A (1-1994) Catalog Number 20810W = Page_3 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer

ORG

Tax Identification Number

EIN

Year/Period ended

December 31, 20XX

and 20XX

“Affiliate members shall be individuals or firms who have interest requiring information concerning
carbon sequestration, and are in sympathy with the objectives of the Board. The dues of Affiliate
Members shall be in such amounts as established annually by the Board of Directors.”

The IRS was not notified of this change to the organization’s bylaws.

Form 990, Return of Organization Exempt From Income Tax

The ORG Form 990 described its program service activities as follows:

The ORG Form 990 described its activities in relation to the accomplishment of its exempt
purpose(s) as follows:

The ORG did not list the organizations it provided support nor identify that ORG was a supporting
organization on its Form 990. ORG described itself as “an organization that normally receives a
substantial part of its support from a governmental unit or from the general public section
170(b)(1)(A)(vi)” (within Part IV of the Form 990, line 11a).

The ORG’s Form 990 reported the following revenue source:

TY 20XX TY 20XX
Contributions, gifts, grants:
Direct public support $
Govt. contributions and grants $
Interest on saving/investments $
Total Revenue $

The ORG 20XX Form 990 reported that its officers and directors were not involved in the daily
operation of the organization, as zero time was applied to section Part V-A, Current Officers,
Directors, Trustees, and Key Employees. Additionally, the 20XX return reported the following
information:

e Showed no employees employed in 20XX
e Schedule A—reported “none” to paying more than $ to an independent contractor
e President signed the Form 990 as the Executive Director

Form 886-A (1-1994) Catalog Number 20810W Page 4 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer

ORG

Tax Identification Number

EIN

Year/Period ended

December 31, 20XX

and 20XX

The ORG 20XX Form 990 reported that its officers and directors were not involved in the daily
operation of the organization, as zero time was applied to section Part V-A, Current Officers,
Directors, Trustees, and Key Employees. Additionally, the 20XX return reported the following
information:

Showed no employees employed in 20XX

Schedule A—reported “none” to paying more than $$ to an independent contractor
Books are in the care of President at same address as the ORG

President signed the Form 990 as the Executive Director

Activities

credit trading history

Unlike the Protocol, the United States (U.S.) government has not yet adopted a policy on carbon
credit trading. The Protocol is defined by some as “originated at COP-3 to the UNFCCC in
Country, December 19XX. It specifies emission obligations for the Annex B countries and defines
the three so-called Country mechanisms: JI, CDM and emissions trading. It entered into force on
February 16, 20XX”. The U.S. does not recognize the Country treaty.

The U.S. program established a voluntary trading program, the CO-8 (CO-8), without mandatory
emissions reductions or the institution of a formal cap-and-trade system. The voluntary trading
program (CO-8) was a study to start on a pilot basis in the U.S. Midwest.

The CO-8, a for-profit entity, was created in 20XX by a grant through the CO-9. The CO-8
described itself as

. RA-1 was the Chairman and CEO of the
CO-8. The CO-8 was a wholly owned subsidiary of CO-10 Plc, a public stock company listed on
the CO-11 of the CO-12. CO-10 Plc also owns the European CO-10, Europe’s leading CO2
emissions exchange.

In July 20XX, the CO-8 was acquired by the CO-13 (CO-13), a leading operator of regulated
global derivatives exchanges and over-the-counter markets. Some of the key benefits of the
acquisition are: 1) more shared European and U.S. utilities market customers, 2) additional global
markets in emissions programs, 3) exposure to Asian commodities marketplaces with 25 percent
stake in Tianjin CO-10, (Exhibit A).

In a cap and trade system, the trading or the trading market is defined as
follows:

Form 886-A (1-1994) Catalog Number 20810W = Page_5 publish.no.irs.gov Department of the Treasury-Interna! Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX
° trading is defined as “a market based mechanism for helping mitigate the increase

of CO2 in the atmosphere”.

e Carbon trading markets is defined as where they bring “buyers and sellers of carbon credits
together with standardized rules of trade”.

“Where the buyer of credits are businesses that emits CO2 to the atmosphere may
have an interest or may be required by law to balance their emissions through mechanism
of sequestration. These businesses may include power generating facilities or
many kinds of manufacturers.”

and

“Where sellers of credits are companies that manage forest or agricultural land
might sell carbon credits based on the accumulation of in their forest trees or
agricultural soils. Also businesses that reduce their emission may be able to sell

their reductions to other emitters.”

e The cap and trade system, as defined in the ORG handbook, works as follows: “the ‘cap’
puts a ceiling on emissions and each allowance authorizes one ton of CO2 emissions.
Limiting the number of available allowances ensures the cap’s integrity. Allowances are
allocated among sources based on emission performance standards and representative
fuel use. At the end of each year, every source must have enough allowances to cover its
emissions for that year. Unused allowances may be sold, traded, or saved (banked) for
future use.

ORG history

The ORG was a participant in the design phase of the voluntary pilot trading market along with
other domestic and foreign nonprofits and for-profit businesses.

In ORG’s brochure titled “

, states that ORG was seeking financial support from the
Governor's office to support its market based project development work. The financial support
would be in a form of a $ grant through the Governor's Office of Economic Opportunity to the
Reclamation and Development Grants Program on behalf of ORG. The brochure went on to say,
“the proposed grant would establish the ORG’s ability to aggregate and enter large-scale carbon
credit trades onto the market through the CO-8”.

Additionally, the brochure stated that in 20XX, ORG conducted a pilot carbon credit trade between
the Confederated Country and Country Tribes and a Country based firm. Previously, the ORG,
under contract with the National Office of the Environmental Protection Agency (EPA), developed

Form 886-A (1-1994) Catalog Number 20810W — Page__6 publish.no.irs.gov Department of the Treasuryinternal Revenue Service

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer

ORG

Tax Identification Number

EIN

Year/Period ended

December 31, 20XX

and 20XX

planning protocols and a standards handbook for forestry based greenhouse gas projects, and
now the ORG is field-testing the resulting planning handbook.

Moreover, the brochure went on to say the ORG projects were delivered to the market through the
CO-8 (CO-8) under a contract with the CO-14. It stated that there would be an 8% program fee
attached to all ORG trades. The program fee or income would be distributed to member
organizations. It predicted that once ORG was fully operational, it would be developing projects
and conducting trades across the U.S.

The ORG activities as described in the State Agriculture and Forest land-20XX report, was as
follows:

“the Coalition is a quasi-public entity created with the help of the State Legislature.
Landowners can receive complete cost sharing to plant trees on land that is not naturally
regenerating to trees. In turn, they receive payments to store in the land and the trees.
Contracts are signed for upwards of 100 years with the offsets transferred to CO-15,
the private entity associated with the Coalition that actually holds the offsets. The idea is to
help corporations mitigate their emissions through purchasing the carbon offsets
associated with the now forested land”.

In 20XX, ORG conducted its first international credit trade between a tribal government
(Country Country Tribe) and a for-profit organization based in Country for $$. Review of the
contract revealed that the CO-16, a Country environmental group established in Country, paid the
tribe $$ for their sale. The money was wired transferred to ORG and then ORG remitted
the money to the tribe. The contract also stated that the ORG acted as the facilitator and the CO-
14 (City-based) arranged the transaction.

