IRS revokes a section 501(c)(3) exemption for private inurement and nonexempt activity

View official IRS release (PDF)

Plain-English summary

The IRS revoked an organization's federal tax exemption under section 501(c)(3), effective January 1, 2007. The examination report states that the organization commingled its bank account with the founder's personal finances and used organizational funds for personal expenses. It also states that the organization operated websites, sold products, and supported political activity that the IRS found inconsistent with its stated charitable and educational purposes. The letter says contributions are no longer deductible and that the organization must file Form 1120 returns.

Ruling snapshot

• Question: Whether the organization continued to qualify for exemption under IRC section 501(c)(3).
• Outcome: revocation
• Key authorities: IRC §§ 501(c)(3), 170, 4942, 4958, 6033, and 7428; Treas. Reg. §§ 1.501(c)(3)-1, 1.501(a)-1, and 1.501(c)(3)-1(f)(2).

Full text (IRS public release)

Internal Revenue Service
Appeals Office
300 N. Los Angeles Street, MS-8000
Los Angeles, CA 90012

Department of the Treasury
Taxpayer Identification Number:
Person to Contact:
Release Number: 201203031
Release Date: 1/20/2012
Date: 10/27/2011
Tax Period(s) Ended:
UIL: 501.03-01

Certified Mail

This is a final adverse determination regarding your exempt status under section 501(c)(3) of the Internal Revenue Code (the "Code"). It is determined that you do not qualify as exempt from Federal income tax under section 501(c)(3) of the Code effective January 1, 2007.

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

To be an organization described in section 501(c)(3) of the Code, an organization must be organized and operated exclusively for charitable, educational, or other exempt purposes described in section 501(c)(3). Our examination of your operations in 2007 and 2008 showed that you were not operated exclusively for exempt purposes because your net earnings inured to your founder and principal officer by your failure to maintain appropriate records to demonstrate furtherance of exempt purposes and by commingling your finances with said officer. Moreover, more than an insubstantial purpose of your organization was to further the private interests of said officer.

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

You are required to file Federal income tax returns on Forms 1120 for the tax periods stated in the heading of this letter and for all tax years thereafter. File your return with the appropriate Internal Revenue Service Center per the instructions of the return. For further instructions, forms, and information please visit www.irs.gov.

If you were a private foundation as of the effective date of revocation, you are considered to be taxable private foundation until you terminate your private foundation status under section 507 of the Code. In addition to your income tax return, you must also continue to file Form 990-PF by the 15th Day of the fifth month after the end of your annual accounting period.

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

If you decide to contest this determination, you may file an action for declaratory judgment under the provisions of section 7428 of the Code in one of the following three venues: 1) United States Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for the District of Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date this determination letter was mailed to you. Please 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. See also Publication 892.

You also have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a United States Court. The Taxpayer Advocate can, however, see that tax matters that may not have been resolved through normal channels get prompt and proper handling. If you want Taxpayer Advocate assistance, please contact the Taxpayer Advocate for the IRS office that issued this letter. You may call toll-free, 1-877-777-4778, for the Taxpayer Advocate or visit www.irs.gov/advocate for more information.

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

Sincerely Yours,

Appeals Team Manager

Enclosure: Publication 892

Internal Revenue Service
Department of the Treasury

Date: SEP 30 2010

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

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

F 886 A Department of the Treasury- Internal Revenue Service Schedule No. or r Explanation of Items Exhibit Name of Taxpayer: EIN: Year/Period Ended December 31, XXX XXXKX XXXKX December 31, XXX I. issue

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

il, Facts
A. Organizing Documents
ji. Articles of Incorporation

XXX (“Organization”) was formed on February 1, XXXX. Its Articles of Incorporation state the Organization's specific purpose is:

to operate for the advancement of education and for other charitable purposes, by the distribution of its funds for such purposes, and particularly for the study of and research into the areas of heart, respiratory and stress related disease with an emphasis on early detection of such iliness and the study of preventative care and treatment of the same...corporation is formed to operate exclusively for such educational purposes...making distributions to organizations which qualify as

tax-exempt organizations...

it. Form 1023

Activities and operational information, Question 1, the organization states that its sources of financial support would be from applying to agencies of the federal and state government, and application to available private funds (ie, foundation grants) will be the organization's main source of financial support.

Part Ill —

Question 2, describe the organization's fund raising program and explain to what extent it has been put into effect. The Organization responded, “As of this date only concept and program design planning have been initiated, to develop our
....project to study ... and its relationship to hypertension and cardiovascular

disease.”

Activities and operational information, item 3, the organization

In Part II -
d those that will be carried on):

described its activities (presently carried on an

Form 886-AvRev.-68) Department of the Treasury - Internal

Revenue Service
Page: -1-

Form 886. A Department of the Treasury: intemal Revenue Service Schedule No. or Explanation of Items Exhibit Name of Taxpayer: EIN: Year/Period Ended December 31, XXX XXXXX XXXXX December 31, XXX

At this time the XXXXxX is not operational fully, due to the planning and conceptual design stage which is crucial to the nature of the professional health

industry.

As our primary purpose will be the establishment of professional education programs to the existing health-care providers (primarily hypertension). Our primary planning phase at this time is the development of a community based program to further research in the area of respiratory and stress-related disease. (timeline allows 3 — 4 months)

I. The Second planning phase will include coordinating and compiling existing health care providers servicing about indicated health care needs. Contacting and affiliating with similar professional medical service and research organizations (Estimate phase 2 / 6 months) :

iii. The third phase will be implementation of 1 + 2 and include

development of a plan for a medical research facility

coordinated with a professional education/provider program

Part Ill — Activities and operational information, item 4, Membership of the organization’s governing body is:

(a) Names, addresses, and duties of officers, directors, trustees, etc:

MD resident in

XXXXX, MD ceccccsscessececceees 0 ceeeveneeeees

psychiatric
Medicine, XXXXX

Medical Director (XXXXX)

XXXXX.

XXXXX, Vice President .........0:6 ceeeees Director of Medical — Medicare Accounting Systems

XXXXX XXXXKX

XXXXX, Secretary- Treasurer... .....-sseeee MA Public Service and five years background in

XXXXX XXXXKX

x k & &
' AKA XXXXX

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

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or Explanation of Items Exhibit Name of Taxpayer: EIN: Year/Period Ended December 31, XXX XXXKX XXXXX December 31, XXX

Assoc. Community
Services.)

In Question 7, the organization describes its assets, “assets not fully operational. Early drafting of proposal for funding is under study. Upon completion of draft,

proposal(s) will be submitted to appropriate agency (s).”

Question 8 (a), What benefits, services, or products will the organization provide with respect to its exempt function?

