Written determination 1245022: IRS revokes an organization's exemption for inurement and missing records

View official IRS release (PDF)

Plain-English summary

The IRS revoked an organization's section 501(c)(3) exemption after finding that it paid personal expenses of its officers and did not keep adequate records to support the business purposes of its expenditures. The organization had described a mission involving religious books, films, videos, prayer services, and retreats, but the examination also identified a fitness program associated with an officer and expenses that appeared personal. The organization did not provide requested source documents, bank records, or a reliable method for allocating reimbursements to officers. The IRS concluded that the organization was not operated exclusively for exempt purposes, that its earnings inured to private individuals, and that its exemption should be revoked.

Ruling snapshot

• Question: Did the organization continue to qualify under IRC § 501(c)(3) despite private inurement and inadequate books and records?
• Outcome: Revocation
• Key authorities: IRC §§ 501(a), 501(c)(3), 509, 170, 511, 6001, 6033, 6104, and 7428; Treas. Reg. §§ 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(d)(1)(ii), 1.6001-1, and 1.6033-1(h)(2)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TE/GE EO EXAMINATIONS 501-03-00
1100 COMMERCE ST. MAIL STOP 4920 DAL
DALLAS, TEXAS 75242
DIVISION
AUG 01 2012

Release Number: 201245022
Release date: 11/9/2012
LEGEND Taxpayer Identification Number:
ORG - Organization name Person to Contact:
XX-Date Address - address Employee Identification Number:
ORG
ADDRESS Contact Numbers:

(Phone)

(Fax)

CERTIFIED MAIL

Dear

This is a final adverse determination regarding your exempt status under section 501(c)(3) of
the Internal Revenue Code (the Code). Our favorable determination letter to you dated
September 20, 20XX, is hereby revoked and you are no longer exempt under section 501(a) of
the Code effective January 1, 20XX.

The revocation of your exempt status was made for the following reasons:

You failed to provide documents to establish that you operated exclusively for exempt purposes,
and that no part of your net earnings inured to the benefit of private shareholders or individuals.
(Code section 501(c)(3)) You failed to keep adequate books and records. (Code section 6001)

Federal income tax exemption is precluded if net earnings inure to the benefit of private
shareholders or individuals. (Treasury Regulation 1.501(c)(3)-1(c)(2))

In reviewing your records for 20XX through 20XX, we found inurement. You paid the personal
expenses of your officers and did not maintain documentation to support the business purposes
of the expenditures. You were not operated exclusively for exempt purposes.

Contributions to your organization are no longer deductible.

You are required to file income tax returns on Form 1120. If you have not already filed these
returns, and the examiner has not provided you instructions for converting your previously filed
Forms 990 to Forms 1120, you should file these income tax returns with the appropriate Service
Center for the tax years ending December 31, 20XX, and for all tax years thereafter in
accordance with the instructions of the return.

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 Internal Revenue 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: United
States Tax Court, the United States Court of Federal Claims, or the United States District Court
for the District of Columbia. A petition or complaint in one of these three courts must be filed
before the 91st day after the date this determination was mailed to you if you wish to seek
review of our determination. Please contact the clerk of the respective court for rules and the
appropriate forms regarding filing petitions for declaratory judgment by referring to the enclosed
Publication 892. Please note that the United States Tax Court is the only one of these courts
where a declaratory judgment action can be pursued without the services of a lawyer. You may
write to the courts at the following addresses:

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 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 contact the person whose name and telephone number are
shown in the heading of this letter.
Sincerely yours,

Nanette M. Downing
Director, EO Examinations

Enclosures:
Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status
Form 6018, Consent to Proposed Action - Section 7428

Internal Revenue Service Department of the Treasury
2525 Capitol Street #217

Fresno, CA 93721-2227

Taxpayer Identification Number:

Date: July 25, 2011

Form:

ORG

Tax Year(s) Ended:
ADDRESS

Person to Contact/ID Number:

Contact Numbers:
Telephone:

Fax:

Certified Mail - Return Receipt Requested
Dear

We have enclosed a copy of our report of examination explaining why we believe revocation of your exempt
status under section 501(c)(3) of the Internal Revenue Code (Code) is necessary.

If you accept our findings, take no further action. We will issue a final revocation letter.

