Determination 1306028: IRS revokes an organization’s section 501(c)(3) exemption for private benefit

View official IRS release (PDF)

Plain-English summary

The IRS revoked an organization’s federal income tax exemption under section 501(c)(3), effective January 1, 2006. The final adverse determination states that a substantial amount of the organization’s assets benefited its founders and that the organization was not operated exclusively for exempt purposes. The attached examination report describes personal and organizational expenses, inadequate records, and transactions that the organization did not sufficiently document as furthering its exempt purpose. The IRS also stated that contributions to the organization were not deductible under section 170 and required the organization to file federal income tax returns for the specified periods and afterward.

Ruling snapshot

• Question: Did the organization continue to qualify for exemption under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 501(c)(3), 6001, 6033, 7428; Treas. Reg. §§ 1.501(c)(3)-1(b)(4), 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(c)(2), 1.501(c)(3)-1(d)(1)(ii)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Appeals Office

Taxpayer Identification
Number: 201306028 Number:
Release Date: 2/8/2013 “ee

Person to Contact:

KkKK

Date: November 15, 2012
kkk Tax Period(s) Ended:

eeKKK
KKKK

kkKK

UIL: 0501.03-30

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”). 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.

The revocation of your exempt status was made for the following reason(s):

A substantial amount of your organization’s assets inured to the private benefit of your
founders. Because a substantial amount of your charitable assets were used for private
purposes, the organization is not operated exclusively for exempt purposes described in
section 501(c)(3) of the Code.

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

You are required to file Federal income tax returns on Forms **** 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.

You have waived your right to contest this determination under the declaratory judgment
provisions of Section 7428 of the Code.

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

Sincerely Yours,

/s/
Appeals Team Manager

DEPARTMENT OF THE TREASURY
Internal Revenue Service
1100 Commerce Street
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
February 18, 2011 Taxpayer Identification Number:
Form:
LEGEND Tax Year(s) Ended:
ORG - Organization name Person to Contact/ID Number:
XX - Date Address - address Contact Numbers:
Telephone:
ORG Fax:
ADDRESS

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 (04-2002)
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 (04-2002)
Catalog Number 34809F

Form U.S. Treasury Department-internal Revenue Service | Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit

Name of Taxpayer Year/Period Ended

ORG December 31, 20XX
LEGEND

ORG ~— Organization name XX - Date EIN — EIN Address - address
City - city State - state Country - country DIR-1 & DIR-2 - 1° &
2™¢ DIR CO-1, CO-2, CO-3,.CO-4, CO-5, CO-6, CO-7, CO-8, CO-9, CO10, CO-11,

CO-12, CO-13, CO-14, CO-15, CO-16, CO-17, & CO-18 — 157, 2™>, 38>, 47, 5TH 6TH,
7TH, g™) oT) 707, 4i™, 12™,) 13T™) 14™) 15™ 16 177 g 187% COMPANIES

ISSUE:

Is ORG operating exclusively for charitable and educational purposes as described in Internal
Revenue Code (IRC) Section 501 (c)(3)?

FACTS:

ORG, whose Employer Identification Number is EIN, was incorporated on October 21,
19XX. In a letter dated September 26, 20XX, ORG was granted exemption from federal income
tax under section 501(a) of the Internal Revenue Code as an organization described in section 501
(c)(3), with a foundation status of 509(a)( 1) during the advanced ruling period which ended on
December 31, 20XX. Another letter dated May 24, 20XX, stated that with the information
submitted by ORG, the Organization will continue to be classified as a public charity with a
status of170(b)(1)(A)(vi). The mission of the Organization as stated on Form is "to preserve
play for future generations of children and parents." In furtherance of its mission, ORG will: (1)
work to educate adults as to the value of constructive play in the lives of children and adults; (2)
provide venues for education regarding and development of insightful play experiences among
adults and children; (3) research and report for educational purposes on the effects of play, and
the lack thereof, on children and adults; and (4) establish a center for research and education on
the benefits of constructive play and the ability to participate in the same.

ORG began operations in City, State in 20XX. DIR-1, the Director, holds an Associates Degree
in Business and a Bachelor of Science Degree in Education. ORG has deviated from their
original purpose, as stated on Form , to the helping of autistic persons by taking them on
hiking trips and other outings. This change in mission was not reported to the IRS. During their
interview, the stated they moved to City to be in the country of State, which provided
more opportunity for hiking and other outdoor activities.

ORG has three main sources of income: monetary contributions, money from an annual
fundraiser that the Organization holds every November, and advertising income. Their income is
used for client incentives, meals, meeting costs, uniforms, transportation expenses for taking
children on outings, travel and entertainment, equipment and repairs, and vehicle and equipment
rental. The Organization does not receive any funding from the city, county, or the State of State.

Department of the Treasury — Internal Revenue Service Form 886-A
Page 1

Form U.S. Treasury Department-Internal Revenue Service | Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer Year/Period Ended
ORG December 31, 20XX

Bank statements for ORG were reviewed on Tuesday, November 18, 20XX. There were
recurring transactions at liquor stores, grocery stores, fast food restaurants, full service
restaurants, CO-1, CO-2, and hair salons, all located within close proximity of their former
residence in City, State, (see exhibits A -L for monthly debit card transactions). Another set of
exhibits (exhibits 1 -7) categorizes the different types of transactions and how many transactions
were made for each category. The final set of exhibits (Q-1 -Q-2) is a list of the checks written
from the Organization's checking account. There are no copies of the cancelled checks, just the
check numbers and the amounts stated on their bank statement. The information on Information
Document Request #1 was requested on April 21, 20XX, and due to the agent by May 21, 20XX.

The following responses to Information Document Request #1 were received on May 19,
20XX, and a duplicate copy with an original signature on May 24,20XX. For exhibits R-1 -R-2
the Officer created a spreadsheet to show how the Organization received their revenue for the
calendar year 20XX. The revenue was divided into five categories: CO-3 Bank Error,
Contribution, CO-4 (advertising income), Event Income, and Class Programming.

° The Officer explained that the CO-3 bank error was an error on the side of CO-3 when
someone else's deposit was mistakenly credited to ORG's account.