“As a service to the XXXXX community, an educational program to assist providers of health care delivery systems (professional Ed.) will be implemented: and offered to same.”

Question 8 (b) Have the recipients been required or will they be required to pay for the organization’s benefits?

The Organization responded in the positive, “Yes” — “In some cases, a donation may be asked in deference to professional consultations or services rendered, as in the case of the proposed professional / provider education program.”

Part V — Financial Data —

The organization only reported legal fees as of June 20, XXXXX as the only data available for the organization.

Attorney Preparation, research and incorporation $560, XXXXX Tax Board $200, Stationary, Letterhead, Printing $278, Office supplies, telephone $196, Total

incorporation costs: $1,234.

Part Vill, Question 21, Newly created organizations with less than one years experience: Explain how the organization is planning to satisfy the requirements

of section 4942(j) with respect to the income test and one the of the supplemental tests during its first year's operation. .

Under provisions income test (2), qualifying distributions (a) “Amounts...”, the organization’s administrate and other expenditures, including fixed monthly expenses are at present presumed by the Trustees themselves, upon the future receiving of grants, gifts, or other income, adjusted net income , as defined in section 4942(f) will be paid directly to

Form 886- Acrev.4-68) Department of the Treasury - Internal Revenue Service Page: -3-

Form 8 86A Department of the Treasury - Internal Revenue Service Schedule No. or Explanation of Items Exhibit Name of Taxpayer: EIN: Year/Period Ended December 31, XXX XXXXX XXXXXK December 31, XXX

satisfy active conduct of the foundation's activities. As the foundation activities are planed to be educationally and research oriented and of a nature that will involve professional consultation and services, a typical budget for (... illegible...) year ending June would allocate all net income
...(illegible)....to funding administrative costs, fixed, maintenance expenses, professional services....etc.

Assets test # 1 Substantially more than 65% of the foundation’s assets are/will be devoted to the active conduct of our activity, ie, to meeting the expenditures generated from creation of medically - related research projects, and establishing the professional education —provider services

described on page 2.

The Organization listed on Schedule B-I a List of Personnel

Name Position Percent of time XXX
Salary Support

XXXXX, M. D. Project Director 100% $9,000
XXXXxX, O.D. Project Assistants 100% 6,000
XXXXX, M.P.S. Secretary Adm/Asst 100% 4,800

iii. Determination Letter

Determination Letter (Form L-391 (4-73)) was dated June 02, XXXX. The organization was granted tax exempt status under IRC section 501(c)(3), and classified as a publicly supported organization described in section 509(aX1) &

170(b)(1(AXVvi).

The Organization's advanced ruling period ended on June 30, XXXX. In a letter dated July 22, XXXX the organization was classified as a private non-operating foundation under section 501(b)(1)(a). On October 14, XXXX, the organization requested an advanced ruling for 60 months termination of their private foundation status. On February 24, XXXX, the Service granted the organization

an advanced ruling period which ended on June 30, XXKXX.

B. The Organization and Affiliated Entities

XXXXX_, reported its mailing address as XXXXX. The Organization is solely

controlled and run by XXXXX, who resides at XXXXX,

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

Revenue Service
Page: -4-

Form 886A Department of the Treasury Internal Revenue Service Schedule No. or Explanation of Items Exhibit Name of Taxpayer. EIN: Year/Period Ended December 31, XXX XXXXX XXXXX December 31, XXX

XXXXX — recipient of funds from (XXXXX). Organization is controlled by founder XXXXX, spouse of XXXXX. reported its mailing address as XXXXX.

C. Form 990 Filings

The Organization filed Forms 990 for the years XXXX and XXXX. The XXXX Form 990 was filed on November 18, XXXX and the XXXX Form 990 was filed

on November 10, XXXX. The forms reported:

Year XXXX XXXX

1. Contributions
   Gifts Grants $264,000 $180,000

2. Total
   $264,000 $180,000

Revenue
10.Grants $36,000

12. Salaries,

other
compensation . $24,000.00

13. Program
    Service
    Management
    and General

14. Total
    Expenses $273,122.00 $192,898.00

19 Excess ($9,122.00) ($12,898.00)

21. Net Assets
    at end of year

$236,926

$36,196

$12,834.00 ($64.00)

D. Activities

The XXXX and XXXX Forms 990 Statement of Program Service Accomplishments state the organization’s primary exempt purpose is the publishing and distribution of newsletters and health information / Nationwide

promotional campaign to promote health and human services.

The Organization stated that it promotes health and healing through the arts (XXXXX), holds marketing events where the organization set up an information booths. The organization did not provide dates of specific exempt activities it

Form 886- Acrev.+68) Department of the Treasury - Internal Revenue Service Page: -5-

Por 886A Department of the ‘Treasury - Internal Revenue Service Schedule No. or Explanation of Items Exhibit Name of Taxpayer: EIN: Year/Period Ended December 31, XXX XXXXX XXXXX December 31, XXX

conducted or any information describing their daily operations and how it serves

and exclusive exempt purpose.
The organization operated two websites during the years under audit:

www.XXXXxXI2.. This was the Organization's (XXXXX) website, as it was commingled with XXXX’s XOXXXX and other non-exempt activities. The website stated:

The XXXXX is a Research And Development Program Of The XXXXX, @ 501(C)3 Non-Profit Wholistic Health Educational

Foundation.

The XXXXxX is described on website:

THE XXXXX, a wholistic, proactive, educational, empowerment party is 2 synthesis of the Republican, Democratic, Libertarian and Green Parties. We have formulated a practical, synergistic 7-point program which addresses and serves to resolve our current socio-economic and ecological challenges... We urge you now to support The XXXXX and our progressive and

enlightened programs and policies!

The organization offers membership to the XXXXX for $30.00 plus $6.00 shipping and handling. Membership is paid through the organization's website and links to a paypal site for payments to be made to the X20OXX.

The organization also accepts donations on XXXXX. Donations link to a paypal site for donations to XXXXX. The Organization also sells “XXXXX” videos. The website describes XXXXX as:

XXXXX is new art form which is both evolutionary and revolutionary in that it serves to actualize human potential through the masterful synergy and synchronization of sacred mandalic art, sacred geometries, exquisite natural imagery and beautiful music...XXXXX elicits a powerful emotional, transpersonal, and _ transcendental experience which demonstrably and consistently "Inspires, Delights, Heals And

Enlightens".

