Determination Letter 1313034 Released March 29, 2013 Revocation Transcribed from scan

IRS revokes a foundation's tax-exempt status over private benefit and donor-advised fund operations

Apply this to your situation

This page covers one taxpayer's ruling from 2013, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.

Not precedent. Under 26 U.S.C. § 6110(k)(3), this written determination may not be used or cited as precedent. It resolved one taxpayer's situation on its specific facts, and identifying details were redacted by the IRS before release. The official IRS release (linked on this page as a PDF) is the authoritative source.

About this page: The plain-English summary and ruling snapshot below were written by Ezel based on the official IRS release. The full text is the IRS's own document.

Transcribed from a scanned original: the IRS released this determination as an image-only PDF. The full text below is a machine transcription, proofread against the scan. Check the original PDF before quoting exact language.

View official IRS release (PDF)

Plain-English summary

The IRS issued a final adverse determination revoking an organization's section 501(c)(3) exemption effective on the stated date. The IRS concluded that the organization primarily administered a donor-advised account linked to an individual and a controlled entity, allowed assets and income to benefit private persons, and operated in connection with an unrelated trade or business. The IRS also found that the organization lacked adequate controls and documentation over the donor-advised fund and related distributions. Contributions to the organization were no longer deductible under section 170, and the organization was required to file federal income tax returns. The determination was based on the organization's specific operations and records.

Ruling snapshot

Question: Did the organization operate exclusively for exempt purposes under section 501(c)(3)?
Outcome: Revocation. The IRS found substantial private benefit and nonexempt business activity.
Key authorities: IRC §§ 501, 170, 507, 6033, 6104, 7428, and 6110; Treas. Reg. §§ 1.501(c)(3)-1, 1.501(a)-1, and 1.704-1

Full text (IRS public release)

Release Number: 201313034

Internal Revenue Service Department of the Treasury

Taxpayer Identification Number:

Person to Contact:

Release Date: 3/29/2013
Date: December 5, 2012

B
Cc
D

Tel:
Fax:

Tax Period(s) Ended:
UIL: 501.00-00:501.33-00

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 effectiveJanuary 1, 2002..

. Our adverse determination was made for the following reasons:

You are not operated exclusively for exempt purposes described in
section 501(c)(3) of the Internal Revenue Code. Your primary activity consisted
of administering and managing a “donor advised” account on behalf of an
individual who established the account using a controlled entity. The funds and
other assets credited to this account were distributed or used to benefit the
individual and/or other private persons, in contravention of Treas. Reg.
§.1.501(c)(3)-1(d)(ii).. Through the creation and operation of this donor advised
fund, you facilitated tax avoidance by enabling this individual to shelter income
and assets from the Collection Division of the Internal Revenue Service for a
period of time. Moreover, you and this sole donor advised fund operated by you

_ were funded through conducting an unrelated trade or business in contravention
of Treas. Reg. § 1.501(c)(3)-1(e)(1). You allowed distributions from the account
that were not in furtherance of section 501(c)(3) purposes. Thus, you are
operated for a substantial non-exempt purpose because you more than
insubstantially served private interests and operated a trade or business for a

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

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

please visit www. irs.gov.

if you were a private foundation as of the effective date of the adverse determination, you are considered
to be taxable private foundation until you terminate your private foundation status under section 507 of
the Code. In addition to your income tax return, you must also continue to file Form 990-PF by the 15th

Day of the fifth month after the end of your annual accounting period.

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

If you decide to contest this determination, you may file an action for declaratory judgment under the
provisions of section 7428 of the Code in one of the following three venues: 1) United States Tax Court,
2) the United States Court of Federal Claims, or 3) the United States District Court for the District of
Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date
this determination letter was mailed to you. Please contact the clerk of the appropriate court for rules for
filing petitions for declaratory judgment. To secure a petition form from the United States Tax Court, write
to the United States Tax Court, 400 Second Street, N.W., Washington, D.C. 20217. See also Publication

892.

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

for more information. .

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

Sincerely Yours,

Karen A. Skinder
Appeals Team Manager

Enclosure: Publication 892
Notice 1214 Helpful Contacts for your “Notice of Deficiency”

Internal Revenue Service Department of the Treasury
Tax Exempt and Government Entities

Taxpayer Identification Number:
Date: September 14, 2010 Form:

Tax Year(s) Ended:
ORG. Person to Contact/ID Number:

ADDRESS . 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.

CU ce not agree with our proposed revocation, you must submit to us a written request for 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

explain how to appeal an Intemal Revenue ervice (IRS) decision. Publication 3498 also inchides 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
letermination letter to you based on technical advice, no further administrative appeal is available to you within
he IRS regarding the issue that was the subject of the technical advice. ,

Letter 3618 (Rev. 11-203)
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
recomme ns shown in the report of examination. If you do not protest this proposed dete ination within 30
days from the date of this letter, the IRS will consider it to be a failure to exhaust your available inistrative
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 Intemal 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 by law that you have to file a petition ina
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 ‘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
Publication 892
Publication 3498
Report of Examination

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

Form 886A Department of the Treasury* Tatemal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 4 12/31/20XX,
RA-1 wo 12/31/20XX,
Address 5 12/31/20XX, &
City, State ; 12/31/20XX,
LEGEND .,
ORG - Organization name XX - Date Address - address City - city
State - state POA - POA Director - director President -

' president President-1 - President-1 Vice-President - vice president
Treasurer - treasurer Treasurer-1 - treastrer-1 Secretary - secretary
DIR-1 through DIR-4 RA-1 THROUGH RA-17 CO-1 THROUGH CO-25
District - district Officer - officer REF-1, through REF-6

. 4
ISSUE

Whether ORG (sometimes referred to as "ORG") operates exclusively for exempt purposes?

FACTS

Formation of ORG

Background: According to the Spring, 19XX issue of the CO-1, "CO-3 at CO-2" (CO-3/CO-2)
was established to encourage each District to set up a "Foundation at CO-2." The newsletter
explained that CO-3/CO-2 would, at some point in the future, establish itself as a separate
organization with its own staff and its own facilities.

CO-2. (CO-2) is currently located in City, State at the same address as ORG. CO-2 is a large
donor advised fund that was incorporated in by DIR-1. in 19XX, but the history of the Director
family's involvement with donor advised funds extends back to the late 19XX's.

The CO-4 (CO-4) is a foundation at CO-2. Only CO-4 members can receive Officer
commissions for assisting persons who set up "Foundations at CO-2."

Articles of Incorporation: The Articles of Incorporation for ORG, originally known as CO-3,
were filed in the State of State by its Registered Agent, DIR-2, on December 23, 19XX.
Amended Articles of Incorporation were filed August 10, 20XX to report that the name of the
organization had been changed to ORG The name was amended a second time on October 23,

20XX to ORG

The stated purpose of ORG was "to encourage philanthropy for charitable purposes by
individuals and entities, and in general, the corporation shall be authorized to conduct any lawful
activity permitted by a State not-for-profit corporation consistent with §501(c)(3) of the Internal
Revenue Code amended, or the corresponding section of any future United States Internal

Revenue Law:"

Attachment A to the Articles of Incorporation provided purpose, powers and dissolution clauses
that are, limited to ones allowable under Internal Revenue Code (Code) Section 501(c)(3).

Form 886-Acrev.4-68) . Department of the Treasury - Internal Revenue Service
Page: -1-

Form 886A Department of the Treasury -- Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
RA-1 12/31/20XX,
Address 12/31/20XX, &
City, State 12/31/20XX,

Paragraph A required that, upon dissolution, the assets would be distributed to organizations
exempt under §501(c)(3). Paragraph B stated that ORG would operate exclusively for §501(c)(3)
purposes. Paragraph C promised that no asset would inure to the benefit of members, officers,
directors, or other private persons "except that the corporation may, at its discretion, pay
reasonable compensation for services rendered and make payments and distributions in
furtherance of the purposes set forth herein."

