IRS revokes an organization’s exemption after finding private benefit in Proposition 65 litigation

Plain-English summary

The IRS revoked an organization’s recognition under IRC § 501(c)(3), effective January 1, 2006. The organization pursued Proposition 65 litigation and said the lawsuits served the public interest, but the examination found that more than 90 percent of monetary awards in the reviewed years were earmarked for attorneys’ contingent fees. The IRS concluded that the organization operated for private interests, failed to establish that its litigation served a charitable purpose, and omitted or misstated material facts in its exemption application. The determination also found that the organization’s founders and the law firm involved had family and business relationships that increased the private-benefit concern.

Ruling snapshot

• Question: Should the organization’s tax-exempt status be revoked retroactively because its litigation activities furthered private interests and material facts were omitted or misstated?
• Outcome: revocation
• Key authorities: IRC §§ 170, 501(c)(3), 507, 6104(c), 6110, 7428, and 7805(b); Treas. Reg. §§ 1.501(c)(3)-1(d)(1)(ii) and (iii); Rev. Proc. 98-1.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Appeals Office

1375 E. Ninth Street, Ste. 815 Taxpayer Identification Number:
Cleveland, OH 44114

Release Number: 201217026 Person to Contact:

Release Date: 4/27/2012
Date: January 31, 2012 Tel:
Fax:
Tax Period(s) Ended:
UIL: 501.03-00
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, 2006.

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 showed
that you were not operated exclusively for exempt purposes because your net earnings
inured to insiders of your organization and you failed to establish you were not operated
for the private interests of designated individuals. Your primary activity of pursuing
Proposition 65 litigation, whereby for years 2006-2009 more than 90% of monetary
awards from such litigation were earmarked for the contingent fees of your attorneys, is
indicative of the private interests being excessively furthered by your operations. See
Treas. Reg. §§1.501(c)(3)-1(d)(1)(ii) & (iii). Retroactive revocation of your exempt status
is warranted because you omitted or misstated material facts and operated in a manner
materially different than represented in your exemption application.

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 a tax matter
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
Exempt Organizations

Taxpayer identification Number:

Date: October 7, 2012 Form:
Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone: -

Fax:

Certified Mall - Return Receipt Requested

Dear

plaining why we believe revocation of your exempt

We have enclosed a copy of our report of examination ex
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,

Enclosures:
Publication 892
Publication 3498
Report of Examination

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

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

1. Should XXXXX's tax-exempt status be revoke due to the existence of private benefit and

inurement?

2. Should XXXXX’s tax-exempt status be applied retroactively?

Facts:

XXXXX Inc, XXX, was granted tax-exempt status on January 29, XXXX as an organization described in
Internal Revenue Code, Code, section 501 (c) (3). XXX's primary exempt purpose, as stated in the
Application for Recognition of Exemption Form 1023, is to educate the public about the dangers of
hazardous chemicals in the air, water, and consumer products. XXX also mitigates or eliminates the
hazardous consequences of such chemical, through bringing and litigating legal actions against those
violators. One objective of the of the lawsuit is to achieve injunctive relief against those violators and
possibly force the violators to clean up contaminated drinking waters, educate and warn the public about

the harmful effects of the hazardous exposures.

XXX is allowed to act in the public interest as a private Attorney General of the State of XXXXX under the
XXXXX Health and Safety Code Section 2524.9, commonly known as Proposition 65. XXX identifies.
suspected violations of the Safe Drinking Water and Toxic Enforcement Act of 1986, Health and Safety
Code section 25249.5 or 25249.6, and it issues the suspected violator a notice, known as a 60 Day
Notice, simultaneously XXX provided the same notice to the Attorney General, AG. The AG has up to 60
days to decide if its office will take action against the suspected violator. If the AG elects not take action
against the alleged violator, then XXX is free to pursue the matter as a private attorney general. If the
suspected violator complies with Proposition 65 then the matter may not be pursued any further but the
violator may be subject to penaities. If the suspected violator does not comply with Proposition 65 then
XXX is free to bring litigation to force the suspected violator into compliance. XXXXX Code of Civil
Procedure section 1021.5 permits an award of attorney fees to the successful party in any action under

Proposition 65.
Form 1023 (Exhibit 1) shows that on page three, item 4, XXXXX POOXX] is the Chief Financial Officer.