HTTP://WWW.XXXXX/

x kk
2 See attachment 1

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

Revenue Service
Page: -6-

Formn 886A Depanment of the Treasury Internal Revenue Service Schedule No. or Explanation of Items Exhibit Name of Taxpayer: EIN: Year/ Period Ended December 31, XXX XXXXX XXXXX December 31, XXX

THE XXXXX PROJECT - is a Research and Development Project of The XXXXX...The XXXXX is a division of The XXXXX, a 501-C-3 Tax Exempt Non-Profit Educational

Foundation.
The organization's websites contained incidental educational articles, however, the vast majority of the websites promoted the XXXXX, the XXXXX project, the sale of products such as videos and elixirs.

ion filed Forms 460, Recipient Committee Campaign Statement Page. These forms show that from March 18, XXXX through April 1, XXXX and from June 1, XXXX through June 30, XXXX, the organization made $7,500 and
$10,000, respectively, in expenditures for the XXXXX.

The Organizat

The campaign disclosure statement form was filed by the XXXXX, part of the XXXXX, which is a division of the XXXXX.

The XXXXX is a political party created by XXXXX, that supported and initiated the ballot, Proposition C, which wanted to see the XXOXX of XXXXX handed

over to the City of XXXXX, have the X1000X torn down, and a center for peace built in its place.

XXXXX Proposition C appeared on the February 5, XXXX countywide ballot in XXXXX, XXXXX, where it lost by a margin of about 3-1.

Proposition C Adopting a Policy that the City Acquire XXXXX to Make it a Global Peace Center -- City and County of XXXXxX (initiative Policy

Declaration - Majority Approval Required to Pass) Shall it be City policy that the City should explore and facilitate the

acquisition of XXXXX from the United States Government to transform it into a XXXXX?

The Organization incurred numerous “professional fees”, “printing and reproduction” expenses, community outreach and networking expenses, all of which were not substantiated to the Service or shown how they serve an exempt

purpose.

It is also apparent that the org
numerous products on its website and bank records show re

anization is selling products via Paypal. It offers ceipts from Paypal.

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

Revenue Service
Page: -7-

i 886A Department of the ‘Treasury Internal Revenue Service Schedule No. or Explanation of Items Exhibit Name of Taxpayer: EIN: Year/Peniod Ended December 31, XXX XXKKXK XXXXX December 31, XXX In Part Ill — Activities and operational information, item 3, the organization described its activities (presently carried on and those that will be carried on) thusly;

anization’s plans to establish and provide
“professional education programs to existing health-care providers... the area of respiratory and stress-related disease”, “...affiliating with similar professional medical and research organizations”, “develop a medical research facility coordinated with a professional education/provider program’ as stated in Part III -

of the Form 1023 was not implemented.

The audit revealed that the org

n responded to Question 8 on the Form 1023 that it would

The Organizatio
—provider services program: This activity has

establish a professional education
not been implemented.

The organization states that its sources of financial support would be from “applying to agencies of the federal and state government, and application to available private funds (ie, foundation grants) will be the organization’s main

source of financial support.”

The Organization’s support is from family trusts, XXXXX’s mother, and de minimis pay pal sales. The Organization provided no evidence that It applied to any federal or state agency for funding. The organization does not have a broad

range of public support.

The Organization could not show that its activities serve an exclusive exempt se. The Organization serves personal and private interests of XXXXX.

The organization does not own any assets (besides the bank account commingled with XXXXX) such as to carry on any exempt function (i.e. no vehicle, building/research facility or equipment, lab supplies, etc).

purpo

E. Revenues
Total revenue reported on the Form 990:

Year XXXXKX XXXKX

4. Contributions Gifts Grants $264,000 $180,000

Per Examination

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

Revenue Service
Page: -8-

Fon 8 86 A Department of the Treasury Internal Revenue Service Schedule No. or Explanation of Items Exhibit Name of Taxpayer: EIN: Year/ Period Ended December 31, XXX XXXXX XXXXX December 31, XXX

i. Revenue and Bank Accounts

The banks statements reveal that the vast majority of the organization’s support

come from trusts established by XXXXX's mother, unidentified bank accounts, and other unidentified sources such as cash, wire transfers, etc. The Forms 990 understate the revenue for XXXXX and XXXXX by $109,602 and $100,994,

respectively (see below).

XXXXX Bank Acct # xxxxx

WOON Deposits XXXKX
1 $35,143.38 Cash $41,797.86
2 $41,047.95 XXXXX Trust $87,407.48
3 $27,888.19 Incoming Wire -

4 $18,959.00 *XXXX $65,379.87
5 $28,945.25 OK $28,000.00
6 $40,699.04 Incoming Wire from
7 $35,622.37 XOX $27,250.00
8 $41,784.63 ‘Incoming Wire from’
9 $26,238.00 XXXXX $10,000
10 $16,864.00 seeing $15,697
ee from
11 $28,586.00 Tagster
42 $32,958.00 XXXXX $4,200.00
pay pal $272.00
$280,004.21

Year Total $374,735.81 Total

ber 2062, From XXXXX for $100,000 was written to “XXXXX” on June 08, XXXXX. The check was subsequently deposited into XXXXX bank account XXXKK | KKKKX / XXXXX (endorsement on the back of the check). The check cleared on June 11, XXXXX. The Organization's bank records (XXXX Bank XXXXX) show that beginning June 11, XXXXX, a series of transfers were made from the unknown account XXXXX to the Organization’s XXXXX bank Bank Account XXXXX has not been revealed to the Service when its

account xxxxx. XXXXX
initial information request asked for all bank statements.

XXXXX Check Num

Transfers from XXXXX:
Transfer from XXXXX $5,000.00 6/11/XXXXX
Transfer from XXXXX $2,000.00 6/20/XXXXX
Transfer from XXXXX $3,000.00 6/22/XXXXX
Transfer from XXXXX $6,000.00 6/26/XXXXX
Transfer from XXXXX $4,000.00 7/2/XXXXX

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

Schedule No. or

Fon 886 A Depanment of the Treasury - Internal Revenue Service Explanation of Items Exhibit Name of Taxpayer: EIN: Year/Period Ended December 31, XXX XXXKXKXK XXXXX December 31, XXX