The CO-14 is an investment bank and consulting firm. The CO-14, CO-16, and the CO-8 are
headed by the same individual, RA-1.

In a 20XX news article about the CO-17 selling its land, the article stated that the CO-17 was
trying to sell its rights to European companies, but because the U.S. has not signed the
Protocol, it cannot, even though the tribe was considered a sovereign nation (Exhibit B).

ORG current activities

In 20XX and 20XX, ORG programs were primarily funded by grants from the University under a
subcontract agreement from the CO-18 (CO-18). The CO-18 was formed in 20XX to be part of
the U.S. Department of Energy (DOE) sequestration research program. The partnership included
public and private sector research institutions, businesses and state agencies. The CO-18 is
headed by CO-19.

Form 886-A (1-1994) Catalog Number 20810W = Page_7 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

_ sep — EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX
The ORG is at the forefront in the emerging field of the credit market (cap and trade
system). In 20XX and prior years, President (President) stated that the ORG used its funding to
further explore and develop the market activity in the state of State, specifically the

capture and storage system--trading carbon credits that would be acceptable to the financial
markets, i.e., setting standards or infrastructure.

Currently, ORG funding is only derived from credit trading. In the initial interview,
President stated that they do not expect to receive any more grant monies. President stated that
they never intended to live on grant monies. The organization’s primary focus was making the
market-based program work.

As indicated in its pamphlets/publications, ORG credit trades in the voluntary pilot trading
market, the CO-8. ORG is also a member of the CO-8 as an Offset Aggregator, which is a CO-8-
registered entity that serves as an administrative and trading representative on behalf of multiple
project owners. The CO-8 requires that projects that produces less than 12,500 metric tons of
CO2 equivalent of Exchange Offsets per year to register through a CO-8-registered aggregator.

In ORG publications/pamphlets, ORG described itself as follows:

1) ORG’s purpose is to provide an opportunity for landowners, tribes, state, and local
governments to participate in a market-based conservation program that provides a marketable
commodity while helping to offset the environmental impacts of carbon dioxide emissions.

2) ORG helps landowners sell carbon offset credits on the CO-8 (CO-8).
3) Since 20XX, ORG has been an official aggregator of carbon credits for the CO-8.

4) Carbon sequestration projects and the credit market provides an opportunity for
landowners to help offset the environmental impacts of greenhouse gases, reverse soil, water and
air degradation, and provide enhancement of wildlife and recreational opportunities while creating
a new source of revenues for landowners and others.

5) Landowners enter contracts for five-year terms. 20 percent of the credits are placed
into reserve pool. If at the end of the market period the project has not been lost or compromised,
the 20 percent is returned to the project owner.

The ORG would place their client’s credits onto the market place, the CO-8. The price of

carbon is updated daily and is based on the current market place price. ORG credit trades
twice per year with two pool per year or when requested by their clients or board members.

The carbon credit trading transaction falls into two categories:

1. credit trading on the CO-8

Form 886-A (1-1994) Catalog Number 20810W — Page_8 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

ORG EIN December 31, 20XX
and 20XX

2. over-the-counter (OTC) transaction
   The ORG conducts credit trading transactions on either the CO-8 or over-the-counter.

In 20XX, credits were selling for about $ a metric ton and if the carbon credit market
becomes mandatory in the U.S., the credit price could be as high as $ or higher. In
Europe, the price has reached about $ to $ a ton.

In 20XX and prior years, CO-8 charged its members a membership fee or annual dues of $ per
year. Currently, the annual dues are about $$ per year.

The over-the-counter transactions are voluntary trades directly between a buyer and seller. The
price for is generally higher than on the CO-8. OTC transactions have no standards or
registry—they are transactions with non-CO-8 members. OTC transactions are cash transactions.

The ORG has two types of membership:

1. Affiliate
2. Sub-aggregator

Affiliate members are described in the ORG amended bylaws. The bylaws state that to be an
affiliate member, an entity can be a private company, nonprofit company, or a state. The
members have to sign a confidentiality agreement and a nondisclosure agreement. Affiliate
members will serve as advisors to the board, and have no voting power.

Affiliate members have access to training workshops and updated handbooks. They are also paid
one percent (1%) commission of all carbon credit trades for projects they bring in or secure a
listing agreement or a buy/sell agreement.

Affiliate members include private and nonprofit organizations in the U.S., the COUNTRY, and
Country.

In 20XX, there were about 27 affiliate organizations (domestic and foreign).

The sub-aggregators are not described in the ORG articles, bylaws, or amended bylaws. Sub-
aggregators of ORG are the following for profit entities:

e CO-19
e CO-20

Sub-aggregators assist landowners to participate in the credit market. Sub-aggregators
conduct the initial outreach to landowners as well as developing and managing carbon pools.

Form 886-A (1-1994) Catalog Number 20810W = Page__ 9 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer

Tax Identification Number

Year/Period ended

ORG EIN December 31, 20XX
and 20XX
They then turn the pools over to the aggregators for marketing and sales (ORG). The sub-

aggregators would receive the trade proceeds from ORG, deduct their administration fee, and
then remit the proportionate payments to all pool participants.

According to ORG manuals and meeting minutes, ORG is trying to create a national tribal
organization to be ORG sub-aggregators. The meeting minutes also show that ORG proposed to
pay the sub-aggregators a 10% commission.

Program information

The ORG trading process includes performing data collection and reports to meet CO-8 criteria,
securing contracts with landowners, securing third party verification, submitting projects to the
exchange, conducting the trade, and distributing revenue to participants.

In the ORG business plan booklet, ORG stated that the purpose(s) of its program are as follows:

“The ORG program is designed to assist landowners in planning carbon sequestration activities
and documenting the resulting Sequestration Unit (CSU) in a manner that adheres to
national standards and protocols, and meets the needs of potential buyers...ORG expects that in
the future a federally based regulatory market will exist. At that point credit trades will be
conducted similar to existing commodity trades”.

The ORG actively solicits landowners to be involved in its credit trade projects. ORG
advertises that landowners can earn income in the credit market by storing carbon. ORG
has contractual agreements that are five (5) years or longer with farmers, ranchers, foresters,
tribal and state governments to trade those landowners credits on the CO-8 or over-the-
counter. Then ORG would remit proportionate payments to pool participants.

The ORG conducts trading for the following offset projects: 1) Agricultural
Methane, 2) Rangeland Soil Carbon, 3) Forestry, 4) Crop, and 5) Grass.

The ORG has application projects with private landowners and tribes in State, State, State, State,
State, State, State, State, and other states. ORG also contracts internationally, i.e., Country and
Country.

Individual projects are assembled into groups or pools that are large enough to qualify for sale on
the CO-8. Prices are set by the market at the time trades are completed. Potential pool
participants complete an application form. The application form is to submit carbon sequestration
projects through the ORG.