If you do not agree with our proposed revocation, you must submit to us a written request for Appeals Office
consideration within 30 days from the date of this letter to protest our decision. Your protest should include a
statement of the facts, the applicable law, and arguments in support of your position.

An Appeals officer will review your case. The Appeals office is independent of the Director, EO Examinations.
The Appeals Office resolves most disputes informally and promptly. The enclosed Publication 3498, The
Examination Process, and Publication 892, Exempt Organizations Appeal Procedures for Unagreed Issues,
explain how to appeal an Internal Revenue Service (IRS) decision. Publication 3498 also includes information
on your rights as a taxpayer and the IRS collection process.

You may also request that we refer this matter for technical advice as explained in Publication 892. If we issue
a determination letter to you based on technical advice, no further administrative appeal is available to you
within the IRS regarding the issue that was the subject of the technical advice.

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

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

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

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

Thank you for your cooperation.

Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

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

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

Name of Taxpayer Year/Period Ended

ORG EIN 20XX, 20XX, &
20XX

LEGEND
ORG - Organization name XX - Date Address - address City - city
State - state President - president DIR-1 - 1st DIR Vice President -
vice president Treasurer - treasurer Secretary - secretary RA-1 &
RA-2 - 1st & 2nd RA Video-1 & 2 - 1st & 2nd video Book-1 - 1st book CO-1
through CO-24 - 1st through 24th COMPANIES

Issues:

Issue 1 - Is ORG organized and operated exclusively for charitable, educational, and
other exempt purposes as described in Internal Revenue Code section 501(c)(3)?

Issue 2 - Should ORG’s tax exempt status be revoked due to the existence of inurement
to President?

Issue 3 - Should ORG’s tax exempt status be revoked for failure to maintain adequate
records as required by Internal Revenue Code section 6033?

Facts:
History of the Organization

ORG (ORG) was incorporated in the State of State on December 16, 19XX. The specific
purpose of the organization, as stated in its Articles of Incorporation, is to produce
religious books, films, and video tapes for distribution to churches, schools, and religious
groups and conduct seminars and retreats. ORG filed Form 1023, Application for
Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code (Code)
with the Internal Revenue Service (Service) on April 3, 19XX. The application is signed by
President, President. The Service issued a letter of determination dated September 20,
20XX recognizing ORG as a tax exempt organization under Code section 501(c)(3). The
letter stated that ORG was not a private foundation because it was an organization
described in Code section 509(a)(1) and 170(b)(1)(A)(vi).

President and DIR-1 founded the organization. On Form 1023 President is listed as the
President and DIR-1 is listed as the Financial Officer. In Bylaws provided on June 5,
19XX, DIR-1 is listed as the President and President is listed as a member of the Board of
Directors.

In Part II, Activities and Operational Information, of Form 1023, ORG provided three
numbered items to describe the activities it would conduct:

1. What are we going to produce? Do we have samples of our productions?

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 1 of 12

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 20XX, 20XX, &
20XX

We are enclosing one of our first videos, “Video-1”. Also enclosed is a book, “Book-1” which
was published in 19XX by President. This is the nature of films, videos and books we wish to
publish and distribute. These were produced at our own expense.

2. How and where will these productions be distributed?

Distribution of these productions will be through friends, relatives, members of prayer and
retreat groups. There are no direct sales; no advertising. All monies received will be from
donations. There will be seminars & retreats for which we will solicit donations, but there will
be no direct charge. The videos, books, candles, food, and anything else we offer will never be
sold but offered for a suggested donation. The donations will always be based on cost and we
will only ask that we can cover our basic costs. No person will be denied an item or service for
lack of money. We look to the philanthropy of others to assist us in our mission.

3. How will these activities further our exempt purpose?

The publication of prayer books and the production of films and video tapes on the various
components of Christian behavior, and making them available to everyone at little or no cost
is the essence of our exempt purpose. This, we trust, will nurture and strengthen members to
conduct weekly prayer meetings in response to invitations to hold prayer services in various
homes in the area.

On Part III, Technical Requirements, of Form 1023, ORG stated that it received the following
grants and provided the nature of the grant:

RA-1 $ Building Remodeling
DIR-1 $ Building Remodeling
RA-2 $ Building Remodeling

On Schedule A, of Form 1023, ORG provided a brief history of the developments and the
reasons for its creation:

On September 11, 19XX, an apparition, the image of a cross, appeared on a bathroom window
at the home of DIR-1. DIR-1 called her mother to view the image, from that word spread and
people flocked to the house at Address, City, State. Since that day people have come to that
location to pray and worship.