Transfer from XXXXKX $1,000.00 TISIXXXXX

Transfer from XXXXX $1,500.00 7/10/XXXXX

Transfer from XXXXX $2,000.00 7/18/XXXXX

Transfer from $1,000.00 7/12/XXXXX

Transfer from XXXXX $3,500.00 7/23/XXXXX

Transfer from XXXXX $3,000.00 7/27/XXXXX

Transfer from XXXXX $1,500.00 B/G/IXXXXX

Transfer from XXXXX $3,000.00 8/9IXXOXOXX

Transfer from $6,079.27 8/13/XXXXX

Transfer from XXXXX $5,000.00 8/21/XXXXX

Transfer from XXXXX $5,000.00 8/24/XXXXX

Transfer from XXXXX $6,000.00 9/11/XXXXX

Transfer from $4,000.00 9/21/XXXXX

Transfer from $5,000.00 9/25/XXXXX

Transfer from XXXXX $5,000.00 10/10/XXXXX

Transfer from $5,000.00 10/152000X

Transfer from XXXXX $5,000.00 10/23/XXXXX

Transfer from $5,000.00 11/5/XXXXX

Transfer from $5,000.00 11/8/XXXXX

Transfer from XXXXX $5,000.00 11/9/XX0OX

Transfer from $500.00 11/30/XXXXX

Transfer from XXXXX $6,000.00 12/13/XXXXX

Total $104,079

Unidentified cash deposits were also made during the year:

Deposit $9,650.00
Deposit $10,030.00
Deposit $68.00
Deposit transfer from XXXKX $50.00
Deposit transfer from XXXXKK $5,000.00
Deposit $313.38
Deposit $120.00
Deposit $30,000.00
Deposit $60.00
Deposit $1,639.95
Deposit $384.00
compusa Return $50.86
Deposit $8,000.00
Deposit $45.28
Deposit $140.00
Deposit $500.00
Deposit $24.00
Deposit $8,300.00

418/XXXXX
4/16/XXXXX
4/1 9/XXXXX
4/23IXXXXX
4126/XXXXX
4/26/XXXXX

2IBIXXXXX

2IIXXXXX
2/1 6/XXXXX
2I221IXXXXX

3/4 /XXXXX

3/5/XXXXX

3/6/XXXXX
3/16/XXXXX
3/23/XXXXX
3/26/XXXXX

AIGIXXXXX

AISIXXXXX

Form 886-Acrev.+-68)

Revenue Service

Department of the Treasury - Internal

Page: -10-

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or Explanation of Items Exhibit Name of Taxpayer: EIN: Year/Period Ended December 31, XXX XXXXX XXXXKX December 31, XXX Deposit $475.00 4/16/XXXXX Deposit $310.00 4/24/1XXXXX Deposit $8,939.88 5/1/XXXXX Deposit $5,620.00 5/8/XXXXX Deposit $250.00 5/15/XXXXX Deposit $1,500.00 5/18DOO0XX Deposit $162.16 5/29/XXXXX Deposit $178.00 5/31/XXXXX Deposit $2,287.23 6/7IXXXXX Deposit $300.00 6/11/XXXXX Deposit $50.00 6/18/XXXXX Deposit $38.30 6/25/XXXXX Deposit $172.37 7I27TIXXXXX Deposit $26.40 8/3DOXKKX Deposit $40.00 8/16/XXXXX Deposit $1,500.00 8/16/XXXXX Deposit $2,000.00 9/28/XXXXX Deposit $130.00 10/3/XXXXX Deposit Transfer from XXXXX $1,400.00 10/5/XXXXX Deposit $36.00 10/10/XXXXX Deposit $250.00 10/22/XXXXX Deposit $1,986.00 11/13/XXXXX Deposit $1,500.00 11/20/XXXXX Deposit $200.00 11/27/XXXXX Deposit $36.00 12/18/XXXXX Deposit $50.00 12/19/XXXXX Deposit $2,000.00 12/20/XXXXX Deposit $3,000.00 12/26/XXXXX Deposit $1,080.00 12/27OXXKXX Total $108,442 Trust deposits are as follow: XXXXKX XXXXX Trust XXXXX Trust 1/2IXXXXX $3,200.00 1/2IXXXXKX $6,700.00 2/6/XXXXX $3,000.00 2/6/XXXXX $5,900.00 3/11XXXXX $6,500.00 3/1/XXXXX $12,000.00 4/2IXXXXX $3,050.00 4/2IXXXXX $6,800.00 5/2IXXXXX $1,485.00 5/2/XXXXX $9,550.00 6/1/XXXXX $5,850.00 6/1/XXXXX $15,750.00 7/3IXXXXX $2,700.00 7/3/XXXXXK $6,850.00 7/31/XXXX $2,800.00 7/311XXXX $7,100.00

Form 886- Acrev.4-68)

Revenue Service

Department of the Treasury - Internal

Page: -11-

Department of the Treasury - Interna! Revere Service

Schedule No. or

Form 886A .
Explanation of Items Exhibit
Name of Taxpayer EIN: Year/Period Ended
December 31, XXX
XXKXX XXXXX December 31, XXX
x x
8/31/XXXX 8/31/XXXX
x $6,100.00 X $13,000.00
9/28/XXXX 9/28/XXXX
xX $2,700.00 xX $6,500.00
41/1 /XXXX 11/1 1XXXX
4 $2,800.00 D4 $6,600.00
12/3/XXXX 12/3/XXXX
X $6,200.00 X $14,300.00
$46,385.00 $111,050.00
$157,435.00

Paypal Deposits are as follow (note, this activity has not been explained to the

Service):

Paypal Transfer Ex Deposit
Paypal Transfer Ex Deposit
Paypal Transfer Ex Deposit
Paypal Transfer Ex Deposit
Paypal Transfer Ex Deposit
Paypal Transfer Ex Deposit
Paypal Transfer Ex Deposit
Paypal Transfer Ex Deposit
Paypal Transfer Ex Deposit
Paypal Transfer Ex Deposit
Paypal Transfer Ex Deposit
Paypal Transfer Ex Deposit
Paypal Transfer Ex Deposit
Paypal Transfer Ex Deposit
Paypal Transfer Ex Deposit
Paypal Transfer Ex Deposit
Paypal Transfer Ex Deposit

$58.00
$24.00
$50.00
$248.00
$30.00
$50.00
$40.00
$228.05
$120.00
$300.00
$60.00
$180.21
$220.00
$70.00
$48.00
$150.00

$40.00
$1,916.26

XXXXX Revenue summary by Type

Trust Deposits $157,435.00
Check 2062 /XXXXX $100,000.00
Unidentifled cash

deposits $108,442.00
Paypal $1,916.00
Additional XXXXX $4,079.00

4181XXXXX
4/1 6/XXXXX
4/291XXXXX
2/5/XXXXX
211 2IXXXXX
2/1 5IXXXXX
3/5/XXXXX
3/211XXXXX
5/4 IXXXXX
5/3/XXXXX
5/14IXXXXX
5/29/XXXXX
8/8/XXXXX
&/20/XXXXX
10/30/XXXXX
12/3/KXXXX
12/31 IXXXXX

Form 886- Acrev.+-68)