XXX's Articles of Incorporation (Exhibit 2), stamped dated by the Secretary of State of the State of
XXXXX, October 8, XXXX, show XXXXX, XXXXX, and XXXXX [XXX] as XXX’s initial Directors.

XXX's Bylaws (Exhibit 3), signed on July 29, XXXX show XXXXX, XXXXX, and XXXXX as XXX's
Directors.

The Internal Revenue Service, the Service, requested information from XXX in a letter dated November
17, XXXX (Exhibit 4) and XXX provided a 13 page letter (Exhibit 5), dated February 3, XXXX. XXX stated
that any attorneys representing XXX should share similar values and principles as XXX, but no mention
was made of any type of relationship between the Directors or Officer of the organization and the law firm
representing XXX. The last page of the letter states that if the Service should have any legal questions to

contact XXX's attorney, XXXXX.

The Service sent a letter to XXX on February 11, XXXX, (Exhibit 6) requesting additional information that
was not provided on the Service's initial request on November 17, XXXX. As a response XXX provided a
seven page letter dated May 17, 2000 (Exhibit 7). In item Ill, XXX stated that the law firm of XXXXX is
currently representing it. In item IV XXX is asked to disclose any type of relationship between its founders,

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: 1 of 8

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

Name of Taxpayer Year/Period Ended

XXXXX

XXXKX

officers, or directors and the private law firms which XXX retains and XXX answered the question with a
no. In item VI XXX is asked if it was created by lawyers whom might represent XXX and XXX provided a
reply but did not answer the question. It did say that Mr. XXXXX conducted the legal work in order to set
up XXX as anon profit. In item Vill XXX is asked if they pay the attorneys from proceeds of the court's
award to XXX or is there a separate award to the attorneys. XXX stated that it is a wrong assumption to

say that the attorneys they engage are purely paid upon a contingency basis. In goes on to say that in
some instances they are paid on a contingency basis, in some an hourly basis, and other in a combination
of both. In the cases where they are paid upon a contingency basis usually there is separate award from
the court. In item X XXX is asked to compare the separate award given to the representing attorney to the
award given to XXX in the same case. XXX stated that it is their policy that the attorney can not receive
more than fifty percent of the award and that the award is equally divided between XXX and the attorney.
In item XII XXX is asked why the private law firm would work for XXX when the law firm can bring action
themselves, among other things, XXX replied that the question should be posed to the law firm.

XXXXX stated during the examination that XXXXX and XXXXX are brothers. Ina telephone interview on
February 24, XXXX Mr. XXXXX, the current president, said that XXXXX and XXXXX are brothers and that

XXXXX, the current attorney working with XXXXX, is the same XXXXX that founded XXX.

In the Superior Court of XXXXX, County of XXXXX, Consent Judgment Number XXXXX (Exhibit 8), filed
by the Attorney General Office against XXX members as a result of donations to disqualified entities. The
Injunctive Relief section, 2.1(a) (iii), states that XXOOXX shall not vote on or participate in any matter

concerning his nephew, XXXXX.

If XXXXX is XXXXX's uncle, then XXXXX is XXXXX’s uncle too. The familial relationship between
XXXXX, XXXXX, and XXXXX was not disclosed to the Service.

XXXXX is one of XXX's founding Directors, an active attorney, Bar Number XXXXX, and was accepted
into the State Bar of XXXXX on December 31, XXXX (Exhibit 9). It is not clear when Mr. XXXXX began to
work with Mr. XXXXX, but there is not doubt that he was an attorney when he founded XXX.

XXXXX is one of XXX’s founding Directors, an active attorney, Bar Number XXXXX, and was accepted
into the State Bar of XXXXX on December 1, XXXX (Exhibit 10). It is not clear when XXXXX began
working with XXXXX, but there is no doubt that he is an attorney.