Facilities

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 2 of 12

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 20XX, 20XX, &
20XX

In a letter dated May 26, 19XX, the Service requested clarification and operating details in
order to make an exemption determination. ORG responded in a two page letter, with
enclosures, dated June 5, 19XX signed by DIR-1. The letter stated that the facility at
Address is owned by one of the Board Members and that the facility is made available at no
cost to the organization. ORG also provided a list of five individuals comprising the Board of
Directors and a list of four officers. President is listed as a Board Member, DIR-1 is listed as
the President, and Treasurer, the first representative for the current examination, is listed as
the Treasurer.

On June 15, 19XX the Service sent a letter to ORG requesting information on what amount the
organization was going to pay for utilities, and how it intended to separate its funds from the
President & DIR-1. ORG' response, dated June 22, 19XX, stated that about 1/3 of ORG’ funds
were used to convert a portion of the home into a prayer room. Further, ORG will pay one half
of the utilities each month for gas, electricity, water, gardening services and janitorial services.
The average utilities were $ a month; therefore, ORG was to reimburse the President & DIR-1
$ a month. The letter also stated that income and expenses will be kept separate from that of
the President & DIR-1 and that the President & DIR-1 would not handle any of ORG money
because the Treasurer is a CPA, and a cosigner of the checks is one of the officers.

Activities

ORG' response to the Service, dated August 22, 20XX, stated that ORG had conducted
monthly healing and prayer services since 19XX and had also included exercise and nutrition
in its activities. The letter goes on to say that ORG conducts three exercise classes in three
locations.

ORG’ facility is located in DIR-1’s residence. The house contains the prayer room which is
approximately 660 square feet. The examining Agent did not observed anything in the prayer
room preventing its use for personal reasons by the President & DIR-1. Since 20XX, ORG’
primary activities consisted of one monthly gathering at its facility, and President said that he
conducted free Fitness classes at nearby hospitals.

At the interview President explained that exercise classes are low impact routines directed at
senior citizens. President founded the mind-body martial-arts fitness program he called Fitness.
The 45 minute program consists of a series of breathing and stretching techniques using
circular motions, knee bends, and weight lifting. Classes are free but some participants are
asked to donate $. The Fitness classes are not mentioned on Form 1023.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 3 of 12

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 20XX, 20XX, &
20XX

President provided a copy of a DVD titled President’s FITNESS Mind Body Fitness Developing
The Core PROGRAM 17 to support the exercise classes. The video was reviewed and it shows
President demonstrating the Fitness methods. The back cover provides a brief description of
FITNESS. The back cover also directs the reader to contact President for class schedule or to
send inquiries to CO-1. The DVD itself shows Copyright 20XX All Rights Reserved By President
and does not mention ORG.

In addition to the above activities, President provided a DVD copy of Video-2 to support the
type of video material ORG produced. The movie depicts a small town being over taken by drug
dealers and corrupt government officials. The drug dealers and officials combine forces to
methodically have all the residents of the small town become drug users. Their plan is spoiled
by a pastor and other good Samaritans. President is one of the actors in the movie. The DVD
cover states that CO-2 Corporation presents the film and shows President as the producer. The
DVD itself shows Copyright 20XX CO-2 Corp All Rights Reserved and does not mention ORG.

Officers

The 20XX Form 990EZ lists four officers. DIR-1 and President are the President and Treasurer
respectively, and Vice President is listed as the vice president. President could not provide
contact information for Vice President because they lost touch a few years back. Secretary is
listed as the Secretary. Secretary was not present during the interview but was contacted at a
later date. He said he has been involved with ORG since its inception but had no knowledge of
ORG’ financial matters. He did not recall the last time the Board convened but was in regular
contact with President. The 20XX Form 990EZ does not reflect compensation for President and
DIR-1, and neither was issued a form W-2 or F1099.

President provided a copy of Board minutes for only one meeting that took place on January 7,
20XX. Those Minutes did not indicate other Board member involvement, other than President
and DIR-1. According to the minutes, ORG business was not discussed.