Revenue Service

Department of the Treasury - Internal

Page: - 12-

Foam 88 6 A Department of the Treasury - Internal Revenue Service Schedule No. or Explanation of Items Exhibit Name of Taxpayer: EIN: Year/Period Ended December 31, XXX XXXXX XXXXX December 31, XXX XXXXX Revenue by date Incoming wire from XXXXX Charitable $20,000.00 4ISIXXXXXK Incoming wire from XXXXX Charitable $8,000.00 1ITIXXXXX Deposit $4,407.61 1/14/XXXXX Deposit $147.00 1/31/XXXXX credit interest $5.31 1/31 /XXXKKX Incoming wire from XXXXX $8,850.00 2/4IXXXXX Deposit $3,000.00 2/8[XXXKXX Deposit $793.00 2/11/XXXXX paypal $100.00 2/12/XXXXX Deposit $1,500.00 2/12/XXXXX Deposit $150.00 2/22/XXXXX Transfer from XXXXX $1,000.00 2/26/KXXXX March 1 - March 6 statement is missing $15,696.89 2/29/XXXXX Deposit $135.00 3/6/XXXXX paypal $50.00 3/11/XXXXX Deposit $150.00 3/12/XXXXX Deposit $201.39 3/11/KXXXX Transfer from XXXXX $1,000.00 3/21/XXXXX Transfer from XX0OOC $1,000.00 3/25/XXXXX Deposit $500.00 3/27/XXXXX Incoming wire from XXXXX $9,700.00 4A DOOKK Deposit $122.58 3/31/XXXXX Deposit $3,000.00 4/31XXXXKXK Deposit $2,000.00 4ITIXXXOXXK Deposit $1,000.00 4/15/XXXXX Transfer from XXXXX $200.00 4/16/XXXXX xxxxx Systems $500.00 4/17/XXXXX Deposit $5,600.00 4/21/XXXXX Transfer from XXXXX $500.00 4/29/XXXXX Incoming wire from XOX $8,700.00 5/2IXXXKXX Transfer from XXXXX $500.00 5/11XXXXX Deposit $1,772.00 5/14/XXXXX Deposit $1,407.00 5/23/XXXXX Deposit $735.00 5/27/XXXXX Deposit $1,200.00 6/3DOOOKX Incoming Wire XXXXX $4,015.00 6/5/XXXXXK Incoming Wire XXXXX $10,000.00 6/41XXXXX Deposit $3,000.00 6/6/XXXXX Deposit $2,000.00 7IQIXXXXX External Deposit XXXXX Trust $6,651.60 7/8IXXXXX External Deposit XXXXX Trust $3,125.00 7/SIXXXXX Incoming wire from XXXXX $6,931.26 8/4IXXXXX Incoming wire from XXXXX $3,146.66 8/4/XXXXX Deposit $1,507.73 8/19/XXXXX

Form 886-A;Rev.+68)

Revenue Service

Department of the Treasury - Internal

Page: - 13-

Depariment of the Treasury- Internal Revenue Service

Schedule No. or

ag oe Explanation of Items Exhibit
Name of Taxpayer: EIN: Year/Period Ended
December 31, XXX
XXKXX XXXXX December 31, XXX
external deposit pay pal $17.00 8/22/)X0OXKX
Deposit $20.00 8/25/XXXXX
external deposit pay pal $19.00 8/25/XXXXX
Incoming wire from XXXXX $51,286.95 8/28/XXXXX External Deposit XXXXX Trust $34,507.54 9/3/XXXXX Incoming wire from XOOXXX $485.00 9/15/XXXXX Deposit $4,020.00 9/29/XXXXX External Deposit XXOOX Trust $8,501.29 10/320QXXXKX External Deposit XXXXX Trust $4,062.42 10/3/XXXXX external deposit pay pal $86.00 10/6/XXXXX Deposit $250.00 10/9/XXXXX Missing 10/10/ - 10/29/8 External Deposit XXXXX Trust $5,968.86 11/4/XXXXX External Deposit X00OX Trust $3,167.30 11/4/XXXXX Deposit $1,500.00 114/20/XXXXX Deposit $1,171.00 12/2/KXXXXX External Deposit XXXXX Trust $14,897.29 12/4IXXXXX External Deposit XXXXX Trust $6,526.18 12/4IXXXXX Deposit $508.55 12/5/XXXXX Total $280,994.41 XXXXX Revenue summary by type Cash $41,797.86 XXXXX Trust $87,407.48 Incoming Wire -
$65,379.87
XXXXX Charitable $28,000.00
Incoming Wire from
XXXXX $27,250.00
Incoming Wire from
XXXXX $10,000.00
Missing $15,697.00
Transfer from XXX $4,200.00
pay pal $272.00

Summary of Income:

Reportedon Omitted

Form 990

Revenue

Form 886- Acrev.4-68)

Revenue Service

Department of the Treasury - Internal
Page: -14-

Department of the Treasury~ Internal Revenue Service Schedule No. or eg Explanation of Items Exhibit Name of Taxpayer: EIN: Year/Period Ended December 31, XXX XXKXX XXXXX December 31, XXX

XXXXX $264,000 $110,735.81°
XXXXX $180,000.00 $100,994.41*

F. Expenditures

Reported

on Form

990
XXXXX $273,122 $370,702
XXXXX $192,898 $262,889

The Organization and XXXXX share XXXXX bank account XXXXX. Account XXXXX is the primary account for both the Organization and XXXXX. XX0OXX is responsible for all recordkeeping and financial responsibilities of the

Organization.

No books or records are kept. Very few receipts or expense substantiation has been provided out of the thousands of transactions that have occurred from the Organization's bank account. The invoices provided are vague and do not

lain how they exclusively serve an exempt purpose. The Service asked in Form 4564, Information Document Request 01, dated January 26, 2009, and Form 4564 002 April 24, 2009 for the XXXXX year and on March 30, 2010 for the XXXXX year to explain how these expenditures furthered an exempt purpose. j The Organization has not provided contemporaneous substantiation that its expenditures have served an exclusive exempt purpose. The organization did provide documents which appear to be invoices for XXXXX which include:

exp

e “XXXXxX” for the category “printing and reproduction’.

° The organization also provided cash to XXOOXX in XXXXX and XXXXX, an organization controlled by XXXXX's spouse XXXXX. The organization reports that it gave XXXX’s controlled

organization $40,100.

zk & k &
3 $374,735.81 - $264,000 =$110,735.81
4 $780,994.41 - $180,000 = $100,994.41

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

Eom 886A Department of the Treasury Internal Revenue Service Schedule No. or Explanation of Items Exhibit Name of Taxpayer EIN: Year/ Period Ended December 31, XXX XXXXXK XXXXX December 31, XXX

e New XXXXX receipt (did not provide invoices) $11,353, the organization has not fully explained this activity and how it furthers

an exempt purpose.