The order of the Superior Court of the State of XXXXX County of XXXXX in Case Number XXXXX, dated
December 20, XXXX, shows that XXXXX, XXXXX, and XXXXX represented XXX in a lawsuit against the

XXXXX (Exhibit 11).

A hard copy print of XXXXX , the Law Firm, web site home page secured on July 21, XXXX shows
XXXXX, XXXXX, and XXXXX as three of the attorneys comprising the firm (Exhibit 12). The information
clearly shows that the attorneys that created XXX are representing XXX.

XXX provided a nine page letter dated November 14, XXXX (Exhibit 16) as a response to the Service’s
request for information and explanation of how it was and intended to operate. The letter states in part that
Mr. XXXXX is assisting with the preparation of the letter. It also states that the most important factor XXX
considers in filing a lawsuit is whether the action will be beneficial to the public and XXX's commitment not
to harm very small business. The letter goes on to say that there are instances that XXX sends a notice
letter but does not follow it up with a lawsuit because the recipients of the notices proved to XXX that their
service or product was not harmful. It also states that if XXX’s primary motive for pursuing cases were

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: 2 of 8

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

Name of Taxpayer Year/Period Ended
XXXXX

XXXKX

financial award, it would not forgo monetary compensation and the XXX bears all the cost of litigation.
XXX states that the court divides the award between XXX and the attorney fees. It also states that in one
case the entire $10,000 award was given directly to the attorneys, but that it is not a common practice. In
the same letter XXX offers an explanation as to why the compensation arrangement with the attorneys
representing XXX's cases should not be considered as serving their private interest and thus would
preclude XXX from qualifying for exemption. XXX states that the attorneys do not receive XXX’s net
earnings. The directors of the organization and not the attorneys make the decisions for XXX. The
paragraph goes on to say that XXX’s non profit status is protected by Revenue Ruling 80-278.

The examination revealed that XXX was unable to demonstrate what criteria it considered before resorting
to litigation. More importantly XXX was unable to demonstrate what factors it considered before a 60 Day
Notice was issued. XXX also did not demonstrate how it determined that an alleged violation existed or
how it determined that harmful exposure or harmful chemicals existed.

The examination revealed that XXX was unable to demonstrate that any of the 60 Day Notices issued on
its behalf resulted in compliance by the alleged violator without XXX resorting to litigation or resulting in a
monetary settlement to XXX. XXX was unable to provide any support to show how the alleged violator
proved to XXX that it complied with Proposition 65 and eliminated the harmful condition or exposure.

XXX was unable to demonstrate that it forgoes monetary compensation. XXX was unable to demonstrate
that any of its efforts resulted in compliance with Proposition 65 without a monetary award to XXX.

XXX did not demonstrate that it bears any costs of litigation. The examination revealed that XXX did not
incur any litigation expenses in XXXX. XXX did not report any litigation or legal expenses on their XXXX,
XXXX, or XXXX Form 990 Return. The AG’s records show that 391 60 Day Notices were filed on XXX's

behaif from January 1 to December 31, XXXX.

XXX was unable to show that it pays the attorneys on an hourly basis. The XXXX, XXXX, and XXXX
Form 990 do not show any litigation or legal expenses yet XXX prevailed and secured 21 and 31 settlements in

XXXX and XXXX respectively

The examination revealed that the monetary awards are not divided equally by the court. The examination
revealed that the court designated 73% of the monetary settlements as attorney fees and only 23% was
designated to XXX. The examination also revealed that the Law Firm received 92%, 97%, and 86% of the

monetary settlements in XXXX, XXXX, and XXXX respectively.

XXX was unable to show that the attorneys do not receive its net earnings. The examination revealed that
the attorneys received XXX's net earnings through court’s monetary settlement award distribution.

XXX did not demonstrate that it gives any direction to the Firm with respect to what violators to pursue.
XXX was unable to demonstrate that it had any knowledge of the 391 60 Day Notices filed on its behalf.
XXX did not provide any support to show how it became aware of the 391 violation, how it determined the
legitimacy of the 391 violation, and that it gave the Law Firm approval to file the 391 60 Day Notices on its

behaif.