Bylaws: On January 8, 20XX, DIR-1, as the sole incorporator of ORG, appointed President,
Treasurer, and Secretary as it's first Board of Directors. The officers were elected on that same
date. President was elected to serve as the President. Treasurer would serve as Treasurer.
Secretary was elected to serve as Secretary. When asked to provide information about these
officers, ORG identified Secretary as a long time employee of CO-2 who provided bookkeeping
services on behalf of ORG. RA-2 supplied technology and other services to ORG. No detailed
information related to President, who is now deceased, was available. The current Bylaws of
ORG were adopted by the new Board on the same date the directors were appointed. The Bylaws
contain provisions for the operations of ORG that include the following:

¢ Article III grants the Board blanket powers and authorities with the exception of
authorities forbidden by the Articles of Incorporation and any substantial activity that do
not further the purposes of the corporation, Section 3.2 requires a minimum of 3
directors. Section 3.3 provides that directors will serve until the next annual meeting. A
director may be elected to succeed him or herself.

Article IV, Section 1 of the bylaws states that the only notice for the annual meeting
would be the date provided in the bylaws. That date is blank. Special meetings required 2
days advance notice to the board members. Directors can waive notice of meetings, but
the waiver must be in writing. Two directors may constitute a quorum.
Article VI states that the Secretary shall prepare and keep minutes of board meetings.
The President may sign with other officer of the corporation deeds, mortgages, bonds,
contracts, and any other instruments unless expressly delegated to some other officer. The
Treasurer is required to give a bond for surety.
Article VII requires the corporation to keep books and records of account and keep
minutes of the proceedings of its Board of Directors.
Article XIII gives the Board of Directors the power to modify any restriction or
condition on the distribution of funds, if in the sole judgment of the Distribution
Committee .

(without the approval of any participating trustee, custodian, or agent), such restriction
becomes inconsistent with the charitable needs of the community served.

Application for Exemption: ORG filed Form 1023, Application for Exemption Under Section
501(c)(3) of the Internal Revenue Code Section 501(c)(3) (Application), with the IRS, in

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

January, 20XX. The applicant stated that the organization would "encourage generosity,
philanthropy and charitable giving (sometimes referred to herein as "GPCG"), both inside and
outside the District, in order to restore, maintain, and extend our national heritage of individual,
corporate, and community social responsibility and action." ORG had no assets but did intend to

acquire office furniture, supplies and equipment.

ORG reported that donors would be allowed to establish funds for exclusively charitable
purposes as described in Code §501(c)(3). The document also included a statement that, "The
donor can offer the Foundation his or her advice about what to do with the funds, but the final
decision rests with the foundation." The Application stated that, "The Foundation may receive
and review requests for contributions from §501(c)(3) organizations and will monitor the
amounts distributed to verify that the funds are used for charitable purposes described in Section

501(c)(3)."

The applicant went on to state that, while payment of commissions is frowned on by the -
charitable community, it (ORG) would encourage members of the financial community, etc. to
undertake a greater role in directing the resources to the private philanthropic sector by paying
reasonable compensation for services rendered while restricting those payments to a reasonable
portion of the gifts made.

Attached to the Application was a resolution adopted on January 5, 20XX in which the Board of
Directors "commits itself to obtain information and take other appropriate steps with the view of
seeing that any participating trustee, custodian, or agent administers each restricted trust or fund
and the aggregate of unrestricted trusts or funds of the REF-6..." The resolution was signed by

President, Treasurer, and Secretary as directors.

Based on the information supplied by the applicant, Letter 1045 was issued by the Internal
Revenue Service on February 29., 20XX recognizing ORG as an organization whose stated
activities qualified for exemption from tax under the provisions of IRC section 501(c)(3).

ORG Governance: On June 28, 20XX, ORG's Board of Directors (Directors President,
Treasurer and Secretary) took two actions by written consent. First, the Board approved the
organization's name change to CO-3 Second, the Board accepted the resignations of the three
directors. President, Treasurer and Secretary did not sign their resignations until July 19, 20XX,
July 17, 20XX, and July 28, 20XX, respectively. In conjunction with the resignation of the
original Board, the following persons were elected to serve as the officers and directors of ORG:

Title Relationship

DIR-2 President Son of DIR-1. and .
Director, Spouse of Vice President

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

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
RA-1 12/31/20XX,
Address 12/31/20XX, &
City, State 12/31/20XX,
Vice President Vice President Spouse of the DIR-2
Treasurer-1 Mother of DIR-2 and spouse of DIR-1
Treasurer
DIR-3 Director None
DIR-4 None
Director

Those five individuals served as the officer/directors of both the CO-2 and ORG from that date
through December 31, 20XX. DIR-1. served as the CEO. No minutes for any meetings of the
Board of Directors related to this change in governance have been provided: In fact, no minutes
of any Board meetings were recorded prior to December 31, 20XX.

All administrative, accounting, and financial activities of ORG continued to be conducted at the
offices of CO-2 before and after the change in directors. Review of the officer signatures on the
20XX, 20XX, and the original 20XX Forms 990 found that President continued to be listed as
the president in each of those years, and Secretary signed all those returns as Secretary. When
asked to explain why Secretary signed the forms more than 2 years after she resigned as an
officer, DIR-1 stated that Secretary signed those documents because "both ORG and she had
simply forgotten that that she had earlier resigned as an officer."

ORG Operations Prior to Establishment of CO-5

According to its president, DIR-2, ORG was established to provide a variety of charitable,
educational, scientific, and religious activities in the REF-6. During the first 2 years (20XX and
20XX), the organization did not receive sufficient revenues to engage in any substantive
activities, and no expenses were incurred. However, per information included in the same
correspondence, CO-2 (CO-2) transferred $ from six of its subaccounts to ORG at the direction
of DIR-1. in January, 20XX. On or about March 10, 20XX, DIR-1. directed RA-3 to transfer $
back to CO-2. DIR-1 attributed the second transfer to requests by the donors who preferred to
have those funds administered directly by CO-2.

On January 4, 20XX, $ was transferred into the ORG checking account as a donation from CO-2.
This donation was reported on ORG's 20XX Form 990. When questioned about the timing of the
reporting, the officers stated that the donation had been pledged in 20XX; therefore, it was
reported on the 20XX Form 990. However, ORG has a cash basis accounting system. Also, on
January 4, 20XX, ORG received $ from RA-4 and $ from two other sources. Four days later, 3
checks totaling $ were issued from the ORG checking account to the CO-6, the CO-7, and the

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

CO-8, all subaccounts held at CO-2. An additional $ check was paid to the CO-9, and $ was paid
to CO-10 at that same time. All 5 of these checks were endorsed and deposited into CO-2's

account at CO-11.

In May, 20XX, an additional $ was transferred from CO-2 to ORG. There is no evidence of any
other activity until July, 20XX when discussions with RA-5 commenced. As a result of those
discussions, CO-5 became the only donor advised fund (sub-account) at ORG in October, 20XX.
CO-5 was the sole donor advised fund at ORG from that date through December 31, 20XX.

RA-5 and Her Business Enterprises

RA-5 is an author and nutritionist who promotes products through CO-12 (CO-12), CO-13, CO- —
14, CO-15, CO-16, and other companies.

CO-12 is a multi-level marketing company specializing in health food supplements and health
products. Sales representatives recruit other distributors or sales representatives. This recruitment
of down-line sellers is necessary to increase a sales representative's sales force and thus generate
a greater number of sales. Down-line interests are generated when distributors sell products and
earn income by creating a network of marketers. When down-line marketers sell products, "up-
line" distributors may earn a commission on the sales. The terms "down-line interest" and "multi-

level interest" are construed to be interchangeable.

RA-5's Involvement with Donor-Advised Funds
Per correspondence dated April 28, 19XX, RA-5 informed RA-6 at CO-12 (CO-12) that she had

changed her will to "give all of my right, title and interest, including any of that represented by
stock share certificates, in CO-14, a not-for- profit corporation, and CO-17., a for-profit
corporation to the CO-18., a non-profit corporation organized for charitable purposes, ..."
According to statements on the CO-2 website, CO-2 purchased a number of accounts from CO-
18 in 19XX. In 20XX, RA-5 contributed CO-12 down-line account # to the RA-5 F oundation at

CO-2.