Purported professional fees that were unexplained $2,500 to Rev. XXXXX, XOOOKX, X2OOXX $10,000 as a “loan/donation’, and a receipt from 00OXX for $12,375 for “Maintenance of Database and PSA distribution of Holistic Health Education materials thru the

internet, At Health Fairs & Shows, + Mail.”

An unsigned statement entitled Community Outreach and Networking Services purportedly by XXXXX received $15,134 for

services for the year XXXXX." These services have not been explained Or substantiated.

« Anunsigned statement entitled Community Outreach and g Services purportedly by XXXXX for $5,425 for “our

Networkin
services for the year XXXXX.” These services have not been

explained or substantiated.

° Anunsigned statement entitled Website Design and Maintenance
_ purportedly from XXXXX for $3,600 for “my services for the year XXXXX.” These services have not been explained or

substantiated.

An unsigned statement entitled Community Outreach and Networking Services purportedly from XXXXX for $2,150 for “my

services for the year XXXXX.” These services have not been explained or substantiated.

e Anunsigned statement entitled Community Outreach and Networking Services purportedly from XXXXX for $2,860 for “my

services for the year XXXXX.” These services have not been explained or substantiated.

The total of theses expenditures is $105,497°.

ke
5 Approximately $123,084 is unaccounted for XXXXX alone:. $370,702 (total expenses) -

$105,497 + $142,121 (direct inurement)

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

Department of the Treasury - Interna] Revenue Service Schedule No. or

icin BBGES Explanation of Items Exhibit
Name of Taxpayer. EIN: Year/Period Ended
December 31, XXX
XXXKKX December 31, XXX

XXXXX

XXXXX’'s compensation is reported on 25(a) Compensation of current officers, of the XXXXX Form 990, as $40,640 — XXXXX CEO and Line 12 and Part IV on

XXXXX Form 990 as $24,000.

XXXXX (XXXXX) makes “No monthly payments for compensation rather, the company pays for things (personal withdrawals checks, credit cards, gas, etc).”

The amounts $40,640 and $24,000 reported as compensation on the Forms 990 are arbitrary, the amount of Organizational funds that inured directly to X0000¢ totaled $142,121° for XXXXX and $139,387’ for XXXXX. The inurement is not deemed compensation. The Organization did not file any information returns such as Forms W-2, Forms 1099, nor did the Organization file any Forms 941 or pay any employment taxes. Furthermore, the expenditures in questions are not expense reimbursements because they were not payments under an "accountable plan” nor were they incurred in the normal course the Organization’s business, rather they were daily reoccurring personal expenses incurred by XXXXX for his private use. Organization’s bank account is commingled with XXXXX's and it is impossible to discern any purported “Foundation” expense from XXXXX’s personal expenditures. The Organization's assets, i.e. its bank accounts, are readily available for XXXXX's immediate and

personal use. The majority of the expenditures were personal in nature or unexplained.

The Organization stated that it makes “no monthly payments for compensation rather, the company pays for things (personal withdrawals checks, credit cards, gas, etc).” Reviewing the organizations expenditures revealed daily reoccurring personal expenses such as restaurant dining, gasoline, gym membership, medical payments, etc., for personal use,. XXXXX commingles with the organization's bank account, the organization paid the following for XXXXX’s

personal use®:

XXXKX XOOOXX
Credit cards and lines of credit $28,981 $31,676 Gas / XXXXX’s personally owned vehicle for personal travel $4,578 $4,738 Restaurants/groceries: $11,026 $9,473 Withdrawals and over the counter

kk ke
5 See attachment of list of personal expenditures 7 See attachment of list of personal expenditures
® See attachment of list of personal expenditures

Form 886-AcRev.+68) Department of the Treasury - Internal

Revenue Service
Page: -17-

Eom 886 A Department of the Treasury - Internal Revenue Service Schedule No. or Explanation of Items Exhibit Name of Taxpayer: EIN: Year/Peniod Ended December 31, XXX XXXKXK XXXXX December 31, XXX Checks $38,934 $25,666 Car insurance $2,757 $2,592 Car payments $6,163 $7,683
$35,300 $30,500

Rent for personal residence
Interactive Media — XXXXX
Cable/utilities/internet .
Massage, personal phone
Gym Membership $7,938 -

Organizational funds inured to XXXXX. The Organization did not differentiate XXXXX’s personal expenditures from any purported Organizational expenditure. in the XXXXX and XXXXX audit years, the Agent Identified $142,121 and
$139,387, respectively, as daily reoccurring personal living expenditures’.

$5,472 -
$6,620 -

G. Internal Controls

All Organizational funds are commingled with XXXXX's personal expenditures. XXXXX is in complete control over the Organization's financial activities. Funds are transferred to the organization as purported donations from Trusts and unidentified cash from XXXXX (XXXXX's mother). The audit reveals that 00OX never relinquishes control over the funds. The Organization maintains no minutes of meetings of the Board of Directors. There is no Board of Directors or other independent body responsible for reviewing, approving, co-signing financial transactions, or preventing Organizational assets (bank account) from inuring to its founder. Transactions are not recorded, there is no segregation of duties, there are no outside parties (such as professional medical entities/governmental agencies) overseeing the organization, there is no annual independent audit.

XXXXxX is the sole controller of the Organization.

XXXXX does not have to substantiate or provide accounting for any expenditure made from the organization’s bank accounts. He has unlimited access to spend organizational funds. All of the organization’s cancelled checks that were

provided were signed by X00OX.

ii. Law

A. Statutes

ae aK
° See speardsheet

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

Revenue Service
Page: -18-

Schedule No. or

886A Departmen of the Treasury - Interna] Revenue Service

payne Explanation of Items Exhibit

Name of Taxpayer: EIN: Year/Period Ended
December 31, XXX

XXXXX December 31, XXX

XXXXKX

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 perated exclusively for one or more of the purposes specified in

organized and o
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.

1.501(a)-1(c) defines a private shareholder or individual as those
| and private interest in the activities of an organization.

individual is considered an “insider” with

Treas. Reg. §
persons having a persona
In general, a private shareholder or

respect to the exempt organization.

es that "Every organization which is exempt
d to file an annual information retum shall

s may be required by the Internal Revenue
nto its exempt status and administering the
01 and following), chapter 1 of subtitle A of

Treas. Reg. § 1.6033-2(i)(2) provid
from tax, whether or not it is require
submit such additional information a

Service for the purpose in inquiring i
provisions of subchapter F (section 5

the Code...."