According to ORG Handbook, the following shows the process outline for ORG portfolio sales:

Form 886-A (1-1994) Catalog Number 20810W = Page. (10 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

ro pes ao EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX

1. A landowner agrees to prepare a project plan for implementation in the event that a sale is
   achieved.

2. A qualified resource professional works with the landowner to develop an Initial Proposal
   (IP) within the guidelines of the ORG Project Planning Handbook.
   a. The IP is reviewed for technical adequacy by ORG Technical Adviser.
   b. The IP is accepted by ORG as adequate

3. The landowner signs a Listing Agreement with ORG
   a. Listing Agreement includes threshold price that seller will accept.
   b. Landowner is provided with full information about payment schedules, fees, etc., so
   that they know exactly how the sale will function if it goes through.
   ORG includes the IP within a prospective portfolio to broker.
   Broker offers prospective portfolio to potential buyers.
   Buyer makes buy offer through Broker.
   a. Buy offer includes price, quantity, and term for purchase.
   b. Buyer lists requirements, if other than regular, for monitoring, verification,
   qualifications for registry, etc.
4. ORG accepts offer and associated conditions if consistent with listing agreement. If not,
   ORG seeks landowner’s approval prior to accepting offer.
5. Preliminary sale is executed

a. Some money (usually 1/2) is paid up front.

b. ORG has 6 months to firm up estimates, measurements, documentation,
etc. and provide buyer with solid assurance. Buyer has money-back protection
during this period.

c. Base line field measurements completed, contracts signed with landowner.

9. ORG provides the buyer with a Certificate of Assurance containing final measurements,
   conditions, commitments, etc. meeting buyer demands. Buyer accepts.

10. Sale is final. Final payments made to ORG.

11.ORG settles up with Landowners, Affiliates, Technical Providers, etc.

Oar

The ORG published and distributed the ORG’s Sequestration Handbook. According to
ORG’s prior website postings, the handbook was available for a $ fee. The handbook was free for
viewing on its website if potential participants registered to the ORG website. ORG also makes
available their Portfolio Standards for the agricultural and forestry practice for viewing if potential
participants register to their website. The ORG handbook and Portfolio Standards are copyrighted
documents and are not to be redistributed or copied.

It was noted in the 20XX minutes, where it discussed the future goal of ORG, that President was
looking at commercial based planning for ORG, where ORG would do the trading. President
mentioned the following: “I can sell everything | can get my hands on right now. If politics go south
it was a great idea, but if politics go our way, it will be the largest in the U.S.”

Outreach and Workshops

Form 886-A (1-1994) Catalog Number 20810W —s Page_14 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX
Initially, ORG conducted workshops to provide information regarding credit trading to

landowners and other interested parties—specifically the process to develop and place projects on
the CO-8. ORG advertised in its web site and publications that it was developing a trading
infrastructure, such as setting procedures, setting contract guidelines for emitters and landowners,
securing offsets against loss, monitoring, measuring, verification of offsets, and needs landowners
to help to test it. See also Exhibit D.

In subsequent years, the workshops were presented to private landowners to advertise ORG’s
services, such as advising of the potential of earning income from carbon sequestration in their
land. ORG advertised that their program was

. ORG also claimed that the
was a potential source of revenue for private landowners, a new marketable commodity.

Currently, ORG continues to actively solicit for landowners (farmers, ranchers, foresters, tribal and
state governments) to participate in its offset projects. ORG advertises in its publications,
flyers, and website that landowners can earn income in the credit market by storing

. According to ORG’s meeting minutes and comments made by President June 3, 20XX,
the workshops were a way for the organization to sign up affiliate members and private
landowners for project offset credit applications.

In one of its publications/flyers, ORG advertised that the CO-8 allows landowners, who enroll
newly planted grasslands, to earn offsets as follows:

e Zone A: includes most Midwest and east coast, Country province of Country, Country,
Country and Country. The soil offset that can be earned is at a rate of 1.0 metric tons of
CO2 per acre per year to land managers for planting undertaken on or after January 1,
19XX. The grass cover must be maintained through 20XX.

e Zone B: includes most southern states. The soil offset that can be earned at a rate of 0.4
metric tons of CO2 per acre per year to land managers for planting undertaken on or after
January 1, 19XX. The grass cover must be maintained through 20XX.

In other publications/flyers, ORG advertised the amount participants can earn as follows:

e Producers will be credited with 0.2 — 0.6 metric tons of for each acre of eligible no-
till cropping and 0.4 — 1.0 ton per acre for qualifying grass stands each year of the contract.
e On native rangeland in the eligible territory, producers can earn .12 to .52 metric tons per
acre with an implemented grazing plan to improve the range vegetative growth. Rotational
or managed grazing is used to restore or maintain range conditions and increase the
stored. The price per ton on the CO-8 varies every trading day.

In a public press release, dated March 11, 20XX, ORG advertised the following regarding its
carbon credit trading activities:

Form 886-A (1-1994) Catalog Number 20810W Page 12 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

rae car eon EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX

“The ORG (ORG), a State-based organization, allows Ag producers and landowners to earn
income by storing in their soil through no-till crop production, long-term grass seeding
practices, grazing management practices, grassland, forestry, and methane capture
projects....Once credits sell, landowners earn income based on the acres they have enrolled. As
an example, this month, ORG distributed over $$ to 66 landowners for the sale of their carbon.”

In a ORG letter to third parties on May 20XX, ORG states that ORG has a total of 268 landowners
and 1,903,908 acres that it represents on behalf of multiple project landowners.

On its sub-aggregator website, the sub-aggregator advertised that the landowners

Exhibit C, titled Partnering for the Environment, are copies of pamphlets/publications that ORG
gives out to prospective landowners/affiliates at ORG workshops (ORG portfolio).

In the ORG portfolio, ORG described the benefits of its activities to the emitters and to the private
landowners as follows:

ORG’s benefits to emitters:

e Industry may find that purchasing CSU’s as an offset for their emissions is an economical
way to meet their emission reduction needs.
Enhances the health and sustainability of the ecosystem.

e Offers participating corporations a cost-effective way to produce enough CSU's to achieve
their dioxide emission reduction goals.

e Companies can take voluntary steps now to establish their own emissions credit programs
for greenhouse gases, in anticipation of “some type” of GHG market-based initiative, which
seems likely, at some point, either on a national or international scale. By doing so, they

can demonstrate their commitment to reducing dioxide emissions and best position
themselves to have their reductions recognized whenever a formalized federal program is
introduced.

e Create positive public relations.
ORG’s benefits to landowners:

Landowners gain the practical experience in producing credits for future markets.
Flexible contractual agreements.

sequestration credits offer landowners a new potential source of revenue.
Enhances the health and sustainability of the ecosystem.

Form 886-A (1-1994) Catalog Number 20810W — Page__13 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

a EXPLANATIONS OF ITEMS

Name of taxpayer Tax identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX

The portfolio advertised the amount of income a prospective landowner expects to earn from the
credits, as well as how credits are priced and when income is received by the
landowners, as follows:

e The concept of credits trading is similar to dealing with any other agricultural
commodity exchange.

e During each production year, a database of all land tracts under contract will be assembled
and transmitted to the CO-8.

e CO-8 verifiers will randomly select a portion of the tracts for a spot check that includes field
visits.

e Immediately after the end of the calendar year, the credits will be placed in ORG’s trading
account and sold.

e The individual producer will receive his or her share of the sale proceeds immediately
following the pool of credits is sold.