XXX did not demonstrate that it operates as the organization depicted in Revenue Ruling 80-278. XXX
does not employ any attorneys. XXX was unable to show that the lawsuits filed on its behalf were not
motivated by private benefit to the attorneys. XXX's litigation activities are not financed through
membership dues or contributions from the public. The attorneys get paid on a contingency basis as a

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: 3 of 8

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

KXKXX

result of a monetary settlement and then the court, not XXX, decides what portion of the settlement it will
designate as attorney fees.

On June 8, XXXX the Firm provided the AG’s office documentation to permit a disbursement of funds in
the XXXXX case. The documentation included a letter from XXX's president in which he states that
XXX’s Board approved Mr. XXXXxX’s bill for investigative work. The documentation also included a letter
from Mr. XXXXX attesting that he provided 433 hours of investigative work at$ an hour from August
XXXX to August XXXX resulting in a §$. bill. XXX was unable to provide any support to show that Mr.
XXXXxX did any work at all. XXX did not provide an agreement, Mr. XXXXX's qualifications to conduct
investigative work, time logs, assignment sheets, and most importantly it did not provide any finding as a
result of the 433 hours of investigative work. A review of the XXX’s XXXX, XXXX, and XXXX Form 990

Returns revealed that Mr. XXXXX is listed as the Treasurer on each Return.

The XXXXX State Legislature has mandated that the court must determine that the attorney's fees in all
settlements of Private Proposition 65 actions be reasonable under XXXXX law. As such the attorneys
representing XXX must submit documentation to support their respective fees to the court for approval.

The AG's office keeps a record, Cumulative Proposition 65 Settlement Report, of the settlements reached
in Proposition 65 cases. The Cumulative Proposition 65 Settlement Reports for years XXXX to XXXX
(Exhibit 18 to 27) were secured from the AG’s website. The records shows the settlement date, the
plaintiff, the defendant, the injunctive relief, total settlement, civil penalty, attorney fees, other distribution,

and an explanation of other distribution. The records show the following:

Year Total Civil Attorney Other

Settlement Penalty Fees % Distributions %
XXKXX 7 0.00 : '% 282,975.00 % ToXXXx
XXXX ; 0.00 % % ToXXxXx
XXXX ” 0.00 % % ToXXXx
XXXX 0.00 % '% ToXXX
XXXX _ % %
XXXX 0.00 1% %
XXXXK 0.00 7
XXXX 0.00 % % TOoXXX
XXXX 0.00 % % TOXXX
XXX 0.00 % i% ToXXX
Totals E % 1% ToXXX

_ ‘in gross receipts from litigation. The XXXX Cumulative
Proposition 65 Report shows that XXX was awarded $ [illegible] in settlements. The report also shows that
$ [illegible] was deemed as attorney fees and $ [illegible] was given to XXX. Page 2 of XXX's XXXX Form 990,
shows that XXX paid $ \in leaal fees; presumably to its attorneys. The total amount paid to the
attorneys in XXXX was §. ‘or = i% of the total settlements amount

XXX's XXXX Form 990 shows $

in gross receipts from litigation. The XXXX Cumulative
in settlements, of which $. was
shows that XXX

XXX’s XXXX Form 990 shows $
Proposition 65 Report shows that XXX was awarded $°

deemed as attorney fees and $553,099 was given to XXX. Page 2, of XXX’s

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

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

Name of Taxpayer Year/Period Ended

XXKKX XXXXK
paid $ in legal fees, presumably to its attorneys. The total amount paid to the attorneys in XXXX
was $ ‘or % of the total settlements amount.

XXX's XXXX Form 990 shows $: ‘in gross receipts from litigation, the XXXX Cumulative

Proposition 65 Report shows that XXX was awarded $ in settlements, of which $ was
deemed as attorney fees and $: was given to XXX. Page 2, of XXX's XXXX Form 990, shows that XXX
paid $ in leaal fees, presumably to its attorneys. The total amount paid to the attorneys in XXXX
was $ | or: % of the total settlement amount. The Balance Sheet of the XXXX Form 990 shows that

the cash amount at the beginning of the year was $ and the cash amount at the end of the year
was $

XXX's XXXX Form 990 shows $ in gross receipts from litigation, the XXXX Cumulative Proposition

65 Report shows that XXX was awarded $. in settlements, of which $ was deemed as
attorney fees and $ ‘was given XXX. Schedule A, of the XXXX Form 990, shows that$ was paid

to the law offices of XXXXX. The total amount paid to the attorneys in XXXX was $ or ‘\% of the
total settlements amount.