B. Cases

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

Foon 886A Department of the Treasury - Internal Revenue Service Schedule No. or Explanation of Items Exhibit Name of Taxpayer: EIN: Year/Period Ended December 31, XXX XXXXX XXXXX December 31, XXX

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). 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

Form 886- Acrev.4-68) Departnent of the Treasury - Internal

Revenue Service
Page: -20-

Form 886A Department of the Treasury Internal Revenue Service Schedule No. or Explanation of Items Exhibit Name of Taxpayer: EIN: Year/Period Ended December 31, XXX XXXXX XXXXX December 31, XXX

assertions and the fact that Donhowe’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 '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.”

organization

In Rev Rul. 75-384, 1975-2, a nonprofit organization formed to promote world peace and disarmament by nonviolent direct action and whose primary activity is the sponsoring of antiwar protest demonstrations in which demonstrators are urged to commit violations of local ordinances and breaches of public order does

not qualify for exemption under section 501(c)(3) or (4) of the Code.

Section 501(c)(3) of the Code provides for the exemption from Federal income tax of organizations organized and operated exclusively for charitable purposes.

Section 1.501(c)(3)-1(d)(2) of the Income Tax Regulations provides that the term “charitable” is used in section 501(c)(3) of the Code in its generally accepted legal sense. The regulation further states that the term “charity” includes - lessening the burdens of government and the promotion of social welfare by organizations designed (i) to lessen neighborhood tensions; (ii) to eliminate prejudice and discrimination; (iii) to defend human and civil rights secured by law; or (iv) to combat community deterioration and juvenile delinquency. —

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 I.R.C. §

501(c)(3).

Form 886-Acrev.4-68) Department of the Treasury - Internal Revenue Service Page: -21-

— 886 A Department of the Treasury - Internal Revenue Service Schedule No. or Explanation of Items Exhibit Name of Taxpayer: EIN: Year/Period Ended December 31, XXX XXXXX XXXXX December 31, XXX

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. 2003-4, §14.01 (cross-referencing §13.01 et seq.), 2003-1 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. XXXXX-52, XXXXX8-30, 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 from that originally represented. Rev. Proc. XXXXX-52, XXXXX-30 IRB 222.

IV. Analysis
A. Taxpayer's position

Is yet to be received

B. Government's position

Is XXXXX operating exclusively for public, charitable, and educational purposes described in Internal Revenue Code (IRC) § 501(c)(3) in which no part of its net earnings inure to the benefit of any private shareholder or individual?

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

1. The Organization's earnings and assets inured to the benefit of its private shareholder. The Organization's assets, (i.e. bank account) are being used by XXXXX, President XXXXX, for personal use. 2. A substantial part of the organization's activities are in the furtherance of nonexempt activities.

2. The Organization's earnings and assets inured to the benefit of its private shareholder:

Federal Income Tax Regulation (Regulation) Section 1.501(c)(3)-1(a)(1) states: "In order to be exempt as an organization described in Section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such Code section. If an organization fails to meet either the organizational test or the operational test, it is not exempt."

Regulation Section 1.501(c)(3)-1(c) defines the "Operational test." Regulation Section 1.501(c)(3)-1(c)(1), "Primary activities," provides, in part: "An organization will be regarded as 'operated exclusively' for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in Section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose."

Regulation Section 1.501(c)(3)-1(c)(2), "Distribution of earnings," expands on the definition of an activity that is not in furtherance of an exempt purpose. It states: "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. For the definition of the words 'private shareholder or individual,' see paragraph (c) of Sec. 1.501(a)-1."

XXXXX fails the operational test because its earnings inured to XXXXX, a private shareholder under Treas. Reg. §1.501(a)-1(c) and key officer of XXXXX.

In XXXXX and XXXXX, XXXXX made $38,934 and $25,666, respectively, in unsubstantiated cash withdrawals. In XXXXX and XXXXX, the Organization paid for XXXXX's lines of credit totaling $28,981 and $31,676, respectively. In XXXXX and XXXXX, the organization paid rent for XXXXX's personal residence totaling $35,300 and $30,500, respectively. The Form 990 reported $40,640 and $24,000 reported as compensation. These figures are arbitrary and were not reported on any information return such as Form W-2 or Form 1099. The Organization did not file any Forms 941 or pay any employment taxes.

Expenditures in question are not expense reimbursements because they were not payments under an "accountable plan" nor were they incurred in the normal course the Organization's business, rather they were daily reoccurring personal expenses incurred by XXXXX for his private use. XXXXX is the only individual who authorizes checks or has signature authority on the Organization's bank account. The Organization's bank account is commingled with XXXXX's and it is impossible to discern any purported "Foundation" expense from XXXXX's personal expenditures. The Organization's assets, i.e. its bank accounts, are readily available for XXXXX's immediate and personal use. The majority of the expenditures were personal in nature or unexplained. The amount of Organizational funds that inured directly to XXXXX totaled $142,121 for XXXXX and $139,387 for XXXXX. The Organization is serving XXXXX's private interests.

A charity's assets are required to 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. By having unlimited use of the Organization's assets, the Organization breached the dedication requirement and its assets and net income have inured to the benefit of XXXXX.

By allowing the Organization's income to inure to XXXXX, the organization fails Treas. Reg. § 1.501(c)(3)-1(c)(2) which 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.

10 XXXXX meets the definition of such under Treas. Reg. §1.501(a)-1(c) because he is a "person having a personal and private interest in the activities of an organization."

The Organization fails Treas. Reg. § 1.501(c)(3)-1(d)(ii) also, which 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.

A core requirement to be considered for an organization described by IRC §501(c)(3) is that no part of the income of the organization shall inure to an individual or shareholder. Church of Scientology v. Commissioner, 23 F.2d 1310 (9th Cir. 1983).

Treas. Reg. §1.501(c)(3)-1(f)(2)(ii) states that in determining whether to continue to recognize the tax-exempt status of an applicable tax-exempt organization (as defined in section 4958(e) and §53.4958-2) described in section 501(c)(3) that engages in one or more excess benefit transactions (as defined in section 4958(c) and §53.4958-4) that violate the prohibition on inurement under section 501(c)(3), the Commissioner will consider all relevant facts and circumstances, including, but not limited to, the following -

(A) The size and scope of the organization's regular and ongoing activities that further exempt purposes before and after the excess benefit transaction or transactions occurred;

(B) The size and scope of the excess benefit transaction or transactions (collectively, if more than one) in relation to the size and scope of the organization's regular and ongoing activities that further exempt purposes;

(C) Whether the organization has been involved in multiple excess benefit transactions with one or more persons;

(D) Whether the organization has implemented safeguards that are reasonably calculated to prevent excess benefit transactions; and

(E) Whether the excess benefit transaction has been corrected (within the meaning of section 4958(f)(6) and §53.4958-7), or the organization has made good faith efforts to seek correction from the disqualified person(s) who benefited from the excess benefit transaction.