At the end of the pamphlets/publications, instructions were given to call President or RA-2.

In ORG business plan booklet, ORG states the following regarding its marketing efforts:

“The ORG targets the majority of its business activities toward placing CSU’S on the CO-8, and

other emerging markets...Under a market-based approach, these companies can buy and trade
their credits through the market just as any other commodities are traded”.

The ORG marketing goal is to continue to trade in the market-based program that is capable of

reaching out across the U.S., and to expand into other tradable offsets, such as wind solar, fuel

switching, methane, etc. for trade on the CO-8.

ORG website

The ORG website address is website. The home page tabs shows the following topics: Home,
Contact Us, Soil calculator, cropland, forestland, methane, rangeland, grassland.

The Home page tab provides the following information about ORG:

e As stated on the organizations web site, ORG’s

Form 886-A (1-1994) Catalog Number 20810W = Page 14 _ publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

jos oe ‘oh EXPLANATIONS OF ITEMS

Name of taxpayer Tax identification Number Year/Period ended
ORG EIN December 31, 20XX
nd 20XX
e The trading will create new revenue source for producers in the following areas:

o No-tilled fields and newly established grasslands
o Rangeland, forest that’s been committed to an improvement program
o Forested land that has managed reforestation or new plantings
o On-farm methane digesters

e The benefits of the program helps the environment in the following ways:

Soil quality improvements
Water quality improvements
Water quantity increase
Energy conservation

Air quality improvements
Wildlife habitat improvements

000000

Under the main menu tab, “About ORG”, the following was stated regarding ORG’s process and
programs:

e credits can be earned via no-tilling cropping, seeding grasses or alfalfa, native
rangeland enhancement, forestry, and methane digesters.

o No-til—can earn credits at a rate of .2 to .6 metric tons of carbon per acre
annually

o Seeded grass stands—can earn credits at a rate of .4 to 1.0 metric tons per
acre annually

o Native rangeland—can earn credits at a rate of .12 to .52 tons per acre annually

o Forestry—can earn several tons of credits annually

o Methane offset—can earn tons of credits annually. Each ton of methane
captured earns 18 tons of credits

e The web site describes the purpose of ORG as follows:

“ORG's purpose is to work with the program and act as a fiscal agent who is actually
contracting and selling the offsets on the CO-8. Income earned from aggregating acres
will result in revenue paid to individual landowners, and ORG’s to continue the good work of land
stewardship”.

Under the Main menu tab, “ORG’s Advantage”, states the following regarding the formation and
activities of ORG:

“ORG is designed to assist landowners in planning n sequestration activities and
documenting the resulting (CSU) in a manner that adheres to national
standards and protocols while meeting the needs of the buyers. The term ‘ Sequestration

Form 886-A (1-1994) Catalog Number 20810W = Page 15 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX
Unit’ represents the amount of organic in the wood or soil that is equivalent

to the removal of one metric ton of CO2 from the atmosphere.”

e ORG is a partnering member of the CO-21, whose purpose is to field-test a proposed trading
system.

In prior year web site postings, the following information was shown regarding ORG past activities:
e In 20XX web posting, the ORG website stated the following regarding its activity intentions:

“While the ORG intends to assist landowners with the sale of CSUs in national and
international markets to the extent possible, it must be recognized that the credit
market only exists in an experimental state, and ORG makes no express or implied
commitment that any project will be successfully sold on the market now or at any time in the
future. Prices for CSUs will be a function of the market condition at the time of sale and ORG
makes no implied or express commitment to the prices that will be in effect at any time now or
in the future. Landowners retain the right to accept or reject purchase offers received through
the ORG or its representatives.”

e In 20XX web postings, the ORG website described the following regarding its solicitation of
potential clients:

ORG solicited for landowner, tribal government, for-profit organizations and other corporations

to participate in the newly emerging offset voluntary trading market. In order for the
“trading infrastructure” to take place and become widespread, it needs to be tested and
developed.

The web site went on to say that the CO-21 (DOE) Regional Partnership was organized to
field-test a proposed trading system developed during the last two years by the partnership
members.

In 20XX web postings, the web site mentioned that the ORG “

.” See also Exhibit D, ORG’s
prior web postings.

ORG Books and Records

In the initial interview, President stated that in 20XX, the ORG revenue was primarily derived from
grants from the Department of Energy (DOE) through the University and the (DNRC). In 20XX,
ORG revenue derived from grants from the University, trade, and interest income.

Form 886-A (1-1994) Catalog Number 20810W = Page 16 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

ORG EIN December 31, 20XX
and 20XX

The ORG funding source was also derived from a revolving loan agreement with CO-22.
According to the loan contract, the revolving loan amount was for a short-term loan of $ at an
interest rate of %. The loan document was signed by President as an agent of the association.
The term of the loan states that not more than $ can be borrowed at one time.

The loan funds were initially deposited into the organization’s CO-23 three investment accounts:

e ACC-1-restricted
e ACC-2-restricted
CO-23, Management Pool

It was noted that the ACC-1 and ACC-2 investment accounts are related to ORG's

trading activities. Per conversation with President on May 3, 20XX, he stated that the ACC-2 is
composed of income derived from the 20 percent (20%) kept as reserve pool (as indicated in
landowners contract) and grant money, the management pool is composed of income from the
CO-19 grant and is used for ORG operation, and the ACC-1 is used to replace offsets that may
have been lost.

ORG personnel

DIR-1 is the President/Board member of ORG and the current Chairman of the CO-24. DIR-1 is
also the current Judge at City of City, State. DIR-1 and other officers/board members are not
compensated for their work at the ORG, except for reasonable reimbursed travel expenses.

Per conversation with DIR-1 on April 23, 20XX, the contracts and agreements ORG enters into are
signed by him or President. DIR-1 stated that he would sign most of the contracts. DIR-1 also
stated that he and the other board members would setup general policies of ORG but would not
be involved in the day-to-day activities, including maintaining financial records.

In the initial interview, President stated that the Vice-President, Secretary, and the Treasurer were
not involved in the day-to-day activities of ORG. They had no actual duties at ORG.

ORG contract out for staffing, data management, and technical services. In the years under
examination, ORG had one employee, the office manager. The office manager is responsible for
the following, according to the ORG business plan booklet:

o Bookkeeping
o Clerical and office management services
o Assist in the management of ORG portfolios

The office manager is the only staff employed by ORG. The Executive Director (President)
supervises the office manager.

Form 886-A (1-1994) Catalog Number 20810W = Page_17 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer

ORG

Tax Identification Number

EIN

Year/Period ended

December 31, 20XX

and 20XX

Per conversation with President on May 3, 20XX, he said that the office manager, RA-3, was let
go on April 1, 20XX because of budget constraints. President said that he volunteered to take
care of the daily business affairs of ORG without compensation.

The ORG hired an outside bookkeeping service to prepare its Form 990 return. President stated
that the bookkeeping service handles the ORG financial records. A discussion with the
bookkeeping service, CO-25, revealed that they only prepare the Form 990 return for ORG. They
claimed that the financial records are maintained by the ORG.