° The Officer stated that copies of where the contributions came from are attached.
However, only the proof of one contributor was attached. See exhibits S-16 & S-17.
° The Officer stated that the cost of generating the publication CO-4 was supported by low

cost advertising from local businesses and organizations that provide services for children
and their parents. This was not entirely true, as many of the advertisements were from
businesses that did not provide services that either helped overcome learning differences
or helped with motor skill development. The Organization did not report their advertising
income on Form

° The deposits in the "Paid Class Programming" column were comprised of class
programming sessions conducted by ORG. It was also stated that DIR-1 conducted these
classes to further his research of play and its benefit to children. He also was providing a
service of monetary value to the children and their parents. The Officer also stated that
the amounts were not donations or tax deductible.

For exhibits Q-1 through Q-2, the Organization provided only partial information. This was
attributed to a computer problem, and the Officer stated, "That the cost of ordering these checks
through CO-3 will cost $ a piece. " The expenses that were explained in exhibits Q-1 and Q-2
were for an apartment that was rented at CO-5 in City, State. There were also payments to CO-6,
CO-7, CO-8 payment, CO-9, and CO-10. No explanation was provided as to how these expenses
furthered their exempt purpose, or if any of these accounts were in the name of the Organization.

The debit card transactions were broken down into eight separate categories, (See exhibits 1
8). For their explanation of exhibit 1, concerning the 123 liquor store transactions paid in the
calendar year 20XX, the Officer stated, "that the transactions were for wine purchases that we

Department of the Treasury — Internal Revenue Service Form 886-A
Page 2

Form U.S. Treasury Department-Internal Revenue Service | Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer Year/Period Ended
ORG December 31, 20XX

needed to purchase a little at a time to increase inventory, so that we have wine to pour at our
annual food and wine events. It relieves the financial burden of having to purchase it all at once
to conduct our event, and wine was also purchased as client incentives for the parents. Many
times DIR-1 would be invited to sit down over dinner with parents to discuss ORG's
programming and how it could benefit their children. This was the cost of doing business to
further ORG's mission." The Organization did not provide documentation as to the times, dates,
and topics discussed for these dinner meetings.

For their explanation of exhibit 2, the 307 grocery store purchases, the Officer stated, "these
grocerystorepurchaseswerefoodpurchasessothatwecouldprovidepicnic, lunches, snacks candy
and drinks to the children while we were on recreational play outings. In addition to these
expenses we would purchase food to prepare if we were hosting a lunch or dinner meeting to
discuss ORG's mission and goals with potential supporters, volunteers, or program
participants." Again, the Organization did not provide documentation as to the times, dates,
places where the play outings took place, or when lunch or dinner meetings took place.

For their explanation of exhibit 3, the 17 rental car and car payments, the Officer stated, "the
car payments to either CO-8 or CO-11 were for DIR-1's vehicle that he used for carrying out
ORG's programming going to and from recreational location, transporting the children, and
meeting potential clients. We had another vehicle we used for non-business related activities and
transportation. The payment to CO-12 glass was to fix a small rock chip in the windshield of the
business vehicle that occurred during programming. Small amounts to CO-13 and CO-14 were
for oil changes in the business vehicle for maintenance. The payments to CO-6 were for auto
insurance on the business vehicle in the event of an accident. The rental car and truck expenses
were in conjunction with trips to and from City to assess possibly moving the Organization, and
then for the expenses associated with the actual move. This was a small portion of the actual
move. We personally incurred most of the expense to move the Organization. " The Organization
did not provide documentation that the vehicles used for the Organization were used exclusively
for the Organization and not for personal use such as a log book which would notate the date,
destination, purpose, and mileage. No document was submitted that identified the windshield
repair and vehicle maintenance as that of the Organization's vehicle or personal vehicle such as a
receipt for the make and model of the car. As far as the rental car and truck expenses are
concerned, no distinction was made as to what part of the move to City constituted
Organizational expenses versus personal expenses.

For their explanation of exhibit 4, the 29 salon, health care, and clothing store transactions,
the Officer stated, "these transactions are the result of obtaining uniforms and equipment to
carry out the programming and client incentives for the kids. Often time's children would be
rewarded for working hard, participating, paying attention or following directions well during a
recreational outing. “ No explanation was received as to how the trips to the beauty salons,
cleaners, jewelry stores, and medical clinics were in furtherance of the Organization's exempt
purpose, or rewards for the children.

Department of the Treasury — Internal Revenue Service Form 886-A
Page 3

Form U.S. Treasury Department-Internal Revenue Service | Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer Year/Period Ended
ORG December 31, 20XX

For their explanation of exhibit 5, the 30 various utility payments, the Officer stated, "These
were the utility costs associated with ORG's office space and one cell phone for DIR-1 and
internet service for the computers." No supporting documentation was provided by the
Organization such as a lease agreement for the office space, or copies of the bills with an address
of the office space location. This was requested in the IDR..

For their explanation of exhibit 6, the 84 various purchases in City, State, the Officer stated,
"These City transactions were in conjunction with the Organization's relocation such as gas
expense to and from City, research, on-site recreational mapping of locations for programming,
meals and programming equipment." No documentation was provided to support these claims,
such as, where they went for on-site recreational mapping, how the meals supported their exempt
purpose, what types of programming equipment was purchased, where it was purchased, and
what was purchased. Again no log book or any other type of receipt was submitted for their gas
expenses.

For their explanation of exhibit 7, the 13 purchases made in State, State, and State, the
Officer stated, "The charges outlined in this exhibit were also in conjunction with moving ORG.
These transactions are only a portion of the expenses incurred for a trip to State to pick up some
office furniture that was being stored there. We personally paid for a majority of the moving
cost." No documentation was provided as to how the purchases at CO-15 # 3573, CO-16 # 0207,
or CO-17, all in City, State, related to the acquisition of their office furniture.