Background of CO-19
CO-19 (sometimes referred to as "Company") was formed March 9, 20XX. Prospective

Members were identified as RA-7, RA-5, and RA-8,with each owning a % interest in the
Company. CO-20 was identified as the owner of the remaining %. Intended contributions were
reported as $ each for RA-7, RA-7 and RA-8, with CO-20 contributing $§.

RA-7 is RA-5's companion, assistant and caretaker. No information concerning RA-8 was
available. ORG officers have stated that they were aware that CO-20 was formerly a member of
the Company but no other history or information related to CO-20 was provided or found

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

through normal research methods. RA-9 exercised signatory authority for CO-21, a trustee for
CO-20. Research found no records related to CO-21.

The Limited Liability Formation Agreement identified the purpose of the CO-19 to "be engaged
in the business of providing business and financial management services, and any other business
which is allowable for a State Limited Liability Company." The prospective members also

agreed that:

Cash and assets would be pooled so that the Company would be profitable, those profits

would be honestly and equitably allocated to each member, and the needs of the
customers would be met:

A separate Capital Account would be maintained for each member and would be
increased by the value of any additional contribution and decreased by any distribution,
so that net profits and net losses could be determined by generally accepted accounting
principles. Then those profits/losses would be allocated according to the Profit Allocation
Plan.
The office of the business where the records would be kept would be Address, City,

State

RA-7 was designated as the Business Manager, Treasurer, and Tax Matters Member.
RA-5 was identified as Assistant Business Manager and the Secretary of the Company.
RA-8 would be the Company Planner.

Per Receipt Certifying Member Interest in CO-19 dated March 19, 20XX, RA-7 received %
interest in the Company for $ in cash, and other valuable consideration. On that March 9, 20XX
CO-20 was allocated a % interest on receipt of $. The remaining % interest was received by RA-
5 by a Receipt Certifying Member Interest in CO-19 dated March19, 20XX. According to the
minutes of an organizational meeting dated March19, 20XX, RA-7 and RA-8 were all the
organizers of the Company. The Receipt Certifying Member Interest in CO-19 was reported to
have been read at the meeting and adopted as the Formation Agreement of the Company. RA-7,
RA-5, CO-20, and RA-8 presented their contributions for Member Interest and the Receipt
Certifying Member Interest in CO-19 was issued.

After the Operating Agreement was read and approved by the members, RA-8 withdrew as a
member of the Company and sold his % interest to CO-19 for $. Ownership interest was then
allocated % to RA-7, % to RA-5, % to CO-20. RA-7 was designated as the manager; RA-5 was
assistant manager. RA-5 and RA-7 were granted blanket authority to sign checks on the bank
accounts of the Company made payable to themselves or entities in which they have a financial

interest.

According to the Operating Agreement of the CO-19, the Company was formed "to engage in
the business of providing business and financial management services and any other business
which a limited liability company may do and perform under the State LLC Act ..."

Form 886-Aqev.4-68) Department of the Treasury - Internal Revenue Service
Page: -6-~

Forn 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
RA-1 12/31/20XX,
Address 12/31/20XX, &
City, State 12/31/20XX,

Article H, Section 3 required that the LLC maintain books and records which any member might
inspect during normal business hours. Article III, Section 1 of the Operating Agreement stated
that the Company would be managed as set forth in the Formation Agreement. Section 5 of
Article III allowed the managers to devote time and efforts to other business interests unrelated
to the Company; provided that Managers would not enter into transactions that directly compete
with the business of the Company. Article III, Section 7 required that manager salaries were to
be set by unanimous vote or written consent of Members.

Article IV, of the Operating Agreement:

Required that an annual meeting of the members be held,
¢ Provided that a quorum would be two-thirds of the Members, as measured by

their percentages of ownership,

Stated that a two-thirds majority vote was required for Members to take action.
Provided that each member would have one vote (or corresponding fraction thereof) for

each one percent of ownership interest.

Article X, Section 2 of the Agreement states, "Any Member can withdraw as a member of the
LLC upon (a) not less than ninety (90) days' written notice to the other Members, or (b)
obtaining written consent of the Members." .

Address, City, Sate was reported as the address for CO-20, and Address, City, State was reported
as the principal place of business for CO-19.

CO-19 appears to have held a down-line CO-12 interest, account # which also appears to have
been under the control of RA-5 as a managing member of the LLC.

Establishment of CO-5 at ORG

In July, 20XX, RA-5 and RA-7 began discussions with "DIR-1" (DIR-1.) and RA-3 concerning
the CO-12 down-line interest held by CO-19. DIR-1 is the founder of CO-2 (CO-2), and RA-3

served as the CO-2 Treasurer until 20XX.
Notable among the documents exchanged during those discussions were the following:

On September 9, 20XX, RA-7 transmitted a fax to RA-3 at CO-2. In that fax, RA-7
outlined a plan to make "RA-5's foundation with CO-2 (or the other one Founder
mentioned) % owner, take RA-5 out as a member leaving me [RA-7] and one other
person with % and after expenses the income would be the " foundations’ [SIC]. We
could hire RA-5 as a manager or something so she could make speeches for CO-12 and

build a work with her down-line."

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

¢ An CO-2 Memo from RA-3, Title, Vice President Investments & Accounting, on
September 10, 20XX introduced RA-5 to Attorney RA-10 as a person whose Federal tax
liabilities exceeded $. RA-3 explained that the liability stemmed from RA-S's decision to
stop filing tax returns to report her income.

On September 13, 20XX, a memo from RA-3 advised RA-7 that "RA-11 has indicated
that the IRS has its sites [sic] on CO-19." RA-11 is identified as the Officer for CO-5.
RA-3 suggested that RA-7 might want to "abandon this one and start again without RA-
5's name associated with it at all. In the light of these possibilities, I would not leave the
down-line in CO-19 but transfer to CO-3 and operate out of there with a fresh new LLC
and avoid any connections until RA-5 and RA-10 are able to resolve the IRS issues."

CO-19 submitted an "Application "to ORG on October 7, 20XX. CO-19
Financial was the proposed name. The donor was identified as CO-19. RA-5 and RA-7 signed
the application as the managers of the LLC. RA-11 was named as the Officer (Officer).

The application provided a pro forma Proposed Charitable Purpose, "Any charitable,
educational, scientific or religious activities that may be approved from time to time." The
applicants chose to provide additional detailed purposes, "To maintain the nutritional and
marketing business through CO-12 for the purpose of generating income for nutritional
education and research, The CO-19 will continue to manage the business and advise the
foundation. They will be paid reasonably for their services and RA-5 will continue to be the
spokesperson magi [sic] with CO-12 Corp. Additional funds may be used to support other
charitable organizations and ministries."

On the same date that the Application was submitted, RA-5 signed the
Transfer of Ownership for CO-12 account ID # from the Company to "District Foundation FBO
CO-5, RA-5 Manager." And, Successor Instructions were submitted to ORG by RA-5 to name
RA-7, friend and companion, to serve as the "REF-2" in the event of RA-5's death or disability. ;

On October 10, 20XX, the members of CO-19 by resolution amended the Profit Allocation
Agreement to provide that, effective November 7, 20XX, all income of the Company received
from CO-12 would be charitably donated to ORG. The resolution reserved the right of the
membership of the Company to "change the foundation receiving this gift." The resolution was
signed by RA-9, RA-5 and RA-7. RA-3 of CO-2, signed an "Agreement to Accept CO-12
Membership" dated October 11, 20XX, on behalf of ORG.

Via a fax from CO-12 on October 14, 20XX, Secretary confirmed a conversation with RA-5
Friday the 11th. Secretary stated that RA-5's successor instructions had been received. Secretary

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

Form 8 86 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer . Year/Period Ended
ORG 12/31/20XX,
RA-1 12/31/20XX,
Address 12/31/20XX, &
City, State 12/31/20XX,

explained that for RA-7 and RA-10 RA-17 to be listed on "your" membership, they must
relinquish any CO-12 membership they currently hold.

