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
Page: -27-

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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