For their explanation of exhibit 8, the 210 restaurant and beverage purchases made in City,
State, the Officer stated, "These transactions are associated with various formal business
meetings over lunch and dinner, meetings organized and conducted at a local coffee shop as
opposed to ORG's office to discuss furthering ORG's mission, organize recreational outings with
volunteers of the Organization as well as to entertain potential donors, grant writing advisors,
non-profit consultants, and potential program participants. Many professional services were
donated to keep ORG's cost low so that the Organization could continue to operate on a very
limited "shoestring" budget while getting the help needed to operate. In return for the generous
help of many professionals and volunteers we would treat them to a cup of coffee, lunch or
dinner as a thank you for their service. Often times a trip to CO-1 was also made to treat the kids
to an after session treat for validation of their good work and good behavior. In addition to the
expenses that ORG incurred, CO-1 would also donate some drinks to match a portion of what we
were spending. As a result we were consistent in going there as an after program location. This
may have happened multiple times in one day if there were multiple classes conducted." Once
again no supporting documentation was provided. No dates, times, who attended, and what was
discussed was provided. Most of the purchases made at CO-1 appear to be for single purchases.

IDR # 3 was sent via certified mail on June 3, 20XX. This request asked for additional
information to clarify the responses given to the Service in IDR # 1, sent on April 21, 20XX for

Department of the Treasury — Internal Revenue Service Form 886-A
Page 4

Form U.S. Treasury Department-Internal Revenue Service | Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer Year/Period Ended
ORG December 31, 20XX

exhibits 1 -8. The Officer noted on the reply that not all of the questions were answered, and that
the additional information will be faxed at a later date. The following questions and answers are
as follows:

1(a). Where is the food and wine event held specifically? Such as a park, hall rental, etc.
Please provide the Service with a copy of the permit(s), and/or rental contracts for the event in
20XX. Their reply was, "CO-18 in City, State No service contract as catering was donated. " No
correspondence between ORG and CO-18 was provided. 1(b). What activities are held at this
event? Is this a one day event, or is it longer? Their reply was, "Wine tasting paired with food. It
was a one evening event." 1(c). How do the annual food and wine events further ORG's exempt
purpose? Their reply was, "Helped raise sustaining funds. "

1(d). How many people attend this event, and do you keep attendance rosters? Their reply
was, "75 people. We have attendance roster." No attendance roster was provided.

1(e). How many bottles of wine, and what kind of food is offered by ORG at this event?
Their reply was, "Wine poured by the glass paired with "Tapas" (small appetizer portions). " No
documentation was submitted as to how many bottles of wine were poured, or who provided the
wine.

1(f). Do you sell tickets to the annual event? Their reply was, "Charged for admission or
sometimes offered opportunity to make donations when events were free. "

1(g). If so, how much are they? Their reply was, "Admission was based on venue's capacity.
Since this event was already held no price was given, or the capacity of CO-18 facility.

1(h). If tickets are sold, does part of the cost of the ticket price go towards your wine and
food costs? Their reply was, "All upfront costs were normally very minimal as venue, food, wine,
linens, etc., were donated. Ticket sales proceeds did not go to cover any of these costs." This
statement is contradictory to their response from IDR # 1, exhibit 1, the liquor store purchases,
"that the transactions were for wine purchases that we needed to purchase a little at a time to
increase inventory, so that we have wine to pour at our annual food and wine events. It relieves
the financial burden of having to purchase it all at once to conduct our event."

”

1(i). If some of the money is used to cover food and wine costs, are the attendees given a
statement that tells them how much of the proceeds qualify as a charitable deduction, and that
only the amount over and above the cost of food and wine is deductible? Their reply was, “Jn
20XX everything was donated. "

For exhibit 2, questions a -e, the following questions and answers are as follows: 2(a). Did you
keep a log in 20XX, of each outing ORG participated in? Their reply was, "Outings can be
accounted for." No supporting documentation was provided as to when, where, how many
children and/or adults attended, and what activities took place.

2(b). If so, how many children went on each trip, and where did you go on each trip? Their reply
was, "4-5 kids going to outdoor parks, trails, lakes, etc." No supporting documentation was
provided.

Department of the Treasury — Internal Revenue Service Form 886-A
Page 5

Form U.S. Treasury Department-internal Revenue Service | Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer Year/Period Ended
ORG December 31, 20XX

2(c). Please provide receipts, a list of each outing's activities, and insurance/medical release
forms from the parent's of the children for each outing. Their reply was, “Outdoor play and
recreation/no release forms required.” Once again no supporting documentation was provided to
support the expenses.

2(d). When ORG hosted a lunch or dinner meeting did you keep the receipts, write down the date
and time of the meeting, and who attended the meeting? Their reply was, "Yes, via bank
statements." The bank statements do not provide any information that the expenses were related
to the Organization's exempt purpose.

2(e). When ORG hosted the lunch and dinner meetings, how did you decide to invite? Their
reply was, "Mailings to parents in our area." No supporting documentation of the mailings was
sent with these responses.

For exhibit 3, questions a -g, the following questions and answers are as follows:

3(a). We will need a copy of the loan agreement for DIR-1's vehicle that is used for ORG's
activities. Their reply to this was, "We no longer have this vehicle. "

3(b). We will need a copy of the mortgage contract for the residence on Address, City, State.
Their reply to this was, "This mortgage contract was signed until 12/6/XX. " No mortgage
contract was provided. .

3(c). Was a record kept of the dates and mileage for each time DIR-1's vehicle was used for
ORG's activities? If so, please provide the Service a copy. Their reply to this was, "Will confirm."
As of December 8, 20XX no records have been sent.

3(d). Were receipts from CO-13 and CO-14 for oil changes in the business vehicles maintenance
retained for the year 20XX? If so, please provide the Service a copy. Their reply to this was,
"Will send." As of the date of this writing, December 8, 20XX no records have been sent.

3(e). Please provide proof of insurance for the business vehicle from CO-6 for 20XX. Also, were
your personal vehicles insured with a different insurance company or with CO-6 in 20XX?
Please provide the Service with proof of insurance on your personal vehicles for 20XX. Their
reply to this was, "Working on this." As of December 8,20XX no records have been sent.

3(f). Why did you rent car and trucks for trips to City instead of using your personal vehicles?
Their reply to this was, "Moved here for business reasons." ORG both lives and runs the
Organization out of their home, so the move was not exclusively for business reasons.

3(g). Do you have receipts for the total moving costs from City to City? If so, please provide the
Service with a copy. Their reply to this was, "Will find and submit." As of December 8, 20XX no
records have been sent.