The regulations further provide that the IRS will consider the above factors in combination, and may assign different weight to each factor depending on the facts and circumstances. Treas. Reg. § 501(c)(3)-1(f)(2)(iii).

When the factors listed above are applied to the situation of the Organization, it becomes abundantly clear that revocation is in order, as each factor favors revocation.

(A) The size and scope of the organization's regular and ongoing activities that further exempt purposes before and after the excess benefit transaction or transactions occurred;

The Organization has not substantiated that it conducts exempt activity. The activities of XXXXX served XXXXX's private interests. The excess benefit transactions occurred continuously throughout the two year period examination.

(B) The size and scope of the excess benefit transaction or transactions (collectively, if more than one) in relation to the size and scope of the organization's regular and ongoing activities that further exempt purposes;

The Scale of the excess benefit transactions at issue in XXXXX was large, in XXXXX and XXXXX, 38% and 50% of the Organization's receipts directly inured to XXXXX, respectively. The remaining Organizational funds were not accounted for and were spent on non-exempt activities.

(C) Whether the organization has been involved in multiple excess benefit transactions with one or more persons;

There were multiple excess benefit transactions with XXXXX in this case; they appear to be ongoing daily during the periods' examination.

(D) Whether the organization has implemented safeguards that are reasonably calculated to prevent excess benefit transactions; and

There is no indication that any safeguards were implemented. XXXXX was the only person in control of XXXXX with no outside Control.

(E) Whether the excess benefit transaction has been corrected (within the meaning of section 4958(f)(6) and §53.4958-7), or the organization has made good faith efforts to seek correction from the disqualified person(s) who benefited from the excess benefit transaction.

None of the excess benefit transaction has been corrected. XXXXX remains in charge of whatever actions XXXXX is operating.

Pursuant to Treas. Reg § 501(c)(3)-1(f)(2)(ii), the numerous excess benefit transactions engaged in by XXXXX, to the exclusion of serving any exempt purpose, warrant revocation of XXXXX's exempt status.

2. A substantial part of the organization's activities are in the furtherance of nonexempt activities.

The Organization is operating in a manner that is inconsistent with its Form 1023, Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code to the Service.

The Organization stated that its primary purpose was:

1. To establish professional education programs to the existing health-care providers (primarily hypertension). "Our primary planning phase at this time is the development of a community based program to further research in the area of respiratory and stress-related disease. 2. coordinating and compiling existing health care providers servicing about indicated health care needs. Contacting and affiliating with similar professional medical service and research organizations. (Estimate phase 2/6 months), 3. implementation of 1 + 2 and include development of a plan for a medical research facility coordinated with a professional education/provider program.

The audit concluded that XXXXX has not: (1) established any professional education programs to existing health-care providers (primarily hypertension), (2) developed a community based program to further research in the area of respiratory and stress-related disease or (3) developed a medical research facility coordinated with a professional education/provider program.

The Organization stated on Item 8 (a), What benefits, services, or products will the organization provide with respect to its exempt function, of the Form 1023 application:

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

Revenue Service
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Form 886 A Depanmem of the Treasury - Internal Revenue Service Schedule No. or Explanation of Items Exhibit Name of Taxpayer: EIN: Year/Period Ended December 31, XXX XXXXX XXXXX December 31, XXX

As a service to the xxxxx community, an educational program to assist providers of health care delivery systems (professional Ed.) will be implemented and

offered to same.

The organization has not developed a medical research facility that’s coordinated with a professional education/provider program.

The Organization also stated on its Form 1023 that Substantially more than 65% of the foundation’s assets are/will be devoted to the active conduct of our medically related research projects, and establishing the professional

education —provider services.

The organization has not substantiated nor shown the Service how any expenditure it has made has furthered medical research. The organization has not implemented medical research program as stated on its Form 1023.

The operation of a websites XXXXX and XXXXX is substantially all of the Organization's activity. The websites do not further any medical research or exempt activity. The websites are self serving to XXXXX by promoting XXXXX’s private ventures and personal interests.. The websites exclusively promote XXXXX’s XXXXX campaign, the legislative and lobbying activity - OOO, and the sale of products: XXXXX videos, and the sale of elixirs. The website contains incidental educational articles (links to other websites or health articles), however, the vast majority of the websites serve 0000's private interests and

any potential exempt activity is incidental.
The organization did spend significant time and money on the Proposition C -

the XXXXX project. This activity was not in furtherance of any exempt medical research, instead it furthered XXXX%'s private interests.

The organization had incurred thousands of expenditures during the two years

under examination. The Organization did not provide any accounting or contemporaneous substantiation on how its expenditures exclusively furthered

an exempt purpose. All expenditures appear to serve XXXXX personally

whether directly or indirectly. In XXXXX, for instance, cancelled checks totaling
$6,176.53 were illegible and are unable to determine the exempt purpose. Additionally, $71,129 in cancelled checks were unexplained, and it was not

shown how these checks served an exempt purpose.

There is no Board of Directors or other independent body responsible for reviewing, approving, co-signing financial transactions, or preventing Organizational assets (bank account) from inuring to its founder. There is no accounting system in place, the organization does not use accounting software such as QuickBooks to record and monitor Organizational transactions. Transactions are not recorded, there is no segregation of duties, there are no outside parties (such as professional medical entities/governmental agencies) overseeing the organization, there is no annual independent audit. XXXXX is the sole controller of the Organization.

C. Effective Date of Revocation

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. 2007-52, 2007-30 IRB 222.

In this case, the agent recommends retroactive revocation of the determination letter because the Organization operated in a manner inconsistent with its exempt status under IRC 501(c)(3). Accordingly, it is recommended that

revocation be effective as of January 1, XXXX.

V. CONCLUSION

Based on our audit, and in light of the applicable law, we have determined that you are not operated for exempt purposes. Rather, you are, primarily, operated for the non-exempt purpose, operating in furtherance of private interests, of XXXXX. Forms 1120 Income Tax Return should be filed for tax years ending December 31, XXXXX, and December 31, XXXXX. Subsequent returns are due no later than the 15th day of the 3rd month following the close of the Corporation's accounting period. Returns should be sent to the following mailing address:

Internal Revenue Service, 55 N Robinson MC 4900 OKC MS, Oklahoma City, OK 72102.

Accordingly, you do not qualify for exemption as an organization described in section 501(c)(3) of the Code and you must file federal income tax returns.

Contributions to you are not deductible under section 170 of the Code.

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

Revenue Service
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