XXX’s XXXX Form 990 shows zero in gross receipts, the XXXX Cumulative Proposition 65 Report shows
that XXX was awarded $. in settlements, of which $ was deemed as a civil penalty,
$ as attorney fees, and zero was paid to XXX. Page 2, of the XXXX Form 990, shows that $
paid in legal fees, presumably to its attorneys. The total amount paid to the attorneys was $.

100%, not taking into account the civil penalty, of the total settlements amount.

XXX's XXXX Form 990 shows §$. in gross receipts from litigations, the XXXX Cumulative Proposition
65 Settlement Report shows that XXX was awarded $ in settlements, all of which was designated
as attorney fees. The XXXX Form 990 does not report any legal fees. The total amount paid to the attorneys in
XXXX was $ ‘or % of the total settlement amount.

XXX's XXXX Form 990 shows $ ‘in gross receipts from litigation, the XXXX Cumulative Proposition
65 Settlement Report shows that XXX was not awarded any settlements in XXXX. The XXXX Form 990 does

not show any legal expenses.

was
or

XXX's XXXX Form 990 shows $ . \in gross receipts from litigation, the XXXX Cumulative Proposition
65 Settlement Report shows that XXX was awarded $220,300, of which$ = = ‘was designated as
attorney fees and $ was given to XXX. The XXXX Form 990 does not show any legal expense. The total

amount paid to the attorneys was $ ‘or 92% of the total settlements amount.

XXX's XXXX Form 990EZ shows zero in gross receipts, the XXXX Cumulative Proposition 65 Settlement
Report shows that XXX was awarded $ in se“‘ements, of which $ was designated as
attorney fees and$_ was given to XXX. The XX) Form 990EZ does not show any legal expense. The
total paid to the attorneys was $ or '% of the total settlement amount.

XXX has not filed their XXXX Form 990 as of date of this report. The XXXX Cumulative Proposition 65

Settlement Report shows that XXX was awarded $ ‘in settlements, of which $° was
designated as attorney fees and $ was given to XXX. The total paid to the attorneysis %

leaving % to XXX.
The information shows that the settlement distributions are not divided equally between XXX and the

representing attorneys as is XXX's stated policy. The information shows that from XXXX to XXXX the
settlements have comprised of % in attorneyfees and % paid to XXX. Taking into account the legal

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: 5 of 8

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

Name of Taxpayer Year/Period Ended

XXXXK

XXKKK

fees XXX paid the attorneys from XXXX to XXXX, the percentage received by the attorneys in the same
time period is 90%.

The XXXX to XXXX Form 990 Returns show that XXX did not received any membership dues or public
donations.

Law:

Section 501 (c)(3) of the Code exempts from federal income tax organizations organized and operated
exclusively for charitable, educational, and other exempt purposes, provided that no part of the
organization's net earnings inures to the benefit of any private shareholder or individual.

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

Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will not be regarded as
operated exclusively for exempt purposes if more than an insubstantial part of its activities is not in

furtherance of exempt purposes.

Section 1.501(c)(3)-1.(d)(1)(ii) of the regulations provide that an organization is not organized or operated
exclusively for one or more of the purposes specified in subdivision (i) of this subparagraph unless it
serves a public rather than a private interest. Thus, to meet the requirement of this subdivision, it is
necessary for an organization to establish that it is not organized or operated for the benefit of private
interests such as designated individuals, the creator or his family, shareholders of the organization, or

persons controlled, directly or indirectly, by such private interests.

Section 7805(b) provided that the Secretary may prescribe the extent, if any, to which any ruling (including
any judicial decision or any administrative determination other than by regulation) relating to the internal

revenue laws shall be applied without retroactive affect.