For exhibit 4, questions a & b, the following questions and answers are as follows:

4(a). You told the Service that the transactions in exhibit 4 were to obtain uniforms and
equipment to carry out programming and client incentives for the kids, so how does beauty
supply stores, jewelry stores, cleaners, and doctor visits further the Organization's exempt
purpose? Their reply to this was, "Beauty supplies for girls, will find receipts for the other and
explain." For the beauty supplies no documentation was provided as to what was bought, and for

Department of the Treasury — Internal Revenue Service Form 886-A
Page 6

Form U.S. Treasury Department-Internal Revenue Service | Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer Year/Period Ended
ORG December 31, 20XX

whom. As of December 8, 20XX, no supporting documents have been sent for the other expenses
inquired about.

4(b). Please send copies of the medical visits incurred on exhibit 4. Their reply to this was,
"Okay, will find and submit." As of December 8, 20XX no records have been sent.

For exhibit 5, questions a -d, the following questions and answers are as follows:

5(a). What was the physical address of your residence in City in 20XX? Their reply was,
"Address, City, State." This coincides with the checks written from ORGs checking account. The
Officer of the Organization stated that in 20XX, the Organization leased office space at a
different location from their residence. The following check numbers, dates written, amounts
written, and who to are as follows:

° #, Thursday, April 20, 20XX, $, The CO-5
° #, Tuesday, May 9,20XX, $, The CO-5

° #, Thursday, June 15,20XX, $, The CO-5

° #, Wednesday, July 12, 20XX, $, The CO-5

¢ #, Tuesday, August 15,20XX, $, The CO-5
5(b). What was the physical address of the office, if different from your personal residence?
Their reply was, “Same. " No supporting documentation was provided that the utility expenses
and rental payments were either for personal or organizational use.
5(c). If the office was at a different location please send a copy of the lease or rental agreement.
Their reply to this was, "N/A. " It appears the Officer's personal residence and ORG's office is at
the same location, and no distinction can be made as to what expenses that were paid by ORG
were for personal or organizational use.
5(d). Please send copies of the utility bills listed on exhibit 5. Their reply was, “Coming.” As of
December 8, 20XX no records have been sent.

For exhibit 6, questions a -c, the following questions and answers are as follows:

6(a). Did ORG keep a log book or any other records to record the mileage, transactions, and
explain how these expenses furthered ORG's exempt purpose? If so, please provide the copies.
Their reply was, "Answered in exhibit 3(c). " As of December 8, 20XX no records have been
sent.

6(b). Did you record what types of research was performed during your trips to City, TX.? If so,
please provide the Service with copies. Their reply to this was, "Research was on best areas for
play/outdoor recreational activities." The Organization did not record the types of research
conducted such as, why they picked the place they did, if they did any internet research, or the
dates they visited each location.

6(c). Provide a list of on-site recreational locations you mapped for programming. Their reply
was, "City, City, City, City, City, City. "

For exhibit 7, questions a -c, the following questions and answers are as follows:

Department of the Treasury — Internal Revenue Service Form 886-A
Page 7

Form U.S. Treasury Department-internal Revenue Service | Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer Year/Period Ended
ORG December 31, 20XX

7(a). Provide a copy of the storage agreement for the office furniture in State. Their reply was,
"Coming." As of December 8, 20XX no records have been sent.

7(b). Does the office furniture belong to ORG? Their reply was, "Yes. "

7(c). What was the total cost incurred to move the furniture from State to State? Please provide
the receipts for the cost of the move. Their reply was, "Coming." As of December 8, 20XX no
records have been sent.

For exhibit 8, questions a -c, the following questions and answers are as follows:

8(a). Please provide receipts to substantiate the business meeting over lunch and dinner. Their
response was, "Coming." As of December 8, 20XX no records have been sent.

8(b). How does entertaining potential donors, grant writing advisors, non-profit consultants, and
potential program participants classify as a charitable or educational activity? Their reply was,
"This was "the cost of doing business" expense as we further ORG. "

8(c). Provide documentation that shows CO-1 donates drinks to match a portion of ORG's
spending. Their reply was, "Will do." As of December 8, 20XX no records have been sent.

IDR # 4 was sent via certified mail on September 7, 20XX. This request asked for responses
and/or documentation that ORG still has not provided. This was the last Information Document
Request that was sent. The following entries are follow-up responses from Information
Document Request # 3, which have been requested on Information Document Request # 4.

Exhibit 1(a) -Question and response to 1(a) on IDR # 3. Where is the food and wine event held
specifically? Such as a park, hall rental, etc. Please provide the Service with a copy of the
permit(s), and/or rental contracts for the event in 20XX. Their reply from IDR # 3 was, “No
service contract as catering was donated." IDR # 4 requested that if they provide the company
with a thank you letter, or something else, so they could prove the services and/or catering was a
donation, please provide the Service with a copy. Their reply was, "Called and thanked
personally so there is no letter or other documentation. "

Exhibit 1(c) -Question and response to 1(c) on IDR # 3. How do the annual food and wine events
further ORG's exempt purpose? Their reply from IDR # 3 was, "Helped raise sustaining funds."
IDR # 4 requested the Organization to provide the Service with a detailed summary such as
follows: Date, fundraising event, location, & amount received. Their reply to this was, "Date:
April 6, 20XX

Fundraising Event: Fall Fundraiser

Location: CO-18 - City

Exhibit 1(d) -Question and response to led) on IDR # 3. How many people attend this event, and
do you keep attendance records? Their reply from IDR # 3 was, "75 people. We have an
attendance roster." IDR # 4, requested the Organization to provide the Service with a copy of the
attendance roster, and the date and time held. Their reply was, “Cannot retrieve from
inaccessible computer hard drive in time for deadline.