The fax went on to state that, 'We received a transfer of ownership from you today, but as we

spoke before, you are to be the listed applicant for the new membership name
. We also received successor instructions for CO-2 which we currently have the listed

applicant or contact name as RA-3. Changes to this membership with CO-12 would need to be
made by RA-3."

On October 25, 20XX, RA-9, authorized signatory, agreed to transfer all the right, title and
interest of a % Member Interest held by CO-20 to ORG Project . The resolution was signed by
RA-7 and RA-5 on October 25, 20XX. CO-3 Project # is the CO-5 subaccount at ORG

On that same date, "RA-5 with CO-19, of Address, City, State, CO-12 ID No." requested that
CO-12 membership name be changed to "CO-3 whose Federal Tax Identification Number is #."
RA-5 went on to acknowledge that "Under the new name and Federal Tax Identification
Number, I will be receiving a commission check instead of using direct deposit."

RA-9 signed the October 25, 20XX resolution for CO-20 on October 29, 20XX. On October 30,
20XX, "RA-3, Signatory for CO-3," (ORG) accepted the % membership interest in the
Company.

Minutes of a board of directors meeting reportedly held by phone on October 30, 20XX; listed
RA-7, RA-5 and RA-9 as attendees. RA-9 in his role as signatory for CO-20 stated that "he
wished to transfer the interest of CO-20 back to the LLC and withdraw as a Member of the LLC,
and wished to receive as compensation therefore the sum of $." The members of the Company
agreed to accept the withdrawal and pay the requested compensation upon execution of a Bill of
Sales. The board members then resolved that the % interest be redistributed to ORG for the sum
of $. RA-3 signed the document to accept the Company membership for ORG.'

Operations of CO-5

Revenues and Expenses: From October 20XX through July, 20XX, ORG received monthly
income from CO-12 interest ##. Monthly payments from CO-12 were credited to the CO-19
REF-1 sub-account. From November, 20XX to July, 20XX, on receipt of the CO-12 monthly
payment, the ORG routinely sent % of the amount of the CO-12 check to the CO-19. From July,

! A meeting of the members of the Company was held on 1/3/20XX. DIR-2, signatory for ORG'
transferred the % interest back to the Company and withdrew as a member on that date. The Bill
of Sales executed on 1/3/20XX transferred ORG' s interest to the Company for a payment of $.

Form 886-Acev.4-68) Department of the Treasury - Internal Revenue Service

Page: -9-

Form 8 86 A Department of the Treasury - Internal Revenue Service ~ Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
RA-1 12/31/20XX,
Address 12/31/20XX, &
City, State 12/31/20XX,

20XX through July, 20XX, ORG changed the regular monthly distributions to the LLC to $.
These payments were recorded as charges against the CO-5 sub-account on ORG accounting
records. See Attachment I for a schedule of the deposits and withdrawals from the ORG bank
account from January 1, 20XX to December 31, 20XX.

When questioned about these payments, ORG provided the following explanations in
correspondence:

November 7, 20XX — "There was an informal agreement that CO-3 (later renamed
ORG) would retain % of the revenues received in regard to the Multi-Level Interest to
pay unrelated business income tax (within the meaning of Code §51 1) in connection with
CO-3' s ownership of The Multi-Level Interest. That was the extent of the
understanding."
May 17, 20XX — "In addition to itemized expenses the Company incurred in
connection with the operation of the down-line interest, ORG paid approximately $ per
month to the Company which represented compensation to be paid various personnel of
the Company that operated the down-line interest." In subsequent correspondence, ORG
identified RA-7 and RA-21 as employees who received Compensation from the
Company.
September 12, 20XX ORG explained that there was no % agreement. "Rather, ORG
voluntarily began paying $ per month to the Company because paying a fixed, rather than
a fluctuating amount would enable the LLC to'-plan adequately for the number of
employees it could hire and retain to maximize the revenues the down-line could generate
for the ultimate benefit of ORG and CO-2."
October 8, 20XX ' "ORG believed that by limiting its support of the Company to % of
the income ORG received from the down-line, it could adequately support the down-line
for the ultimate benefit of CO-2 and ORG and leave a balance which could also be used

to support its charitable purposes."

During that same time period, additional payments were made to CO-19 by ORG based on
monthly Transaction Forms submitted by RA-S. These Transaction Forms were normally
accompanied by a listing of Actual and Projected Expenses from CO-13 REF-3 or invoices for
Labor and expenses for RA-12. State corporate records identify RA-5, RA-7 and RA-12 as the

managers of CO-13. Those expenses included:

Salary/Consulting fees paid to RA-12,
Lease payments at the address of CO-13,
Various office expenses including $ per month for office supplies and the same

amount for FedEx fees,

Legal expenses described as "trademark application, redo corporate structure,

inventions and patents, trademark fees,"

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

Preparation of REF-4 (CO-13) tax returns, revision of a business plan for a potential
investor, auto insurance and maintenance, and mileage reimbursements at the standard

rate.

See Attachment II for a schedule of the expenses reported on the listings. The list is not all
inclusive since documents related to some disbursements to the Company were not provided

When asked to provide detailed documents to verify Company expenses, DIR-2 provided oral
testimony during the 4/25/XX interview. DIR-2 stated that ORG had requested vendor invoices
and purchase receipts from the Company, but none had been provided. Further DIR-2 indicated
that because ORG was a limited partner, ORG could not force the Company to produce those
documents. Later, in it's response to Information Document Request 5 on December 3, 20XX,
ORG defended its disbursements of the income from the down-line interest by quoting the
Uniform Management of Institutional Funds Act. The response stated that the board of directors
of State charities is required to "act with care, skill, prudence, and diligence ..."

RA-11 was paid a commission of approximately % through CO-24 for serving as the Officer,
and % of each CO-12 check was allocated to ORG as Marketing Service Fees.

IRS Levy: On July 19, 20XX, CO-12 notified RA-5, that a notice of a tax levy against her next
CO-12 commission check had been received from the Internal Revenue Service. The levy was, in
fact, issued against "CO-3, EIN as nominee, transferee and/or holder of a beneficial interest of
RA-5." RA-5 contacted CO-2/ORG on July 20, 20XX to request assistance. That same day, DIR-
2 sent a letter to RA-13 at the Internal Revenue Service stating "this project of ORG. was
authorized on October 7, 20XX."

On July 23, 20XX in a letter from RA-5 to DIR-2 on "CO-14" letterhead, RA-5 declined to have
DIR-2 contact her friends for a gift. And, RA-5 questioned whether DIR-2 would give the money
received to her instead of paying his own tax obligation. Her analogy was, "It seems to me that
you have asked (CO-2) to pay (CO-3) bill!" CO-2 is the account number for the RA-5
Foundation at CO-2. CO-3 is the account number assigned to the CO-5 at ORG.

In an email to RA-14 at CO-12 on August 2, 20XX, Attorney RA-15 identified his law firm as
the representative of ORG. RA-15 requested "any documents in REF-5's possession, such as an
assignment, etc :.. that demonstrates that the down-line interest was conveyed from RA-5 to CO-
3." Later that day RA-14 requested RA-5's approval to provide those documents to RA-15. One
of those documents was a Fax on 10/4/20XX from RA-5 to RA-16 at CO-12. In that fax, RA-5
thanked RA-16 for helping her with her estate problems. She also stated that she was "ready to
sign the transfer of Membership to ORG of City, State with one exception. I want to be able to
be the Manager of my down-line (and the Foundation agrees that that is fine with them) ..."

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

In a second letter dated August 3, 20XX POA, Power of Attorney for RA-5, and RA-15,
representing ORG requested a Collection Due Process Hearing with the Internal Revenue
Service. The letter pointed out that:
e RA-S5 had made an offer in compromise, but the IRS had continued collection
activity:
A levy had been issued to the CO-12 Companies on the belief that RA-5 had
transferred a down-line interest to ORG in 20XX;
e RA-5 was not an officer, a director, nor an employee of ORG:
e RA-5 receives no compensation or other payments from ORG;
e The levy relates to property owned by ORG, not RA-5

From July, 20XX to October, 20XX, the CO-12 checks issued to ORG for account ## were
mailed directly from CO-12 to the IRS to reduce RA-5's tax liability. During that time CO-
2/ORG officers, RA-5, and their attorneys gathered records and formulated strategies in an
attempt to release and reverse the levy. During that same time period, with the exception of $
from the final liquidation of an investment account, the only income received by CO-5 sub-
account resulted from transfers/donations from the RA-5 Foundation at CO-2.