The ORG contract out its work to two primary individuals/entities:

1. CO-26 (CO-26)
2. CO-27

The CO-26 offers its executive director/broker and marketing director services to ORG. CO-26 is
a for-profit partnership organization owned by President and RA-2, a husband and wife
partnership. President is the executive director and RA-2 is the marketing director for ORG.
Income received by the executive director and the marketing director was paid on Form 1099-
MISC.

In ORG business plan booklet, it states that President of CO-26 is responsible for overseeing all
management and financial affairs of all ORG projects, program development, and management
activities including day-to-day supervision of ORG staff and oversight of all contracted services.

In meeting minute dated April 14, 20XX, President stated the following regarding his contribution
to ORG and his request to have a seat on the board:

“President reported on monies contributed by the CO-26s (CO-26) so that ORG would remain
competitive and viable. Between CO-27 and CO-26s, a total of $ has been contributed to further
ORG's efforts.”

And

“It was the consensus of all parties that a 5 to 10-year contract be entered into for both the CO-26
and CO-27 versus CO-26 and the CO-27 having a seat on the board. A discussion was held
regarding the profit share percentages for CO-26 and the CO-27. It was the consensus of the
board that CO-26 and the CO-27 receive the 2.5% of profit after securing the budget monies for
operations including the sub-contractor fees and dividends to organizations.”

In an internet news article, President was described as having founded ORG. The article stated
that President used to work for the CO-28 (CO-28) as a coordinator and that he left his job at CO-
28 and formed ORG in 20XX to pursue the trading market (see Exhibit E). See also

Form 886-A (1-1994) Catalog Number 20810W = Page 18 _ publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

a owes _ EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX

Exhibit F, President’s resume stating that he was instrumental in the creation of the ORG. A
discussion with the office manager noted that this organization was “his baby’.

In the ORG business plan booklet, it states that RA-2 of CO-26 is responsible for “marketing
activities for the ORG, including congressional, state, and local government contacts, and lobbying
on behalf of ORG, industry, landowner and other nongovernment organizations, associations, and
other nonprofit contacts for the ORG and direct contact with potential buyers, sellers, and brokers
of ,

The ORG also hired RA-4 of CO-27 to be the primary technical advisor for ORG. Income received
by RA-4 was paid on Form 1099-MISC.

RA-4 of CO-27 has been involved with ORG since inception. CO-27 specializes in analyzing and
presenting natural resource management and policies. RA-4 is the president of CO-27 He also
served as a technical advisor to the CO-29 and he co-chaired the technical workshop on carbon
sinks sponsored by the White House in 1993 to explore forestry and agricultural activities for
President’s “Climate Change Action Plan’.

According to ORG business plan booklet, RA-4 is responsible for portfolio design and project
development. In 20XX, RA-4 was also the chairman of the ORG Technical Standards Committee.

According to ORG 20XX budget proposal, CO-26 and CO-27 compensations increased and that
the two entities continue to be a substantial contributor of ORG. The information below notates
what was discussed with respect to the role of CO-26 and CO-27:

CO-26 to receive a base contract payment of $
The CO-27 will receive a contract payment of $$.The CO-27 will receive a fee of 2.5%
of the gross for each company from the sales of offsets. This fee will also be applicable
to revenue which exceeds the operational needs of the ORG.

e CO-26 will be responsible for the overall management and marketing of ORG and will
be the principle developer of crop grass, methane, and range offsets.

e The CO-27 will be responsible for technical assistance and review of projects as well as
the development of a strong forestry and fuel switching portfolio for ORG.

Contracts

The following information details some of the submitted contracts.

Contract with CO-26 (CO-26):

The contract with the CO-26 and ORG was for 20XX and 20XX. The contract identified the CO-26

as the subcontractor and the ORG as the contractor. The two parties have entered into a
research subcontract with the CO-19 Office of Sponsored Programs Agreement. The contract

Form 886-A (1-1994) Catalog Number 20810W = Page 19 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

hie 5 aay EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX

stated that President, as project manager, would provide coordination and project
development/contracting activities for all ORG and DOE related activities. RA-2, partner of CO-
26, as project marketer, would provide marketing and coordination of all activities related to ORG
and DOE. The contract states that they will be independent contractors acting as project broker
and marketing director/staff and facilities coordinator for ORG.

The CO-26 will charge ORG $ per hour per separate services rendered as either project broker
and marketing director. In addition, ORG to pay CO-26 a fee based on a “graduated scale of
percentages of the cumulative gross collected revenues from each project”. Project expenses will
be reimbursed by ORG for lodging, per Diem, and all out-of-state and instate travel costs.

The ORG places no restrictions on President or RA-2’s place of work or the amount of time
devoted to providing the services to ORG.

The ORG 20XX contract between CO-26 and ORG contained the same contract language as in
20XX and 20XX year contract.

Contract with the CO-17:

The contract with the CO-17, specifically with RA-5, states that ORG projects include private, state
lands, and tribal lands. The CO-17 will act as a subcontractor, independent contractor, and will
receive $ as payment for services rendered. The CO-17 will be reimbursed for project related
expenses via submission of an invoice to ORG. The contract states that RA-5, RA-6, will provide
technical and coordination assistance for development of projects in the tribal portfolio.

Contract with the Confederated Country and Country Tribe:

The agreement was between the Confederated Country and Country Tribes, ORG, and the CO-16
The CO-16 was established under the laws of Country.

The agreement was to sell greenhouse gas emission offsets to the CO-16 during the years 20XX
through 2081 and to delivery of 80% of the buffer in the year 2101. The Tribe was to maintain
carbon storage through the end of year 2101. The purchased price of the greenhouse gas
emission offsets was $$. The money was to be transferred to a bank account in the United States
specified by the ORG and then ORG would remit the money to the Tribe.

The ORG was introduced to the CO-16 by a company called the CO-14 based in City.
Contract with CO-19, a sub-aggregator of ORG:
The contract was entered into agreement on January 20XX, between CO-19 and ORG. The

contract states that the CO-19 is a limited liability company located in City, State. The CO-19 will
act as a sub-aggregator for ORG to “ i

Form 886-A (1-1994) Catalog Number 20810W = Page 20 _publish.no.irs.gov Department of the Treasury-internal Revenue Service

Schedule number of exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX

The contract identified President as the project broker for ORG and that all written
communications regarding this agreement should be to President.

The contract stated the goal and purpose of the sub-aggregator’s role as follows:

“The goal of ORG and CT is to develop, qualify and market XFOs under CO-8 rules in an effective
and efficient manner that returns revenue to the certified landowner. The ultimate goal is to
provide a means for family forest landowners to participate in sequestration markets, to
earn a revenue stream from their growing forest, to offset real estate taxes, land management
expenses and other costs so family forests can continue to grow and provide all the associated
benefits to the landowners and society.”