Department of the Treasury — Internal Revenue Service Form 886-A
Page 8

Form U.S. Treasury Department-Internal Revenue Service § Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer Year/Period Ended
ORG December 31, 20XX

Exhibit 1(i) -Question and response to 1(i) on IDR # 3. If some of the money is used to cover
food and wine costs, are the attendees given a statement that tells them how much of the
proceeds qualify as a charitable deduction, and that only the amount over and above the cost of
food and wine is deductible? Their reply from IDR # 3 was, "20XX everything was donated. See
(H)." In IDR # 4, the Organization was asked to provide a copy of any written documentation
given to donors during 20XX. Their reply was, "None of the money raised was used for food
costs because, as previously stated, the "passed food" (small quantities) was donated in full.
Also, we did not charge in excess of$. "

Exhibit 2(a) -Question and response to 2(a) on IDR # 3. Did you keep a log book in 20XX, of
each outing ORG participated in? Their reply was, "That the outings can be accounted/or." But
no records were sent. IDR # 4, asked them to please provide the date(s), time, purpose, how
many children went, the cost to the parent(s), and a detailed description of the outing(s). Their
reply was, “Cannot retrieve from inaccessible computer hard drive for deadline.

Exhibit 2(d) -Question and response to 2(d) on IDR # 3. When ORG hosted a lunch or dinner did
you keep the receipts, write down the date and time of the meeting, and who attended the
meeting? Their reply to this request was, "Yes, via bank statement." As of December 8, 20XX no
bank statements have been provided. IDR # 4 asked to provide the date and time of the lunch and
dinner meetings, the place where the meeting was held, what business purpose that meeting had,
such as, what was discussed, how it was presented, and how long it took ORG's relation to those
who attended, and especially, who attended. Their reply to IDR # 4 was, Copies of all bank
statements have previously been provided to you.

Exhibit 3 -Request and response to question 3(b), from IDR # 3. We will need a copy of the
mortgage contract for the residence on Address, City, State. Their reply was, "This mortgage
contract wasn't signed until 12/6/XX." As of December 8, 20XX, a copy of the mortgage has yet
to be submitted. In IDR # 4, the Organization was asked to please provide the Service with a
copy of the mortgage contract for the address stated in Exhibit 3(b). Their reply was, "The
closing documents for Address were executed at the title company on 12/6/20XX, and no
mortgage payments were made until the following year, 20XX. "

Exhibit 3(c) -Question and response to question 3(c), from IDR # 3. Was a record kept of the
dates and mileage for each time DIR-1's vehicle was used for ORG's activities? If so, please
provide the Service a copy. Their reply was, "Will confirm." As of December 8, 20XX no
documents have been submitted. IDR # 4 asked them to please provide the Service with a copy of
these records. Their reply was, "1 can now confirm that we did not keep a mileage log. "

Exhibit 3(d) -Question and response to question 3(d), from IDR # 3. Were receipts from CO-13
and CO-14 for oil changes in the business vehicles maintenance retained for the year 20XX? If
so, please provide the Service a copy. Their reply was, "Will send." As of December 8, 20XX no
documents have been submitted. Please provide the Service with copies of these receipts. Their
reply to IDR # 4 was, "No."

Department of the Treasury — Internal Revenue Service Form 886-A
Page 9

Form U.S. Treasury Department-internal Revenue Service | Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer Year/Period Ended
ORG December 31, 20XX

Exhibit3(e)-Requestandresponseto3(e),from IDR #3. Please provide proof of insurance for the
business vehicle from CO-6 for 20XX. Also, were your personal vehicles insured with a different
insurance company or with CO-6 in 20XX? Their reply was, "Working on this." As of December
8,20XX no documents have been submitted. IDR # 4 again requested the documentation. Their
reply was, "Can 't find in time for deadline. " .

Exhibit 3(f) -Question and response to question 3(f), from IDR # 3. Why did you rent cars and
trucks for trips to City instead of using your personal vehicles? Their response to this was,
"Moved here for business reasons." In IDR # 4 the Organization was asked to please provide an
explicit explanation of" business reasons." Their reply was, "As stated in our initial
interview/audit in City, State and is stated in our Organization's charter we moved to City to
research and establish a "center for promoting the value of play for kids and adults. "

Exhibit 3(g) -Question and response to question 3(g), from IDR # 3. Do you have receipts for the
total moving costs from City to City? If so, please provide the Service with a copy. Their reply
was, "Will find and submit." As of the December 8, 20XX no documents have been submitted.
IDR # 4 asked the Organization again to please send copies of these receipts. Their reply was,
"Can 't find in time for deadline. "

Exhibit 4

Exhibit 4(a) -Question and response to question 3(a), from IDR # 3. How do the beauty supply
stores, jewelry stores, cleaners, and doctor visits further the Organization's exempt purpose?
Their reply was, "Beauty supplies for girls, will find receipts for other and explain." In IDR # 4,
the Organization was asked to provide a list of the girls ORG provided beauty supplies for, and
the receipts and explanation of the other expenses listed on Exhibit 4(a). Their reply to IDR # 4
was, "No separate list exists other than the list that was kept on the computer hard drive that can
no longer be accessed, and the receipts were presented during the initial interview. "

Exhibit 4(b) -Request and response to 4(b), from IDR # 3. Please send copies of the medical
visits incurred on exhibit 4. Their reply was, "Okay, will find and submit." As of December 8,
20XX no documents have been submitted. In IDR # 4, we asked the Organization to please send
the Service copies of the medical visits. Their reply was, "Can't find in time for deadline. "

Exhibit 5

Exhibit 5(d) -Request and response to item 5(d) from IDR # 3. Please send copies of the utility
bills listed on exhibit 5. Their reply was, "Coming." As of December 8, 20XX no documents
have been submitted. In IDR # 4, we asked the Organization to please provide the Service with
the requested information. Their reply was, "Can't find in time for deadline. "

Exhibit 6

Exhibit 6(a) -Question and response to question 6(a) from IDR # 3. Did ORG keep a log book, or
any other records to record the mileage, transactions, and explanations of how these expenses
furthered ORG's exempt purpose? Their reply was," Answered in Exhibit 3(c)." As of December
8, 20XX, no documentation has been received. In IDR # 4, we asked the Organization to please
provide the Service with the amount of each separate expense for transportation and lodging, the

Department of the Treasury — Internal Revenue Service Form 886-A
Page 10

Form U.S. Treasury Department-Internal Revenue Service | Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer Year/Period Ended
ORG December 31, 20XX

date you left and returned on each outing, who attended each outing, and the name and location
of each outing. Their reply was, "Cannot retrieve from inaccessible computer hard drive in time
for deadline.”