On October 28, 20XX, RA-7, as manager of CO-19, provided a notice of a potential claim
against ORG for its failure to make payments to CO-19. According to that letter, "We hereby
demand that you immediately reinstate the funding mechanism to support the work of CO-19's
employees for your benefit." A subsequent notated copy of RA-7' letter advised RA-7 that "DIR-
1"(DIR-1.) had spoken to RA-S and had been assured that there was no intention to sue. DIR-1
warned RA-7 that in the event that the letter was, in fact, a notice of intention to sue,
distributions from the account would be frozen to save for a potential lawsuit.

RA-5 Bankruptcy: Finally, in October of 20XX, RA-5 declared bankruptcy. Bankruptcy laws
prevented IRS levies against the CO-12 payments to ORG for the remainder of 20XX. Payments
from the CO-12 account to ORG resumed that month. And, ORG resumed its monthly
disbursements to CO-19. In March, 20XX, ORG distributed $, reported to be the total of residual
CO-12 payments held by ORG, to RA-5's bankruptcy account. The CO-12 membership interest
was also forfeited to the bankruptcy account.

On January 10, 20XX, the Internal Revenue Service filed an Adversary Complaint against RA-5
requesting that the bankruptcy court determine that her federal income tax was non-
dischargeable and to determine the extent and validity of federal tax liens. The Complaint stated
that RA-5's tax liability for 19XX through 20XX with interest and penalties was $. Per that
complaint, "In the early 19XXs, RA-5 became involved with promoters of abusive tax avoidance
schemes involving sham trusts to shelter income. The IRS audited RA-5 and assessed over $in
taxes. As the result of an IRS audit, RA-5 agreed to collapse the trusts, but continued to avoid

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

payment of her outstanding taxes holding assets in the name of and diverting income to various
nominees, such as CO-25, CO-2, and CO-3."

The IRS also alleged that RA-5 was attempting to shelter substantial income from IRS collection
by transferring her down-line interest in a multi-level marketing plan to ORG. "Now, according
to the Debtor [RA-5], she has diverted her income to an entity known as CO-2 that she failed to
disclose in her schedules or statement of financial affairs this case."

On July 17, 20XX, RA-5 filed an Original Disclosure Statement for Case Number # in the
United States Bankruptcy Court Eastern District of State Marshall Division. According to that
document, "The Debtor has been an author, lecturer and noted nutritionist for over 40 years. She
has been instrumental in helping to develop various nutritional and health products which are
generally marketed by and through her CO-22 organization which is managed by CO-12
Companies located in City, State. The CO-22 is generated through CO-19, a State Limited
Liability Company of which the Debtor held a Percent (%) interest prepetition. She had
previously conveyed (%) to the CO-3 ("CO-3"), a non-profit, tax exempt
organization in City, State This transfer occurred following the date when the IRS had actually
filed a federal tax lien against the Debtor. As a result of the previously mentioned Adversary
Proceeding with the IRS, the Debtor has requested that CO-3 turn over the % interest conveyed
to her through her disbursing Agent, which has been agreed by CO-3's counsel ..."

The document went on to state, "The Debtor's significant problems arose as a result of her
acceptance of poor advice from individuals and groups concerning tax reporting and income tax
liabilities."

The Agreed Final Judgment found that RA-5's federal income tax liability was non
dischargeable. The court also found that the IRS had "valid tax liens that attach to all property
and interest in property, regardless of record ownership." The judgment continued by ordering
that RA-5's federal tax liabilities attach to the down-line interest, CO-12 ID ## previously held in
the name of CO-19 for the debtor's benefit.

Financial Data & Calculations: During the period from January 1, 20XX through December
31, 20XX the sole checking account for ORG was held at CO-11 in City, State in account
number #. No separate checking account was established for the CO-19. Receipts from all
sources, including CO-12 payments, were deposited into this account. And, all checks written,
including checks to the Company were issued from this account.

The only other financial account held by ORG was an investment account that was established at
CO-23 in City, State. The account was initially funded with a $ withdrawal from the checking

ORG checking account to purchase of shares on March 30, 20XX:

Form 886-A cev.4-68) Department of the Treasury - Internal Revenue Service
Page: -13-

Form 886 A . Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
RA-1 12/31/20XX,
Address 12/31/20XX, &
City, State 12/31/20XX,
REVENUES
Total ORG Revenue 20XX through 20XX (For annual detail, see Attachment III.)
CO-2 contributions $
Other donations (subsequently transferred to CO-2) $$
CO-12 Acct ## receipts $$
CO-2 donations from RA-5 Foundation $$
Income from RA-5 $$
Interest & Investments $$
Earnings on CO-19 (See K-1 Schedule
below.) $$
Total Revenues $$

ORG's Income from Company Operations as reported on Forms 1065 and K -1

First copy Amended

20XX 20XX* 20XX 20XX

Ordinary Income $$ $$** ($$) $$
Short term capital loss ($$) ($$)
Charitable
Contributions ($$) ($$) ($$)
Section 179 Expense ($$)
Net after deductible
expenses $$
Non deductible expense ($$) $$
Net earnings $$ $$ ($$)

*ORG provided 2 K-1's for 20XX for its CO-19 earnings. Those documents did not match. The
2nd copy was accepted as correct since the amount reported as the ending capital account
balance was reported as the beginning balance on the 20XX K-1.

**COQ-19 credited % of its 20XX net earnings to ORG. However, ORG was a partner for only
the last quarter of that year.

EXPENSES

Total ORG disbursements 20XX through 20XX (For annual detail see Attachment IIT)
ORG Operating

Expenses

Accounting $$

Annual Corporate Filings $$

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

Page: -14-

Form 8 86 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit

Name of Taxpayer Year/Period Ended
ORG 12/31 /20XX,
RA-1 12/31/20XX,
Address 12/31/20XX, &
City, State 12/31/20XX,

IRS Late 990 Filing Penalties . $$

Expenses associated with CO-5
Transfers to CO-2/RA-5
Foundation to purchase books

from RA-7-RA-5 $$
Officer Expense $$
Checks to CO-19
LLC $$
RA-5 Legal fees $$
Postage ; $$
Bank Charges $$
U BIT Tax/penalty on CO-12
income $$
$$
Donations $$
Total ORG Expenses $$
Comparison of ORG income from CO-12 payments to total RA-5/Company related
expenses
Income from CO-12
payments $$

Paid directly to CO-19, LLC

RA-5 and Levy related

legal expenses paid to

vendors $$
Transfers to RA-5 FDN to buy

books from RA-7 RA-5

Enterprises $$
Amount returned to RA-7/RA-5 Control $$
Other related expenses $$
Total RA-5/CO-19 expenses $$

Percent of CO-12 income to distributed to
the RA-5/Company
expenses ($$/$$) %

Percent of ORG donations out to total

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

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

Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
RA-1 12/31/20XX,
Address 12/31/20XX, &
City, State 12/31/20XX,

income ($/($) %

It should be noted that no Forms 990-T were filed and no unrelated business tax was paid
by. ORG until August, 20XX when delinquent Forms 990-T were filed for the tax years
20XX and 20XX. The taxable income reported on those returns was the "commission
revenue" received from CO-12 account ##.

LAW

§501(c)(3) of the Code provides, in pertinent part, for the exemption from federal income tax of
corporations, and any community chest, fund, or foundation, organized and operated exclusively
for religious, charitable, scientific, testing for pub | i c 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, no part of the net earnings of which inures to the benefit of any private
shareholder or individual §1.501(c)(3)- 1 (a)(1) of the Tax Regulations states that in order to be
exempt as an organization described in section 501(0(3), an organization 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 test or the operational test, it is not exempt.