Rev. Proc. 98-1, 1998-1 |.R.B. 7 provides that except in rare or unusual circumstances, the revocation or
modification of a letter ruling will not be applied retroactively to the taxpayer for whom the letter ruling was
issued or to a taxpayer whose tax liability was directly involved in the letter ruling provided that: (1) there
has been no misstatement or omission of material facts; (2) the facts at the time of the transaction are not
materially different from the facts on which the letter ruling was based; (3) there has been no change in
the applicable law; (4) the letter ruling was originally issued for a proposed transaction; and (5) the
taxpayer directly involved in the letter ruling acted in good faith in relying on the letter ruling, and revoking
or modifying the letter ruling retroactively would be to the taxpayer's detriment.

Taxpayer's Position:

Taxpayer does not agree with the proposed revocation.

Government’s Position:

XXX was unable to demonstrate that is organized and operated to serve a public interest. A single
activity can serve both an exempt and a nonexempt purpose. In this particular case bringing on litigation to
force compliance of Proposition 65 does benefit the public, the exempt aspect; and providing reasonable

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: 6 of 8

ieleyaon 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
XXKXX XXXXK

compensation for the litigation services is private benefit to the attorney providing those services.
However XXX was unable to demonstrate that it does not target Proposition 65 offenders other than those

that result in a monetary settlement to XXX or to the Law Firm.

Based on the facts the examination revealed XXX does not qualify to be exempt from Federal income tax
because it failed to demonstrate that it carries on any charitable activities within the meaning of Section
501 (c) (3). XXX did not provide any creditable support to show that it carries on any activities to further its
tax exempt purpose. XXX did not demonstrate that it identifies, selects, or verifies any Proposition 65

violations.

XXX was unable to demonstrate it is operating in the manner it said it would operate to gain it tax exempt
status. XXX was unable to demonstrate that it directs the Law Firm to do anything on its behalf.

XXX did not demonstrate that it pursues Proposition 65 offenders based on the benefit to the general
public. The Law Firm pursues alleged offenders of Proposition 65 in the name of XXX but no support was

provided that XXX selected the offender or that it authorized it.

XXX did not provide any support that it identified and pursued a Proposition 65 violation that resulted in
compliance by the offender without a monetary settlement.

The method XXX and the Law Firm operate results in private benefit to the Law Firm. The private benefit
exists because of the attorney fees the Law Firm receives for representing XXX. The examination
revealed that the Law Firm acts independently of XXX to pursue Proposition 65 offenders and then it only
pursues those offenders resulting in a monetary settlement, nullifying the charitable aspect of the

activities.

The Law Firm is comprised of three individuals responsible for XXX's creation, XXXXX, XXXXX, and
XXXXX. The fact that the Law Firm undertakes litigation under XXX's name can not be ignored. By doing
so the Law Firm avoids the public interest law firm rules and that too is a private benefit.

The AG's records show that the monetary settlements awarded to XXX are not equally divided between
the Law Firm and XXX.
Section 7805(b) relief should not be granted because XXX did not disclose the familial relationship

between its founders and the Law Firm. XXX did not disclose the fact that Mr. XXOXX was an attorney.
XXX did not disclose the fact that at least one of its creators was an attorney at the time XXX was created.

XXX was asked if it was created by attorneys whom might be retained by XXX, clearly a perceived
indicator of a possible private benefit situation. XXX did not answer the question. The attorneys that

created XXX are representing XXX.

If XXX had disclosed the fact that at least one of its founders was attorney and the disclosed the familial
relationship the Service would have been alerted to the high probability to private benefit and not granted

tax-exempt status.

The $ [illegible] provided to Mr. XXXXX represents inurement because he is an insider and XXX did not
provide any support to show that Mr. XXXXX provided any investigative services.

Conclusion:

Form 886-A (rev. 4-68) Department of the Treasury - Internal Revenue Service
Page: 7 of 8

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

Based on the foregoing facts, XXX's tax-exempt status should be revoked. XXX is not entitled to section

7805(b) relief.

Form 886-A (rev. 4-68)

Department of the Treasury - Internal Revenue Service
Page: 8 of 8