Financial Information

President said that he receives the donations, deposits the donations, balances the check book,
and writes the checks. President said that DIR-1 and Treasurer can also sign checks. Check
copies were requested for 20XX and the subsequent years, but they were not provided.

ORG provided February through December bank statements for 20XX for its one bank account.
The deposits and credits were tabulated and showed that ORG deposited $ in

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 4 of 12

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 20XX, 20XX, &
20XX

funds and paid $ in disbursements. On its 20XX Form 990EZ ORG reported $ in revenues and
$ in expenses.

President did not provide source documents to substantiate the expenses paid by ORG in
20XX.

President's explanations for the questioned expenses did not appear to further ORG’ charitable
purpose. President also said that an allocation method to calculate the amount of expenses ORG
would reimburse the President & DIR-1 does not exist. He also said that contemporaneous
travel logs or reimbursement requests and or receipts were not kept.

A review of the 20XX bank statements and check register resulted in a categorization of $
of the expenses. The bank statements provided a brief note of the identity of the payee for
electronic transactions, but did not provide any indication of the payee for checks, and copies of
checks were not provided. President categorized the expenses paid with checks and provided
the payee and purpose for the electronic transactions as follows:

20XX

Mortgage payments Fuel Purchase
Utilities CO-8
CO-3 CO-9
Gardener CO-10
Honorarium CO-11
Supplies Checks to cash
CO-4 Air travel
CO-5 CO-12
CO-7 CO-13
CO-6 CO-14
Car Payment CO-15
Car Insurance Miscellaneous
Sub total Sub total

Sub total

Sub total

Total

ORG reported $ in revenues and $ in expenses on its 20XX Form 990EZ. President was issued
IDR 3, dated September 17, 20XX, requesting the bank statements, copies of paid checks, and
supporting documentation for the 20XX year, but none were provided. The income and expense
figures reported on Form 990EZ were not verified, but reflect the following expense amounts:

20XX

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 5 of 12

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 20XX, 20XX, &
20XX

Professional fees
Occupancy
Depreciation

DVD Duplication
Food for events
Honorarium
Information Tech
Insurance

Repairs & Maint
State & Local taxes
Transportation
Total

ORG reported $ in revenues and $ in expenses on its 20XX Form 990EZ. President was issued
IDR 3, dated September 17, 20XX, requesting the bank statements, copies of paid checks, and
supporting documentation for the 20XX year. President provided copies of bank statements and
handwritten financial statements for the 20XX year, but did not provide source documents for
any of the expenses. The bank statements were reviewed and the deposits and expenses
tabulated. ORG deposited a total of $ and paid a total of $. The expenses are categorized as
follows:

Gasoline

Car Payments

Car Repairs
Travel

DMV License

Car insurance
Food Potluck

Food Special Occa
Meeting Care Fac
Meeting Restaurant
Loan to Care Fac
Supplies

CO-21

CO-22

CO-23

CO-24

Toiletries

Cleaning Service
Special Food Cash
Sub total

20XX

Lawn Service
Donation

Tax Service

House Payments
Home Insurance
Honorarium

CO-16

CO-17

Utilities

CO-18

DVD Editing
CO-19

CO-20

Electrical Service
Install Cooking Grill
Install Water Heater
Install Shed

Sewer Repair

Sub total

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 6 of 12

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 20XX, 20XX, &
20XX
Total

Law:

Code section 501(c)(3) 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 Federal Tax Regulations (Regulations) provides that in
order to be exempt as an organization described in Code section 501(c)(3) the
organization must be one that is both organized and operated exclusively for one or more
of the purposes specified in that section.

Regulations section 1.501(c)(3)-1(c)(1) 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.

Regulation section 1.501(c)(3)-1.(d)(1)(ii) provides 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.

Code section 6033(a)(1) provides, except as provided in Code section 6033(a)(2), every
organization exempt from tax under Code section 501(a) shall file an annual return, stating
specifically the items of gross income, receipts and disbursements, and such other
information for the purposes of carrying out the internal revenue laws as the Secretary
may by forms or regulations prescribe, and keep such records, render under oath such
statements, make such other returns, and comply with such rules and regulations as the
Secretary may from time to time prescribe.