The contract also set guidelines on the duties and obligations of the ORG and the CO-19. The
contract states that the ORG will be the carbon broker for the CO-19's offset programs,
specifically the managed forest pools. The ORG will be the “administrative representative’ on
behalf of CO-19. As an administrative representative, ORG will:

establish a CO-8 Registry Account on behalf of CO-19;

obtain CO-8 approval on CO-19 offset programs to participate in the CO-8 market;
review and manage all forest pools developed by CO-19;

arrange for verification and registration of all managed forest pools amounts on the CO-8
registry

pay all registration, trading, and verification costs from gross pool sale proceeds

sell registered pools upon approval from CO-19

remit balance of gross sale proceeds to CO-19

The duties and obligations of CO-19 are to:

e to “conduct outreach to CO-30 members and forestry consultants to inform and train them in
creating CO-8-qualified managed forest offset projects.”

e The CO-19 will accept project applications from CO-30 members and maintain their pool
summary records. Provide pool summary records to ORG for review and verification.

e Atthe discretion of CO-19, will provide ORG with the timing and details of trading each
managed forest pool (the CO-19 will advise the ORG of when to trade their managed forest
pool project).

e The CO-19 will receive the trade proceeds from ORG, deduct their administration fee, and
remit the “proportionate payments to all pool participants”

Contract with Affiliate members:

e Contract with CO-31 (CO-31):

Form 886-A (1-1994) Catalog Number 20810W = Page__21 _publish.no.irs.gov Deparimemitotitis Treasury. Antara eze eoemeeee

Schedule number or exhibit

a ae 1004) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX
The contract was with CO-31 and ORG. The goal of CO-31 was to “CO-31 wants to promote
ORG's work in the and then bring sequestration projects to the ORG to
be placed in the CO-8 to be traded. In exchange for its efforts promoting trading
, the CO-31 wants exclusive rights to bring sequestration projects from

through ORG to the CO-8 for one (1) year.”

The contract states that the ORG would pay CO-31 1% commission for all CSU’s sold by ORG
that are brought from the to ORG. The contract also states that as a member
of ORG, the CO-31 will have access to ORG confidential information.

e Contract with the CO-32:

The contract was in June 20XX. The contract states that the ORG would pay the CO-32 two
and one-half percent (2.5%) of the gross trade revenues for all trades for projects
they bring in or secure a listing agreement or a buy/sell agreement and the ORG will receive
seven and one-half percent (7.5%) as commission.

e Contract with the CO-33:
The contract was in December 20XX. The contract states that the ORG would pay the CO-33
two and one-half percent (2.5%) of the gross trade revenues for all trades for
projects they bring in or secure a listing agreement or a buy/sell agreement.

Financial information

The ORG Profit and Loss statement shows revenues deriving from the following sources:

TY 20XxX:

DNRC grant $
DOE-CO-19 grant §$
Total revenue $

The ORG Profit and Loss statement shows the following expenses for contracted services:

Marketing Director-RA-2 $
Project broker-President $
RA-4, CO-27 $
RA-5, CO-17 $

$

The ORG filed Form 1099-MISC for the following individuals:

Form 886-A (1-1994) Catalog Number 20810W = Page 22 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

ie ae EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX
Form type Namee Amounts
1099-MISC RA-5, CO-17 $
1099-MISC COQ-27 $

1099-MISC CO-26s,Inc.
$

A review of ORG financial records shows ORG underreporting CO-26 income of $.
The ORG filed Form W-2 for administrative services for the following individual:

Form type _Namee Amounts
W-2 RA-8 $

The contracted service for the above individuals (subcontractors) works as follows:

1. President, RA-2, RA-4 and RA-5 would submit an invoice detailing their work to ORG (work
   record).

President would approve of the invoices

The invoices are then submitted to CO-19 for payment of services rendered

CO-19 would submit the check to ORG

ORG would then issue the checks to the subcontractors (checks are signed by President)

aArWN

The approval for payment of the subcontracted services rendered was by President, including his
own services. President also approved of the ORG’s expenses, including his own expenses.

President and RA-2 of CO-26 charge ORG $ per hour for professional services rendered. ORG
also pays President's travel expenses to conduct ORG work. This included meals, lodging,
airfare, etc. President and RA-2 also had use of the ORG’s credit card—The CO-34 card. The
charges to the CO-34 card were approved by President.

RA-4 of CO-27, located in City, State, charge ORG $ per hour for professional services rendered.

ORG also pays for RA-4’s travel expenses. This included lodging, airfare, meals, etc. RA-5 of the
RA-6, located in City, ID charge ORG $ per hour—this includes his salary and the tribe's standard
fringe benefit package.

TY 20XX:
The ORG Profit and Loss statement shows the following revenue sources:

contracts $
DOE-CO-19 grant $

Form 886-A (1-1994) Catalog Number 20810W = Page. 23 ~_publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

oa ia ah EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX
Total revenue $

The ORG Profit and Loss statement shows the following expenses for contracted services:

Marketing Director-RA-2 $
Project broker-President $
RA-4, CO-27 $
RA-5, CO-17 $

The ORG filed Form 1099-MISC for the following individuals:

Form type Namee Amounts
1099-MISC RA-6 $
1099-MISC RA-6, RA-5 $
1099-MISC CQ-27 $
1099-MISC CO-26 $

$

The ORG filed Form W-2 for administrative services for the following individual:

Form type Namee Amounts
W-2 RA-7 $

The contracted service for the above individuals (subcontractors) works as follows:

1. President, RA-2, RA-4 and RA-5 would submit an invoice detailing their work to ORG (work
   record).

President would approve of the invoices

The invoices are then submitted to CO-19 for payment of services rendered

CO-19 would submit the check to ORG

ORG would then issue the checks to the subcontractors (checks are signed by President)

aPwON

The approval for payment of the subcontracted services rendered was by President, including his
own services. President also approved of the ORG’s expenses, including his own expenses.

President and RA-2 of CO-26 charge ORG $ per hour for professional services rendered. ORG
also pays President's travel expenses to conduct ORG work, including meals, lodging, airfare, etc.
President and RA-2 also had use of the ORG’s credit card—The CO-34 card. The charges to the
CO-34 card were approved by President.

RA-4 of CO-27, located in City, State, charge ORG $ per hour for professional services rendered.
ORG also pays for RA-4’s travel expenses, including lodging, airfare, meals, etc.

Form 886-A (1-1994) Catalog Number 20810W Page 24 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

wee posit 1904) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX

trading transactions:

The ORG financial records, i.e., Profit and Loss statement, general ledger, etc., did not report
trading activities. A review of ORG 20XX through 20XX meeting minutes revealed
that ORG conducted trading activities and received income from the trades since
inception. The 20XX meeting minutes showed that revenues were received from
trade projects with private landowners and affiliate members. In 20XX, ORG reported revenues of
$ from contract. Per conversation with President, the trade revenues were
derived from selling offsets to a Mexican nonprofit company (Mexico trade) and from a
reverse auction with the U.S. House of Representatives (Exhibit G).

The following information was shown in the 20XX meeting minutes:

e rading activities was with 66 landowners (Crop pool #1), Gross of $
e Forestry pool, Gross of $

Upon request, ORG provided a list of the 66 landowners. A review of the 66 landowners revealed
that they were primarily individuals and for profit businesses. It was also revealed that these
individuals and business entities were not the ORG supported organizations.

Upon request, ORG provided handwritten spreadsheets of trading transactions with
the 66 landowners. The spreadsheets showed a proportionate income distribution to the
landowners, CO-26, CO-27, and affiliate members. The spreadsheets also showed trading fees
deducted from the transactions. President stated that the trade on the CO-8 was
done in vintage years/credits.