Exhibit 6(b) -Question and response to question 6(b) from IDR # 3. Did you record what types of
research was performed during your trips to City, TX.? Their reply was, "Research was on best
areas for play/outdoor recreational activities." In IDR # 4, we asked the Organization to please
provide the Service with a list of what sources was used for research. Their reply was, “Research
was done by visiting and researching what areas of the Country would offer the best options for
play/outdoor recreation such as hills, water, and abundance of outdoor activity. "

Exhibit 7

Exhibit 7(a) -Request and response to exhibit 7(a) from IDR # 3. Provide a copy of the storage
agreement for the office furniture in State. Their reply was, "Coming." As of December 8, 20XX
no documents have been submitted. In IDR # 4, we asked the Organization to please provide the
Service the requested documentation. Their reply was, "There was no storage agreement. "
Exhibit 7(b) -Question and response to question 6(b) from IDR # 3. Does the office furniture
belong to ORG? There reply was, "Yes." IDR # 4 asked for copies of receipts or cancelled checks
for the furniture. Their reply was, "Cannot retrieve from inaccessible computer hard drive in
time for deadline. "

Exhibit 7(c) -Question and response to question 7(c) from IDR # 3. What was the total incurred
to move the furniture from State to State? Please provide the receipts for the cost of the move.
Their reply was, "Coming." As of December 8,20XX no documents have been submitted. IDR #
4 asked the Organization to provide the Service the requested information. Their reply was,
"Cannot retrieve from inaccessible computer hard drive in time for deadline. "

Exhibit 8

Exhibit 8(a) -Request and response from item 8(a) from IDR # 3. Please provide receipts to
substantiate the business meetings over lunch and dinner. Their reply was, "Coming." As of
December 8, 20XX no documents have been submitted. IDR # 4 asked the Organization to please
provide the Service the requested information. Their reply was, "Actual transactions are listed on
the copies of the bank statements. "

Exhibit 8(c) -Request and response from item 8(c) from IDR # 3. Provide documentation that
shows CO-1 donates drinks to match a portion of ORG's spending. Their reply was, "Coming."
As of December 8,20XX no documents have been submitted. IDR # 4 we asked the Organization
to please provide the Service the requested information. Their reply was, "Cannot retrieve from
inaccessible computer hard drive in time for deadline. "

IDR # 3 asked about the $ in assets reported on the 20XX Form 990-EZ, but no response was
given. IDR # 4 asked for a list of the assets along with copies of receipts and cancelled checks.
Their reply was, "On the 20XX Form 990-EZ the $ in assets listed would have been outstanding
accounts receivable due to ORG at the time the return was filed.

Department of the Treasury — Internal Revenue Service Form 886-A
Page 11

Form U.S. Treasury Department-Internal Revenue Service | Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit

Name of Taxpayer Year/Period Ended

ORG December 31, 20XX
LAW:

IRC 501(a) provides, in part, that organizations described in section 501(c) are exempt from
federal income tax. Section 501(c)(3) provides in pertinent part, that an organization must be
organized and operated exclusively for religious, charitable, or educational purposes and no part
of its net earnings may inure to the benefit of any private shareholder or individual.

IRC 501(c)(3) are corporations, and any community chest, fund, or foundation, organized and
operated exclusively for religious, charitable, scientific, testing for public safety, literary, or
educational purposes, or to foster national or international amateur sports competition (but only if
no part of its activities involve the provision of athletic facilities or equipment), or for the
prevention of cruelty to children or animals, and no part of the net earnings of which inures to the
benefit of any private shareholder or individual.

IRC 6001 provides that every person liable for any tax imposed by this title, or for the collection
thereof, shall keep such records, render such statements, make such returns, and comply with
such rules and regulations as the Secretary may from time to time prescribe. Whenever in the
judgment of the Secretary it is necessary, he may require any person, by notice served upon such
person or by regulations, to make such returns, render such statements, or keep such records, as
the Secretary deems sufficient to show whether or not such person is liable for tax under this
title.

IRC 6033(a)(1) provides, except as provided in IRC §6033(a)(2), every organization exempt
from tax under 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.

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

Treasury Regulation §1.501(a)-1(b)(3)(c) states that the words "private shareholder or
individual" in section 501 refer to persons having a personal and private interest in the activities
of the organization. The word "shareholder," as used here, does not have the same meaning as it
does in a for-profit corporation. An exempt organization cannot have shareholders, or it would
not meet the organizational test. However, these are terms that Congress gave us.

Department of the Treasury — Internal Revenue Service Form 886-A
Page 12

Form U.S. Treasury Department-internal Revenue Service | Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer Year/Period Ended
ORG December 31, 20XX

Treasury Regulation §1.501(c)(3)-1(b)(4) provides that an organization is not organized
exclusively for one or more exempt purposes unless its assets are dedicated to an exempt
purpose. Further, it provides that an organization does not meet the organizational test if its
articles or the-law of the State in which it was created provide that its assets would, upon
dissolution, be distributed to its members or shareholders.

Treasury Regulation §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 engages primarily in activities
which accomplish one or more such exempt purposes specified in section 501(c)(3) of the Code.
An organization will not be so regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose.

Treasury Regulation §1.501(c)(3)-1(c)(2) states 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.

Treasury Regulation §1.501(c)(3)-1(d)(1)(ii) states 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. This group of individuals is generally referred to as
"insiders. " This regulation places the burden of proof on the organization to demonstrate 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.

The Operational Test must meet the following three requirements:

1. Engage primarily (>50%) in activities which accomplish one or more of the exempt
   purposes specified in IRC section 501(c)(3) and (Treas. Reg. Section 1.501 (c)(3)-1(c)(1)),

2. Not allow its net earnings to inure to the benefit of private shareholders or individuals
   (Treas. Reg. Section 1.501(c)(3)-1(c)(2)),

3. Not engage in substantial (>5%) lobbying activity (Treas. Reg. Section
   1.501(c)(3)1(c)(3)), and not engage in any political activity (Treas. Reg. Section 1.501

(c)(3)-1 (€)G)).

If an organization fails to comply with any of these requirements, it will fail the operational test
and lose its IRC section 501(c)(3) exemption.

Department of the Treasury — Internal Revenue Service Form 886-A
Page 13

Form U.S. Treasury Department-Internal Revenue Service | Schedule No. or -

886-A EXPLANATION OF ITEMS Exhibit |

|
Name of Taxpayer Year/Period Ended |
ORG December 31, 20XX

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 IRC § 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.