§ 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 of such exempt purposes specified in section 501(c)(3). An organization will not be so
regarded if more than an insubstantial part of its activities is not in furtherance of an exempt

purpose.

§1.501(c)(3)-1(d)(1)(n) of the regulations provides that an organization is not organized or
operated for an exempt purpose unless it serves a public rather than a private interest. Even
though an organization serves a public interest, it will not qualify for status under §501(c)(3) of
the Code if it also serves a private interest more than incidentally. Therefore, the organization
must 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 interest.

§1.501(a)-1(c) The words "private shareholder or individual" in §501 refer to persons having a
personal and private interest in the activities of the organization.

TAX-REGS, §1.704-1. Partner's distributive share, Part 02 of 02
(2) Basic tests as to ownership

Form 886-A cev.4-68) Department of the Treasury - Internal Revenue Service
Page: -16-

(i) In general. —Whether an alleged partner who is a donee of a capital interest in a partnership
is the real owner of such capital interest, and whether the donee has dominion and control over
such interest, must be ascertained from all the facts and circumstances of the particular case.
Isolated facts are not determinative; the reality of the donee's ownership is to be determined in
the light of the transaction as a whole. The execution of legally sufficient and irrevocable deeds
or other instruments of gift under State law is a factor to be taken into account but is not
determinative of ownership by the donee for the purposes of section 704(e). The realities of the
transfer and of the donee's ownership of the property attributed to him are to be ascertained from
the conduct of the parties with respect to the alleged gift and not by any mechanical or formal

test.

TAX-REGS, § 1.6033-2(i)(2) requires every organization which is exempt from tax, whether or
not it is required to file an annual information return, to submit such additional information as
may be required by the Internal Revenue Service for the purpose of inquiring into its exempt
status and administering the provisions of subchapter F (section 501 and following), chapter 1 of
subtitle A of the Code, section 6033, and chapter 42 of subtitle D of the Code, See section 6001
and § 1.6001-1 with respect to the authority of the district directors or directors of service centers
to require such additional information and with respect to the books of accounts or records to be _
kept by such organizations.

In National Found,, Inc. v. United States, 13 Cl. Ct. 486 (1987) (NFI), the court found that the
plaintiff demonstrated the structural controls necessary to retain its exempt status where the
evidence showed that the organization would refuse to administer a project if it did not meet five
stringent standards:

That it be consistent with a the charitable purposes specified in section 501(c)(3);
That it have a reasonable budget;
That it be adequately funded;
That it be staffed by competent and well trained personnel; and,
That it be capable of effective monitoring and supervision by NF.
The court also found that donors had relinquished all ownership and control over the donated
funds or property to NFI and that NFI exercised its discretion in authorizing charitable

distributions of the funds.

New Dynamics Foundation, Inc. v. United States; No. 99-197T provides a case in which the
donor advised fund demonstrated inadequate controls. New Dynamics Foundation, Inc. (NDF)
was initially operated as a "sub-account" under the National Heritage Foundation (NHF). NDF
was later spun-off into a "west coast version of NHF." In that case, the court distinguished NFI,
finding no indication that New Dynamics Foundation had a set of standards designed to prevent
abuse of its funds or that donors relinquished all ownership and custody of the donated funds or
property. In denying NDF's request for a declaratory judgment that it was exempt under IRC §
501(c)(3) the court commented that unlike NFI"...there is no indication in the case sub judice,

Form 886-A rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -17-

that plaintiff had, let alone enforced, a comparable set of standards -- a strong indication, in this
court's view, that it was not serious about preventing the abuses of its funds."

In Addis v. Commissioner, 118 T .C. 528 (2002), affd 374 F.3d 881 (9th Cir. 2004) and Weiner v.
Commissioner, T. C. Memo. 2002-153, the Tax Court held that National Heritage Foundation
Form 886-A (R.ev.4-68) Department of the Treasury Internal Revenue Service failed to provide
a good-faith estimate of the value of goods and services that the taxpayer received in
consideration for contributions the taxpayer made to NHF in connection with a charitable split
dollar life insurance arrangement and therefore denied the taxpayer's charitable contributions for

1997 and 1998 entirely. —

In Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279, 2443 (1945), the
Supreme Court stated that the presence of a single nonexempt purpose, if substantial in nature,
will destroy the exemption regardless of the number or importance of truly exempt purposes. The
importance of this finding was emphasized by the addition of § 1.501(c)(3)-1(c)(1) to the tax
regulations which 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 of such exempt purposes specified in section 501(c)(3) of the Code. Thus the operational
test standard prohibiting a substantial nonexempt purpose is broad enough to include inurement,
private benefit, and operations that further nonprofit goals outside the scope of section 501(c)(3)
of the Code. An organization will not be so regarded if more than an insubstantial part of its
activities are not in furtherance of an exempt purpose.

Retired Teachers Legal Defense Fund v. Commissioner, 78 T C 280, 286 (1982) concluded that
prohibited private benefit may include an "advantage; profit; fruit; privilege; gain or interest."

In American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989), the Tax Court held that
an organization that, as its primary activity, operated a school to train individuals for careers as
political campaign professionals was not operated exclusively for exempt purposes as described
in section 501(c)(3) of the Code because the school's activities conferred impermissible private
benefit. The court defined "private benefit" as "nonincidental benefits conferred on disinterested

persons that serve private interests."

In Plumstead Theatre Socy., Inc. v. Commissioner, 675 F.2d 244 (9th Cir.1982), affd. per curiam
74 T.C., 1324 (1980), a nonprofit arts organization furthered its charitable purposes by
participating as sole general partner in a partnership with private parties to produce a play. With
Housing Pioneers, Inc. v. Commissioner, 49 F.3d 1395 (9th Cir.1995), affd. T.C. Memo.1993
120 on the other hand, the organization that did not qualify as a $501 (c)(3) organization because
its activities performed as co-general partner in for-profit limited partnerships substantially

Form 886-Acev.4-68) Department of the Treasury - Internal Revenue Service
Page: -18-

furthered a non-exempt purpose, and serving that purpose caused the organization to serve
private interests. It had no management responsibilities and could describe only a vague
charitable function of surveying tenant needs.

In Harding Hospital, Inc. v. United States, 505 F.2d 1068 (6th Cir. 1974) ( "Harding "), a
nonprofit hospital with an independent board of directors executed a contract with a medical
partnership composed of seven physicians. The contract gave the physicians control over care of
the hospital's patients and the stream of income generated by the patients while also guaranteeing
the physicians thousands of dollars in payment for various supervisory activities. The court held
_that the benefits derived from the contract constituted sufficient private benefit to preclude

exemption.

In Redlands Surgical Servs. v. C.LR, 113 T.C. 47, 1999 WL 513862 (1999) the court found
"impermissible private benefit. resulted from a nonprofit hospital's contract with a physician
group, giving them a virtual monopoly over care of the hospital's patients and the income stream
they represented, and providing the physician group with fees for supervising the hospital's
medical staff." The court went on to state that Redlands Surgical Services "has ceded effective
control over the operations of the partnerships and the surgery center to private parties,
conferring impermissible private benefit"

In est of Hawaii v. Commissioner, 71 T.C. 1067 (1979), affd in unpublished opinion, 647-F.2d
170 (9th Cir. 1981), the Tax Court concluded that the for-profits were able to use the non-profit
as an "instrument" to further their for-profit purposes. Neither the fact that the for-profits lacked
structural control over the organization nor the fact that amounts paid to the for-profit
organizations under the contracts were reasonable affected the court's conclusion. Consequently,
est of Hawaii did not qualify as an organization described in section 501(c)(3) of the Code.

A tax exemption is a matter of legislative grace, and an organization seeking an exemption must
prove that it "comes squarely within the terms of the law conferring the benefit sought". Nelson
v. Commissioner, 30 T.C. 1151, 1154, 1958 WL 1079 (1958); see also Fla. Hosp. Trust v.
Commissioner, 103 T.C. 140, 153, 1994 WL 400439 (1994), affd. 71 F.3d 808 (11th Cir.1996).