According to the ORG Handbook and CO-8 website, the minimum trading unit on the CO-8 is one
Exchange Offset. Each exchange is identified by annual Vintage. Annual Vintage means the year
it was eligible under CO-8 rules to be used for compliance with the CO-8 emission reduction
schedule, “all CO-8 offsets are issued on a retrospective basis, with the CFI vintage applying to
the program year in which the GHG reduction took place. Projects must undergo third party
verification reports are then inspected for completeness by the Financial Industry Regulatory
Authority (FINRA).”—this means participants are eligible for backdated sequestration
credits, back to 20XX when CO-8 started trading.

The following information was provided by ORG detailing the gross sales receipt of
trade on the CO-8 (with 66 landowners, representing 110,379 acres and 73,402 metric tons), and
proportionate payments and commissions paid to pool participants.

Trade proceeds for Pool #1 (66 landowners in the pool):

20XX year: RA-8 Total Net

Form 886-A (1-1994) Catalog Number 20810W = Page 25 _publish.no.irs.gov Department of the Treasury-internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX
ORG CO-26 Group Affiliates withheld amount
Gross 5% 2.50% 2.50% 1% 89%

Gross for Grass
Gross for No Till

20XX year: RA-8 Total Net
ORG CO-26 Group Affiliates withheld amount
Gross 4% or 5% 2.50% 2.50% 1% 89%

Gross for Grass
Gross for No Till

Grand total for
20XX and 20XX

The above table shows the disbursements from the proceeds for the sale of their carbon to the
individual landowners, ORG, CO-26, and others as follows: 89% to landowners, 5% to ORG,
2.50% to CO-26, 2.50% to The CO-27, and 1% to Affiliate members.

According to President, the income from the trade sale was withheld and was not distributed to the
participants in the pool until 20XX ($ in 20XX vintage year and $ in 20XX vintage year). The net
amount of $ and $, respectively, was disbursed to private landowners in 20XX.

The payments to landowners were at net of fees. On occasions, the fees associated with trading
on the CO-8 were paid for by grants received by ORG, sub-aggregators or via revenues received
through subsequent trades. Additionally, the trading fees are sometimes reimbursed back
to the private landowners. The trading fees for vintage years 20XX and 20XX were later
reimbursed back to private landowners by the ORG of $. Per meeting minutes dated April 14,
20XX, there were over $ in fee reimbursements, making the total net amount disbursed to
landowners of $.

Sometimes when the carbon credits are traded, the trade income would be used to pay for the
trading fees. The trade income from this transaction would not be reported on the financial
statements.

The following table also shows the disbursements from the proceeds for the sale of carbon to the
CO-17--Forestry pool project. The trade was conducted with a Mexican nonprofit company
(Mexico Trade) in connection with a reverse auction with the U.S. House of Representatives. The
forestry carbon sequestration pool was conducted in 20XX and income was recognized in 20XX.

Trade proceeds (Forestry pool):

Gross ORG CO-26 CO-27 Landowner-CO-17
20XX year:
20XX year:
Grand total

Form 886-A (1-1994) Catalog Number 20810W = Page 26 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

ig inka EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX

The ORG financial records shows that the payment to the CO-17 was after taking into account the
funds that went to CO-26, RA-8, and ORG. The disbursements were made in two payments.
Check # for $ was made in 20XX and check # for $ was made in 20XX as final payment.

LAW:

IRC section 501(c)(3) describes certain organizations exempt from taxation under section 501(a)
of the Code and reads as follows:

Corporations, and any community chest, fund, or foundation, organized and operated
exclusively for religious, charitable, scientific, testing for public safety, literary, or
educational purposes, or for the prevention of cruelty to children or animals, no part of the
net earnings of which inures to the benefit of any private shareholder or individual, no
substantial part of the activities of which is carrying on propaganda, or otherwise
attempting, to influence legislation, and which does not participate in, or intervene in
(including the publishing or distributing of statements), any political campaign on behalf of
any candidate for public office.

Section 1.501(c)(3)-1(a)(1) of the Regulations provides that in order to be exempt as an
organization described in section 501(c)(3) of the Code, the organization must be one that is both
organized and operated exclusively for one or more of the purposes specified in that section. If an
organization fails to meet either the organizational or operational test, it is not exempt.

Section 1.501(c)(3)-1(c)(1) of the Regulations provides that an organization will not be regarded
as operated exclusively for exempt purposes if more than an insubstantial part of its activities is
not in furtherance of exempt purposes. The organization will not qualify for exemption if a
nonexempt activity is more than an insubstantial part of its activities, or if an activity of the
organization has more than an insubstantial nonexempt purpose.

Section 1.501(c)(3)-1(c)(2) of the Regulations provides that an organization is not operated
exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the
benefit of private shareholders or individuals. Section 1.501(a)-1(c) states that the word “private
shareholder or individual” refer to persons having a personal and private interest in the activities of
the organization.

Section 1.501(c)(3)-1(d)(ii) of the regulations provides that an organization is not organized or
operated exclusively for one or more exempt purposes unless it serves a public rather than a
private interest. Thus, 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.

Form 886-A (1-1994) Catalog Number 20810W Page 27 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

a ai 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX

Section 1.501(c)-1(d)(3) of the regulations defines the term “educational” as including the
instruction or training of the individual for the purpose of improving or developing his capabilities,
or the instruction of the public on subjects useful to the individual and beneficial to the community.

In Better Business Bureau v. United States, 326 U.S. 279 (1945), the court held that regardless of
the number of truly exempt purposes, the presence of a single substantial non-exempt purpose
will preclude exemption under section 501(c)(3).

In Living Faith, Inc. v. Commissioner, 950 F. 2d 365, a nonprofit organization which operated
restaurants and health food stores in accordance with the doctrines of the Seventh-day Adventist
Church. The court found that Living Faith conducted its operations with a substantial commercial
purpose, and therefore does not qualify as a tax-exempt organization.

Harding Hospital, Inc. v. United States, 505 F.2d 1068, 1072 (6th Cir. 1974), the court holds that
the transfer of funds directly to the disqualified persons and to their business served the financial
interests of the disqualified persons and/or their business.

Church by Mail, Inc. v. Commissioner, 769 F.2d 1387 (9th Cir. 1985) and est of Hawaii v.
Commissioner, 71 T.C. 1067 (1979) states that an organization has a substantial commercial
purpose that serves a private rather public interests, it will not be recognized as exempt.

Rev. Proc. 20XX-52, with respect to revocation or modification of a determination, states in part,
the revocation or modification of a determination letter or ruling recognizing exemption may be
retroactive if the organization omitted or misstated a material fact, operated in a manner materially
different from that originally represented, or, in the case of organizations to which section 503 of
the Code applies, engaged in a prohibited transaction with the purpose of diverting corpus or
income of the organization from its exempt purpose and such transaction involved a substantial
part of the corpus or income of such organization.

TAXPAYER’S POSITION:
GOVERNMENT’S POSITION:

Based on the facts and circumstances described above, it is the government's position that the
ORG does not qualify as an organization exempt from tax because ORG did not operate
exclusively for purposes described under IRC 501(c)(3). Therefore, the government is proposing
the revocation of the organization’s tax exempt status under IRC section 501(c)(3).