In accordance with the above cited provisions of the Code and regulations under IRC § 6001 and
6033, organizations recognized as exempt from federal income tax must meet certain reporting
requirements. These requirements relate to the filing of a complete and accurate annual
information (and other required federal tax forms) and the retention of records sufficient to
determine whether such entity is operated for the purposes for which it was granted tax-exempt
status and to determine its liability for any unrelated business income tax.

Revenue Ruling 78-232, 1978-1 C.B. 69 explains that in the instant case the money deposited
by the taxpayer in the ABC church account was used or available for use for the taxpayer's
benefit. The taxpayer had complete control and enjoyment of the money and it was used to
maintain the taxpayer's accustomed standard of living. Under the circumstances no portion of the
amounts deposited by the taxpayer in the ABC church account can be identified as for the
exclusive benefit of the organization.

Church by Mail, Inc. v. Commissioner of Internal Revenue 1985, 765 F.2d 1387,56
A.F.T.R.2d 85-5483, 85-2 USTC P 9549. The dispositive issue in this case is whether the
Church meets the "operational" test imposed by I.R.C. § 501 (c)(3). The Treasury Regulations
specify three criteria for this requirement. First, the organization must be primarily engaged in
activities which accomplish one or more of the exempt purposes specified in section 501(c)(3),
so that it is "operated exclusively" for exempt purposes. Treas. Reg. § 1.501(c)(3)-1(c)(1).
Second, the organization's net earnings must not be distributed in whole or in part to the benefit
of private shareholders or individuals.

The tax court upheld the Commissioner's determination, holding that (1) the Church was operated
for the non-exempt purpose of providing a market for Twentieth's services, and (2) a substantial,
if not principal, purpose of the Church's operations was to generate income for the private benefit
of Reverend Ewing and Reverend McElrath and their respective families.

In Church of Gospel Ministry, Inc. v. United States, 640 F. Supp. 96, 1986 U.S. Dist., due to
the taxpayer's failure to keep adequate records, the court held that the taxpayer failed to sustain
its burden to show that it was qualified for federal tax exemption as a corporation organized and
operated exclusively for religious and charitable purposes, as required under IRC §501 (c)(3), and

Department of the Treasury — Internal Revenue Service Form 886-A
Page 14

Form U.S. Treasury Department-Internal Revenue Service | Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer Year/Period Ended
ORG December 31, 20XX

that it was further qualified to receive deductible charitable contributions under IRC §170(c)(2).
The court found that as a prerequisite to an IRC §6033 filing exemption, it was necessary for the
taxpayer to show it qualified as an IRC §501 (c)(3) organization, which it could not.

John Marshall Law School v. U.S. 1981 WL 11168, 48 A.F.T.R.2d 81-5340, 81-2 USTC P
9514 (Ct.Cl. Trial Div. Jun 24,1981) (NO. 27-78, 28-78)

In its determination letter, the IRS stated that it had considered numerous items pertaining to the
fiscal years ended August 31, 1967 to August 31, 1973, including, but not limited to, payments
by John Marshall Law School (JMLS) for Fenster family: automobiles, education, and travel
expenses, insurance policies, basketball and hockey tickets, membership in a private eating
establishment, membership in a health spa, interest-free loans, home repairs, personal household
furnishings and appliances, and golfing equipment. John Marshall Law School hereinafter
(Plaintiff) argued that all the expenses incurred by the organization were ordinary and necessary
in furtherance of their exempt purpose. The term 'net earnings’ in the inurement-of-benefit clause
of § 501(c)(3) has been construed to permit an organization to incur ordinary and necessary
expenses in the course of its operations without losing its tax-exempt status. The issue, therefore,
is whether or not the expenditures Plaintiff paid to or on behalf of the Fenster family were
ordinary and necessary to Plaintiff operations. Also, the burden of proof was on Plaintiff to
establish that the grounds set forth in determination letter and the resulting revocation of notice
of exemption was erroneous.

Ultimately, the court decided that their jurisdiction was limited to a review of error for the
Service's revocation of Plaintiffs favorable tax-exempt ruling. The burden of establishing
whether the Plaintiff is an organization described in section 501(c)(3), furthermore, rests with the
Plaintiff. It is the courts decision that the Commissioner of Internal Revenue's revocation of
Plaintiffs notices of exemption for the years 1966 through 1973 was correct.

In Better Business Bureau of Washington D.C., Inc. v. United States, 326 U.S. 279 (1945),
the Supreme Court held that the presence of a single non-exempt purposes, if substantial in
nature, will destroy the exemption regardless of the number or importance of truly exempt
purposes. Also, the existence of a substantial nonexempt purpose, regardless of the number or
importance of exempt purposes, will cause failure of the operational test. The Court found that
the trade association had an "underlying commercial motive" that distinguished its educational
program from that carried out by a university.

GOVERNMENTS POSITION:

Based on the facts shown above, ORG has been involved in numerous transactions that without
further detail indicates the Organization is not operating within scope of IRC 501(c)(3).

ORG, a corporation recognized by the Internal Revenue Service as being exempt from federal
income tax under Internal Revenue Code section 501 (c)(3) and having a foundation status of

Department of the Treasury — Internal Revenue Service Form 886-A
Page 15

Form U.S. Treasury Department-internal Revenue Service | Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer Year/Period Ended
ORG December 31, 20XX

170(b)(1)(A)(vi), must pass two tests in order to continue its exempt status. The first test, an
organizational test, relates to the organizational documents. This test can only be satisfied if the
written documents prepared at the time of the organization's formation meets the requirements of
the regulations. An organizational document must meet requirements in both form and language.
ORG satisfied the organizational requirement by having their Articles of Incorporation formed
under the State of State’ non-profit corporation law. Their Articles of Incorporation were stamped
received by the Secretary of State of State. ORG also satisfied the language requirement by
having an acceptable purpose clause, powers clause, and although not needed in the State of
State, a dissolution clause.