In Church of Scientology v Commissioner, 823 F.2d 1310, 1318 (9th Cu. 1987), the Ninth Circuit
noted that it found the taxpayer's arguments unpersuasive in large part because the taxpayer
presented little documentation to show that the majority of the money was used for Church
purposes and failed to present the documentation necessary to trace the source and use of Church

monies.

The Tax Court in Bubbling Well Church of Universal Love, Inc. v. Commissioner, 74 T.C. 531

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

(1980) noted that the taxpayer failed to establish that it was not operated for the private benefit of
its founders, The taxpayer claimed to have expenditures for maintenance and supplies, office
supplies and maintenance and supply inventory The taxpayer made a general statement that the
amounts were for hymnals, church and office equipment, postage, etc. This was found not to be
adequate. The taxpayer claimed to follow Protestant forms of ritual but there was no direct
information about the services conducted or who attended. No objective facts were provided to
explain the purposes of a trip to Germany. Only vague information was provided making it
probable that virtually all of the income benefited the founders. Inadequate information was
given about how compensatiori-was determined and there was virtually no objective information

about the services performed.

In The Church in Boston v. Commissioner, 71 T.C. 102 (1978), the court concluded that the
operational test was not satisfied where the taxpayer could not adequately document grants that it
made. The taxpayer stated the grants were made in furtherance of a charitable purpose to wit, to
assist the poor who were in need of food, clothing, shelter and medical attention. The only
documentation for the grants was a list of grants made which included the name of the recipient,
the amount of the grant and the "reason" for the grant which was specified as either
unemployment, moving expenses, school scholarship or medical expense. Some grants were
made to the taxpayer's officers. The court found this was inadequate and that there needed to be
documented criteria which would demonstrate the selection process of a deserving recipient, the

reason for specific amounts given, or the purpose of the grant.

In New Concordia Bible Church v. Commissioner, T.C. Memo. 1984-619, the court noted that
complcte information about disbursements was required to ensure there is no inurement. There
needs to be details about services provided in exchange for support.

APPLICATION OF LAW TO ORG OPERATIONS

The analysis of any organization's qualification for recognition as one described in Code
§501(c)(3) must begin with the organizational and operational tests discussed in Treas. Reg. §
1.501(c)(3)-1. That regulation points out that, "If an organization fails to meet either the
organizational test or the operational test, it is not exempt.” _

Organizational Test

The organizational test requires that the governing instruments limit the purposes of the entity to
ones described in Code §501(c).(3) and may not expressly empower the organization to engage,
other than as an insubstantial part, in activities which in themselves are not in furtherance of one
or more exempt purposes. In order to establish that it is operated exclusively for one or more
exempt purposes, the assets must, also, be irrevocably dedicated to §501(c)(3) purposes.

Form 886-A crev.4-68) Department of the Treasury - Internal Revenue Service
: Page: -20-

Therefore, upon dissolution, such assets would, by reason of a provision in the organization's
articles or by operation of law, be distributed for one or more exempt purposes, 0 r to the Federal
government, or to a State or local government, for a public purpose.

Review of the original Articles of Incorporation filed on December 23, 19XX found that the
specific purpose was to "encourage philanthropy for charitable purposes." Attachment A to the
Articles of Incorporation provides purpose, powers, and dissolution clauses that closely follow
the standard ones that have been adopted by many organizations and are provided in IRS
publications as the model for provisions that are adequate to meet the organizational
requirements of §501(c)(3). Therefore, ORG meets the organizational test required by

§501(c)(3).
Operational Test

Preface
Any charitable, educational, scientific or religious activities that may be approved from time

to time... To maintain the nutritional and marketing business through CO-12 Corp for the
purpose of generating income for nutritional education research. T. he CO-19 will continue to
manage the business and advise the foundation. They will be paid reasonably for their services
and RA-S5 will continue to be the spokesperson. Additional funds may be used to support other
charitable organizations and ministries.”- CO-5 Proposed Charitable Purpose 10/7/XX.

As pointed out in New Dynamics Foundation, Inc. v. United States, No. 99-197T, "/T/Jhe critical
inquiry under the operational test is on the ‘purposes towards which an organization 's activities
are directed." In applying Tax Regulation § 1.501(c)(3)-1(c), ORG must "engage primarily in
activities which accomplish one or more of such exempt purposes specified in section 501(c)(3)."

Prior to the Pension Protection Act of 20XX the term "donor advised fund" was not defined in
the Code. However, the term was understood to refer to separate funds or accounts established
and maintained by public charities to receive contributions from a single donor or a group of
donors. The charities had ultimate authority over how the assets in each account were invested
and distributed, but the donors, or individuals selected by the donors, were permitted to provide
nonbinding recommendations regarding account distributions and/or investments.

CO-5 was the only donor advised fund at ORG from its inception in 19XX through December
31, 20XX; therefore, its operation must be the focus of the analysis in evaluating ORG's
activities and whether it operates in an exempt manner. And, among the historical facts that must
be considered in this analysis are ORG's close association with CO-2 and the governing body,

facilities and staff shared by the two.

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

While ORG had a relatively short history and states that the organization struggled in its early
years, its directors, officers, and the CO-2 staff that provide services to ORG had many years of
experience operating a donor advised fund that is arguably one of the largest in the country. -

ORG Operations

The only documented activities of ORG and its only sub-account, CO-5, from 1/4/20XX to
12/31/XX were:

Receipt of three small donations on 1/4/20XX that were transferred to CO-2

subaccounts four days later,

Receipt of $ in "endowment" funds transferred from CO-2,
Communications with RA-5 related to the transfer of the CO-12 down-line interest,
acceptance of that transfer and subsequent CO-12 checks, and acceptance of the CO-19

partnership interest,

Payments to and for CO-19, Charitable contributions totaling $ as requested by RA-5,

manager of the Company, and

Attempts to obtain a release of the levy precipitated by RA-5's personal tax liability.

ORG Structural Control

National Found., Inc. v. United States, supra provides the elements that demonstrate structural
controls necessary for a donor advised fund to retain its exempt status. NFI would not accept a
project unless it met five stringent standards:

That the purpose of the project (sub-account) be consistent with the charitable purposes
specified in 501(c)(3);

ORG has provided no evidence that any officer, director or authorized representative of ORG
ever questioned RA-5's expectations that the CO-5 would:
¢ Maintain the nutritional and marketing business,

Conduct nutritional education research,
Allow the LLC RA-5 and RA-7 managed to operate the business with RA- 5 as the
spokesperson with CO-12, and
Pay for those services.

When asked if ORG examined financial statements, earning reports, balance sheets, etc, ORG
officers stated that because the Company was newly formed, it did not have any history to
examine. However, the CO-12 reports stated that account # (the down-line interest that was
transferred to the CO-19 and then to ORG for the benefit of the CO-5 sub-account) has been an

CO-12 account since 19XX and has earned nearly $ since inception.

Form 886-A mev.4-68) Department of the Treasury - Internal Revenue Service
Page: -22-

Form 886 A Department of the Treasury - Internal Revenue Service ; Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
RA-1 12/31/20XX,
Address 12/31/20XX, &
City, State 12/31/20XX,

The ORG/CO-2 officers had accepted a similar membership transfer to the RA-5 Foundation at
CO-2 the previous year and would have been aware that RA-5 had been involved with CO-12 for
many years. ORG officers were cognizant of the fact that RA-5 had written several books on
nutrition. And, the officers were aware that RA-5 had an outstanding federal income tax liability
exceeding $. Yet, these officers tacitly accepted that RA-5 was and would remain the manager of
CO-19. No contemporaneous documents have been provided to demonstrate that any ORG
officer or director:

Investigated the operations of the nutritional or marketing business,

«, Determined whether CO-19 had employees who had the expertise to

conduct the nutritional research,

Questioned how the research results would be disseminated to benefit the public, or
Attempted to retain the rights to patents and/or copyrights developed through funding

from ORG which were awarded to CO-13 and/or other for-profit companies controlled by

RA-5.