With respect to non-exempt commercial purpose(s):
The ORG’s primary activity and purpose since inception is the trading of carbon offsets on the

public market, CO-8 (CO-8) and to eventually carbon credit trade nationally. The ORG, in
conjunction with the CO-8, was formed to setup an infrastructure for the voluntary cap and trade

Form 886-A (1-1994) Catalog Number 20810W = Page__28 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

ager EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX
system in the sequestration market. The conduct of trade onto the market

place is a non-exempt commercial activity.

The facts show that the net income of ORG is not being distributed to benefit the supported
organizations; rather it is directed to private for-profit domestic and foreign entities. ORG is an
environmental brokerage firm that provides services such as matching buyers and sellers,
organizing and constructing trade deals in the carbon sequestration trading market.

As an Offset Aggregator for the CO-8, the ORG is acting as a conduit organization for private
landowners and for- profit entities. Through an offset aggregator, small landowners can be
registered and sell . Offset Aggregators serve as administrative and trading
representatives on behalf of numerous individual participants.

The ORG is being used as a conduit to accomplish a prohibited transfer of money or property--is
acting as a mere conduit in a transfer between the private landowners and
purchasers through the CO-8.

As an intermediary organization, ORG is providing a commercial facilitator service operated for a
substantial non-exempt purpose and private benefit, factors that is inconsistent with section
501(c)(3) status.

ORG web site states that ORG’s purpose was to “act as a fiscal agent who is actually contracting
and selling the offsets on the CO-8”. The ORG marketing goal is to continue to trade in
the market-based program that is capable of reaching out across the U.S., and to expand into
other tradable offsets, such as wind solar, fuel switching, methane, etc. for trade on the CO-8.
Additionally, it was stated, in the 20XX meeting minutes, that President was planning on
conducting ORG activities on a commercial basis.

With respect to private benefit/interests:

An organization is described in section 501(c)(3) only if no part of its net earnings inures to the
benefit of any private shareholder. 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.
An organization is not operated exclusively for exempt purposes if its net earnings inure to the

benefit of private shareholders or individuals.

In the years under examination, it was determined that the ORG’s net earnings have inured to the
benefit of its insiders. The insider is in a position to exercise control over the organization's net
earnings as if they were his/her own by using them at will rather than within the limitations. In
effect, the insider is using the public’s “net earnings” for his/her own benefit. The facts show that
President is able to use the organization's funds as if they were his own. President had
supervision over the office manager. All the checks written are signed by President. President
also signed tax returns and controlled all the brokerage accounts.

Form 886-A (1-1994) Catalog Number 20810W = Page 29 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

ae = ve EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN December 31, 20XX
and 20XX

In addition, ORG’s net earnings benefited individual private landowners as well as for-profit
entities. Helping private landowners such as ranchers, farmers, private forest owners, and other
corporations sell from their land is not a charitable purpose nor are they considered
members of a charitable class under IRC 501(c)(3).

When an organization operates for the benefit of private interests, such as designated individuals,
the creator or his family, or persons directly or indirectly controlled by such private interest, the
organization by definition does not operate exclusively for exempt purposes. Section 1.501(c)(3)-

1(d)(1)(ii).

Income received by private landowners as a result of trading on the CO-8 benefits
an individual or for profit entity and consequently a prohibitive transaction under IRC section
501(c)(3).

ORG received grants from CO-19 and used a majority of the funds to pay for contracted out
services, specifically to President, RA-2, and other consultants. A miniscule amount was paid to
conduct the administrative duties of ORG. The supporting organization was supposed to support
the eight supported organizations, but none was actually spent to support its charitable activity in
comparison to the amount that was spent for the personal benefit of the executive director,
marketing director, consultants, and private landowners/businesses.

ORG advertised in its promotional materials that carbon trading was a way for private individuals
or landowners to make money from selling offsets in that it offers “landowners an
opportunity to realize revenue from a new source”.

Essentially, private landowners are being paid to sequestered from their land and their
independent-contractors are urged to promote the ORG activities, where these contractors are
recruited with the promise of earning a lot of money. In recruiting its contractors, the ORG
advertised that its operation would make money for its contractors.

The ORG’s Form 990 reported the following revenue source:

TY 20XX TY 20XX
Contributions, gifts, grants:
Direct public support $
Govt contributions and grants $
Interest on saving/investments: $
Total Revenue $

Form 886-A (1-1994) Catalog Number 20810W Page 30 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer

ORG

Tax Identification Number

EIN

Year/Period ended

December 31, 20XX

and 20XX

A review of the organization’s financial records indicate that the $ in revenue reported in 20XX
year should be reported as from government contributions and grants via CO-19, not direct public
support. The funds of $ in 20XX and $ in 20XX year were derived from the DNRC via CO-19 and
not directly from government grants or contributions. It was also noted that in 20XX, the $ was
from trade activity, not public contributions.

In 20XX, of the total revenue received, $ of the ORG’s funds (76%) have been distributed to the
CO-26 partnership and private consultants, of which $ went to the CO-26 partnership (65%), not
including the profit sharing the CO-26 and the consultants were to receive (5% combined) for
every carbon trade conducted. Only $ went to pay for the office manager.

In 20XX, of the total revenue received, $ of the ORG’s funds (82%) have been distributed to the
CO-26 partnership and private consultants, of which $ went to the CO-26 partnership (60%), not
including the profit sharing the CO-26 and the consultants were to receive (5% combined) for
every carbon trade conducted. Only $ went to pay for the officer manager.

With respect to the ORG trading transactions, of the total revenue generated from the
trade in 20XX ($), only $ went to ORG and $ was distributed to private landowners. The rest of
the funds were distributed to the CO-26 and CO-27. In 20XX, of the total revenue generated from
the trade ($), only $ went to ORG and §$ was distributed to private landowners. The rest of the
funds were distributed to the CO-26 and CO-27

Consequently, the ORG is providing more than an insubstantial benefit to insiders, President, RA-
2, RA-4, through direct compensation and other payments to or for the benefit of these insiders,
and through payments to controlled for-profit businesses.

CONCLUSION:

The ORG does not qualify as an organization exempt from tax because ORG did not operate
exclusively for purposes described in IRC 501(c)(3), ORG net earnings inured to the benefit of
private individuals, and that more than an insubstantial part of its activities furthered private
purposes rather than exempt purposes.

The ORG'’s primary activity and purpose since inception has consisted of the trading of carbon
offsets on the public market, CO-8. The income generated from trading serves a
substantial nonexempt purpose of promoting private business interests.

Additionally, ORG’s activities does not serve a charitable class and thus, does not operate to
further a charitable purpose(s) within the meaning of section 501(c)(3).

The ORG exemption should be revoked effective January 1, 20XX.

Form 886-A (1-1994) Catalog Number 20810W = Page__ 31 ~_publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

ORG EIN December 31, 20XX
and 20XX

The ORG is required to file Federal income tax returns on Form 1120 for any years that are still
open under the statute of limitations, for tax periods after December 31, 20XX.

Form 886A (1-1994) Catalog Number 20810W = Page 32 _pubilsh.no.irs.gov Department of the Treasury-internal Revenue Service