The second test relates to the organization's activities. To establish that ORG operates primarily
in activities which accomplish its exempt purposes, the Organization must establish that no more
than an insubstantial part of its activities does not further an exempt purpose. Section 1.501
(c)(3)-1 (c)(1), Income Tax Regulations. The presence of a single substantial nonexempt purpose
destroys the exemption regardless of the number or importance of the exempt purposes. Better
Business Bureau v. United States. While ORG is not an action organization, it has failed to
comply with the first two conditions of the operational test because of the egregious usage of the
Organization's assets for private benefit.

A Section 501(c)(3)'s assets are required to be irrevocably dedicated to their exempt
purpose(s).Treasury Regulations Section 1.501(c)(3)-1(b)(4). The inurement prohibition serves to
prevent the individuals who operate the organization from siphoning off any of a 501(c)(3)
organization's income or assets for personal use.

An organization is described in Section 501(c)(3) only if no part of its net earnings inures to the
benefit of any private shareholder. The inurement prohibition is designed to insure that
organization's assets are dedicated to exclusively furthering public purposes. ORG is not operated
exclusively for exempt purposes because its net earnings inure to the benefit of DIR-1 & DIR-2.
Inurement can take the form of questionable transactions that have no causal relationship to the -
organization's exempt purpose(s) but result in some benefit to an insider. The insiders, DIR-1 &
DIR-2, are in a position to exercise control over the organization's net earnings as if they were
their own by using them at will rather than within the limitations of a fiduciary capacity. In
effect, the Booth's are using the public's "net earnings" for their own benefit by using the
Organization's assets to further their own interests. ORG has breached the private inurement
prohibition.

Although the requirements for finding inurement or private benefit are similar, inurement and
private benefit differ in two key respects. The first is that even a minimal amount of inurement
results in disqualification for exempt status, whereas private benefit must be more than
quantitatively or qualitatively incidental in order to jeopardize tax exempt status. The second is
that inurement only applies to "insiders" (individuals whose relationship with an organization
offers them an opportunity to make use of the organization's income or assets for personal gain),

Department of the Treasury — Internal Revenue Service Form 886-A
Page 16

Form U.S. Treasury Department-Internal Revenue Service | Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer Year/Period Ended
ORG December 31, 20XX

whereas private benefit may accrue to anyone. ORG has failed the operational requirement
(inurement), in using a substantial amount of the Organization's assets for personal gain as
discussed in Treasury Regulation Section 1.501(c)(3)-1(d)(1)(ii). Inurement can take the form of
any transaction. The transaction results in inurement because it provides a disproportionate
benefit to an insider. Both DIR-1 & DIR-2 are considered insiders. Private inurement may be as
straightforward as a cash payment to an insider when the Organization has no obligation to pay.
Put simply, inurement is the use of an exempt organization's assets to benefit an individual(s)
connected to it on a personal level. As a result, such use means the organization does not
exclusively serve the public. Note, that the payment of personal expenses of an insider that the
organization did not characterize as compensation at the time of payment may constitute
inurement even when, if added to compensation, the total amount of compensation would be
reasonable.

As in the case of John Marshall Law School v. U.S., the assets of ORG inured to the private
benefit of DIR-1 & DIR-2, Officers of ORG. The Internal Revenue Code and Regulations
provide that an organization exempt under IRC Section 501(c)(3) cannot allow its assets to
benefit private interests; an organization that allows their assets to benefit private interests is not
exempt.

The "not more than an insubstantial part of its activities" standard of Section 1.501(c)(3)-1(c)(1) of
the Regulations can be understood by reference to Better Business Bureau v. United States, 316
U.S. 279 (1945) which held that an organization which engaged in some educational activity but
pursued nonprofit goals outside the scope of the statute was not exempt under Section 501(c)(3)
of the Code. The Court stated that an organization is not operated exclusively for charitable
purposes if it has a single non charitable purpose that is substantial in nature. This is true
regardless of the number or importance of the organization's charitable purposes. Thus, the
operational test standard prohibiting a substantial nonexempt purpose is broad enough to include
inurement, private benefit, and operations which further goals outside the scope of Section

501(c)(3).

DIR-1 & DIR-2 used ORGs debit card everyday of the 20XX calendar year except for a total of
35 days. No debit card statements were available for review for the month of September 20XX.
While the number of days the card was used is not the issue, the types of transactions are. There
was no calendar of events, no client listings, no billing information, and no log books were kept
as to where and when the outings took place, and how many individuals participated. IRC 6001
requires that every person liable for any tax imposed by the Code shall keep adequate records.
ORG failed to keep such records as required by this Code section. Also, IRC 6033(a)(I) requires
every organization exempt from tax under Section 501 (a) shall file an annual return stating
specifically the items of gross income, receipts and disbursements. In the 20XX Form 990-EZ the
Organization filed stated that they had $ in Accounts Receivable, but there was no explanation as
to what it involved. In IDR #3 & 4, we asked to list the $ in assets. We did not get a response to
this question in IDR # 3. In IDR # 4, we again asked as to the nature of the $ in assets, and their

Department of the Treasury — Internal Revenue Service Form 886-A
Page 17

Form U.S. Treasury Department-internal Revenue Service | Schedule No. or

886-A EXPLANATION OF ITEMS Exhibit
Name of Taxpayer Year/Period Ended
ORG December 31, 20XX

response was, "On the 20XX Form 990-EZ the $ in assets listed would have been outstanding
accounts receivable due to ORG at the time the return was filed." This was not specifically
explained, nor was the client incentives, such as who the clients were, when they met, and what
was discussed.

CONCLUSION:

In the case of ORG, the primary activity is to use the assets of the Organization for personal gain.
ORG does not qualify for exemption from Federal Income Tax as an organization described in
Section 501 (c)(3) of the Code because of the egregious nature as to which the assets of the
Organization were used for personal gain.

Consequently, we are proposing ORG's exemption from federal income tax be revoked as of
January 1, 20XX. Please file U.S. Corporation income tax return Form for tax periods
ending December 31, 20XX, December 31, 20XX, December 31, 20XX, December 31, 20XX,
and December 31, 20XX. Contributions to your organization are not deductible under IRC Code
Section 170.

If you agree with our decision please sign and return Form in the enclosed envelope.

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. Please refer to the attached letter and Publications
enclosed for specific details of this process.

Department of the Treasury — Internal Revenue Service Form 886-A
Page 18