Regulation section 1.6001-1(a) in conjunction with section 1.6001-1(c) provide that every
organization exempt from tax under Code section 501(a) and subject to the tax imposed by
Code section 511 on its unrelated business income must keep such permanent books or
accounts or records, including inventories, as are sufficient to establish the amount of gross
income, deduction, credits, or other matters required to be shown by such person in any
return of such tax. Such organization shall also keep such books and records as are required
to substantiate the information required by Code section 6033.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 7 of 12

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 20XX, 20XX, &
20XX

Regulation section 1.6001-1(e) states that the books or records required by this section
shall be kept at all times available for inspection by authorized internal revenue officers or
employees, and shall be retained as long as the contents thereof may be material in the
administration of any internal revenue law.

Regulation section 1.6033-1(h)(2) provides that every organization which has established
its right to exemption from tax, whether or not it is required to file an annual return of
information, shall submit such additional information as may be required by the district
director for the purpose of enabling him to inquire further into its exempt status and to
administer the provisions of subchapter F, Code section 501 and Code 6033.

Rev. Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested to
produce a financial statement and statement of its operations for a certain year. However,
its records were so incomplete that the organization was unable to furnish such
statements. The Service held that the failure or inability to file the required information
return or otherwise to comply with the provisions of Code section 6033 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 exempt status.

Taxpayer’s Position:
The taxpayer previously did not agree with the proposed revocation, but subsequently
verbally agreed to the proposed revocation.

Government’s Position:

Issue 1 - Is ORG organized and operated exclusively for charitable, educational, and
other exempt purposes as described in Code section 501(c)(3)?

ORG stated on Form 1023 that it was going to produce Christian based videos and books.
The videos and books were to be distributed to friends, relatives, and the general public.
The videos and books were to be made available at no cost or at minimal cost. At some
point President began to provide fitness classes.

The Video-2 DVD does not mention ORG. The President & DIR-1 were unable to demonstrate
that the production of the video and the video itself furthered ORG’ tax exempt purpose. The
President & DIR-1 were unable to demonstrate that the video was distributed at no cost or
minimal cost. The President & DIR-1 did not provide any support to show that ORG was
involved in the video production. The President & DIR-1 were unable to show that President's
involvement was not a private venture undertaken by

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 8 of 12

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 20XX, 20XX, &
20XX

President. The rights to the Video-2 DVD are held by CO-2. ORG did not provide any book
samples.

The FITNESS DVD depicts exercise instructions directed toward senior citizens. ORG is not
mentioned in the DVD or on the DVD cover. The video does not have a religious aspect and
the production of exercise videos is not mentioned on Form 1023. The reader is directed to
contact President or CO-1 for schedule information. The DVD itself shows Copyright 20XX All
Rights Reserved By President. President is using ORG funds to pay the expenses he incurs to
conduct the Fitness classes. President is using ORG funds to promote a fitness program he
invented and holds the rights to. Regardless of the fact that the classes are provided at no
cost to the participant, the manner in which the activity is carried on is no different than a
marketing strategy, that is provide free samples to consumers with the hope the product will
find a market.

ORG' history provided on Form 1023, Schedule A, states that DIR-1 witnessed an apparition in
19XX. Word of the apparition spread and people began to gather at the home to pray and
worship. The gatherings, as described in Schedule A, further ORG’ tax exempt purpose.
However, the President & DIR-1 were unable to demonstrate that the current gatherings are
as described on Form 1023. The President & DIR-1 were unable to show that the gatherings
have not been over taken by a social quality to host friends and or relatives. The President &
DIR-1 use ORG funds to purchase food for the gatherings, but providing food at their gatherings
is not mentioned in Form 1023 and does not further the ORG’ tax exempt purpose. Although
it is expected that the gathering will inevitably have a social aspect, ORG’ tax exempt purpose
is to permit the gathering of individual to witness the apparition, not to provide food for the
gatherings.

The President & DIR-1 did not demonstrate that ORG is operated exclusively for charitable,
educational, or other exempt purposes as described in Code section 501(c)(3).

Issue 2 - Do ORG’s net earning inure to the benefit of President as prohibited in Code
section 501(c)(3) and should ORG’s tax exempt status be revoked due to the existence of
inurement?

As stated in the Facts portion of this report, the President & DIR-1 did not provide source
documents for any of the expenses paid with ORG funds. The explanations provided by
President indicate that ORG funds are used to pay for personal expenses. The explanations
also show that the President & DIR-1 received reimbursement amounts for hosting ORG in
their home in excess of the amount they stated would be paid to gain tax exempt status. No
support was provided to demonstrate how an increase was calculated or approved. The
automobile fuel, loan, insurance, and repair payments made with ORG funds to pay for the
expenses incurred by President while providing the Fitness classes do

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 9 of 12

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 20XX, 20XX, &
20XX

not further ORG’s tax exempt purpose. The expenses are personal in nature and are incurred
by President in the course of marketing his Fitness classes.

The amount of inurement is calculated by subtracting the annual reimbursement amount ORG
was to pay the President & DIR-1 from the amount actually paid. The calculated annual
reimbursement amount is calculated by multiplying the monthly reimbursement amount by 12
($ X 12 =$). The amount of inurement is calculated as follows:

20XX
20XX Professional fees
Mortgage payments Fuel Purchase Occupancy
Utilities CO-8 Depreciation
CO-3 CO-9 DVD Duplication
Gardener CO-10 Food for events
Honorarium CO-11 Honorarium
Supplies Checks to cash Information Tech
CO-4 Air travel Insurance
CO-5 CO-12 Repairs & Maint
CO-7 CO-13 State & Local taxes
CO-6 CO-14 Transportation
Car Payment CO-15 Total
Car Insurance Miscellaneous Allocation
Sub total Sub total Total inurement
Sub total Sub total Allocation
Total Inurement

20XX
Gasoline Lawn Service
Car Payments Donation
Car Repairs Tax Service
Travel House Payments
DMV License Home Insurance

Car insurance
Food Potluck

Food Special Occa
Meeting Care Fac
Meeting Restaurant
Loan to Care Fac
Supplies

CO-21

CO-22

Honorarium
CO-16
CO-17

Utilities

CO-18

DVD Editing
CO-19

CO-20

Electrical Service

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 10 of 12

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

Name of Taxpayer Year/Period Ended
ORG EIN 20XX, 20XX, &
20XX
CO-23 Install Cooking Grill
CO-24 Install Water Heater
Toiletries Install Shed
Cleaning Service Sewer Repair
Special Food Cash
Sub total Sub total
Sub total Total
Sub total Allocation
Total Inurement

The amount of inurement in the 20XX year is $, in the 20XX year is $, and in the 20XX
year is $. The amount of inurement represents %, %, and % of total reported revenues for
the 20XX, 20XX, and 20XX years respectively.

Substantially all of the ORG’ net earnings inure to the benefit of the President & DIR-1 and
therefore revocation of ORG’ tax exempt status is warranted.

Issue 3 - Did ORG maintain adequate records as required by Code section 6033 and
should ORG’s tax exempt status be revoked for failure to maintain adequate records?

ORG did not provide source documents to show that any of the expenses paid furthered its tax
exempt purpose for 20XX. ORG did not provide source documents or bank statements for the
20XX year. ORG did not provide source documents to show that any of the expenses paid in
20XX furthered its tax exempt purpose. ORG did not provide an expense reimbursement
allocation method to show the amount it was to reimburse the President & DIR-1 for hosting
ORG in their home. ORG did not provide support to show how the expense reimbursement
amount was calculated, and who approved it, that resulted in a significant increased from the
amount the President & DIR-1 stated would be paid on Form 1023.

ORG was unable to provide support for its revenues. Support for its revenues was requested
and only hand written notes were provided, but no source documents were presented. The
support request was made to confirm that ORG is publicly supported. The notes provided
indicate that ORG is not a publicly supported organization. ORG failed to provide source
documents for expenses for 20XX, 20XX, and 20XX. The lack of records alone is sufficient to
revoke an organization’s tax exempt status and coupled with the other issues identified in the
examination, ORG’s exemption should be revoked.

Conclusion:

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 11 of 12

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG EIN 20XX, 20XX, &
20XX

The President & DIR-1 did not demonstrate that ORG is operated exclusively for charitable,
educational, or other exempt purposes as described in Code section 501(c)(3); ORG’ net
earning inure to the benefit of President and DIR-1 as prohibited in Code section 501(c)(3); and
ORG did not maintain adequate records as required by Code section 6033. ORG’ tax exempt
status should be revoked for all of the above-explained reasons.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: 12 of 12