There is no contemporaneous record of any occasion when an officer or director questioned the
value of the CO-19 membership or the possible lack of donative intent behind the transfer

to CO-5. ORG officers did not assess the value of the down-line for tax purposes, nor, was there
any evidence that financial statements, tax returns, revenue and/or expense reports were
examined to evaluate the earning potential of the CO-12 account or the value of % interest in

CO-19.
(2) That the sub-account have a reasonable budget;

ORG has provided no evidence that a budget was solicited or submitted prior to acceptance of
the application. Instead, the officers stated that because ORG was an organization in its infancy
which needed ‘seed' funding, it accepted the CO-19 Application (sub-
account) in spite of the uncertainties and with knowledge of RA-5's tax liabilities.

(3) That the sub-account be adequately funded;

ORG may have believed that the Foundation would be adequately funded by the CO-12
payments. But, there is no record that the earnings history of the down-line was solicited or
examined. No annual budget was prepared. And, there is no record that the officers reviewed or

discussed the operations of CO-19 before or after accepting the application.
f4) That the sub-account be staffed by competent and well trained personnel;

When ORG was asked to provide the names and the qualifications of the employees and
contractors who were compensated by CO-19, RA-7 and RA-21 were the only employees

Form 886-A cev.4-68) Department of the Treasury - Internal Revenue Service

Page: -23-

identified. In correspondence, RA-17, as the current vice-president of ORG, responded that that
since ORG did not hire those persons, it was not aware of the qualifications that led to the
selection of these individuals. When asked to provide employment tax form, DIR-4 responded
that the individuals were not employees of ORG; therefore, ORG does not have copies of those

forms.
(5) That it be capable of effective monitoring and supervision

Despite the fact that it held a % ownership interest in CO-19 (which conveyed nearly all the
member voting control to ORG), ORG has not documented any occasion when an officer or
representative attended any board meetings or even requested minutes of those meetings. No
ORG officer or other authorized person has provided any records of informal conversations, calls
or correspondence to confirm that disbursement requests were valid business expenses. With the
exception of travel expenses for one RA-5 speaking engagement in 20XX and invoices provided
for expenses in the last 2 months of 20XX, the only invoices provided consisted of a list of
undocumented operating expenses attached to the ORG Transaction Form. From 11/20XX
through 11/20XX the invoices were provided on CO-13 letterhead. From 11/20XX to 8/20XX,
the source of the listing in some months was not identified. In other months, the list referenced

RA-21, one of the managers of CO-13.

Other disbursements from ORG to the CO-19 were routinely made without any documentation.
When asked to provide records of contacts with the Company, ORG reported that the discussions
were primarily oral, and ORG had no other documents related to those payments.

The antithesis of the CO-18. case can be found in New Dynamics Foundation, Inc. Like New
Dynamics Foundation there is no indication that ORG has a set of standards designed to prevent
abuse of its funds or insure that donors relinquished all ownership and custody of the donated
funds or property. Instead, ORG's pattern of returning the CO-12 income to pay the alleged
operating expenses of CO-19, while it continued to be managed and controlled by RA-5 and RA-
7, suggests that the donor did not truly relinquish ownership and control over the donated funds
and property. ORG 's lack of involvement and RA-5's control of the CO-12 account were clearly
evidenced by the fact that CO-12 notified RA-5, not ORG, that an IRS levy had been received
against her account nearly 2 years after she had transferred ownership of the CO-12 account.

The Addis v. Commissioner and Weiner v. Commissioner cases provide instances where donors
received substantial benefits while the documents structuring the transaction avoided stating that
any obligations were imposed on the donee (NHF). In both cases, the court found that the
taxpayers contributed money in the amount of the premium that the donee was required to pay to
be eligible for a portion of the death benefit on the donors' lives. NHF would then pay the
premium on a split dollar life insurance policy with the donated funds and issue a confirmation to

Form 886-A cRev.4-68) Department of the Treasury - Internal Revenue Service
Page: -24-

the taxpayer acknowledging the charitable contribution, along with a statement that NHF "did
not provide any goods or services to the donor in return for the contribution."

As part of the Addis v. Commissioner decision the court stated that, "Petitioners and NHF
designed a scheme purporting to provide no benefits to petitioners in exchange (or consideration)
for petitioners' payments. However, petitioners received substantial benefits from NHF under the
life insurance policy. In the documents structuring this transaction, petitioners and NHF avoided
stating any obligation of NHF and made it appear that petitioners made an outright gift to NHF
with no quid pro quo. However, petitioners expected, and they told NHF that they expected,
NEF to use their contributions for both their and NHF's benefit."

Like the donations by Addis and Weiner, the transfer of the CO-12 down-line interest appeared
to

be an outright donation of a valuable asset. Unlike Addis and Wiener, the donation was not
structured to provide a tax deductible contribution. But, CO-2/ORG officers were aware that RA-
5 already had a substantial outstanding tax liability.

ORG has pointed out that it was under no legal obligation to approve payments to the down-line.
But, in fact, all requests for payments were approved as long as the CO-12 payments were
providing an income stream to ORG. And, after those payments were made, ORG stated that, as
the "junior partner," it was not in a legal position to access invoices, influence day to day
operations, be part of the employee selection and compensation process, or access the
employment tax records to verify the validity of the expenses.

The ultimate result was that ORG allowed RA-5 and RA-7 to continue to control the CO-12
income circuitously by having ORG receive the income for the benefit of the CO-19 Financial
sub-account and then requesting disbursements from the sub-account to CO-19. Those funds
were used to pay the expenses of for-profit entities controlled b y RA-5 and RA-7.

ORG Partnership Control

As evidenced by the Schedule K-1 provided to ORG by the Company, CO-19 elected to be
treated as a partnership. IRC § 1.704-1 provides that the reality of the transfer and of the donee's
ownership of interest in a partnership attributed to him are to be ascertained from the conduct of
the parties with respect to the alleged gift and not by any mechanical or formal test. The
execution of legally sufficient and irrevocable deeds or other instruments of gift under State law
is a factor to be taken into account but is not determinative of ownership by the donee for the

purposes of section 704(e).

A §501(c)(3) organization may form and participate in a partnership, including an LLC treated as
a partnership for federal income tax purposes, and meet the operational test if participation in the

Form 886-Aev.4-68) Department of the Treasury - Internal Revenue Service
Page: -25-

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
‘Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12/31/20XX,
RA-1 12/31/20XX,
Address 12/31/20XX, &
City, State 12/31/20XX,

partnership furthers a charitable purpose, and the partnership arrangement permits the exempt
organization to act exclusively in furtherance of its exempt purpose and only incidentally for the
benefit of the for-profit partners. See Plumstead and Housing Pioneers. Similarly, a §501(c)(3)
organization may enter into a management contract with a private party giving that party
authority to conduct activities on behalf of the organization and direct the use of the
organization's assets provided that the organization retains ultimate authority over the assets and
activities being managed and the terms and conditions of the contract are reasonable, including
reasonable compensation and a reasonable term. See Broadway Ti heatre League. However, if a
private party is allowed to control or use the non-profit organization's activities or assets for the
benefit of the private party, and the benefit is not incidental to the accomplishment of exempt
purposes, the organization will fail to be organized and operated exclusively for exempt

purposes.

Revenue Ruling 98-15 in Situation 1 and Plumstead Theatre Society, Inc describe partnership
agreements which are structured in a manner that permits the charity to contro] the partnership.
In both cases, the exempt organization structured the partnership agreement, to permit the
organization to act exclusively in furtherance of exempt purposes. In contrast, ORG has claimed
that the "limited partnership agreement" [sic] positioned it as nothing more than an investor who
"merely passively maintained the down-line asset by receiving a share of income from the CO-
22 and making distributions to maintain a capitol asset of the organization." Under those
circumstances, ORG argues that it could not exercise the control necessary to insure that its.

Assets are dedicated to charitable purposes.

ORG defends its disbursements of the income from the down-line interest by quoting the
Uniform Management of Institutional Funds Act. The response stated that the board of directors
of State charities are required to "act with care, skill, prudence, and diligence ..." ORG has not
provided evidence of any due diligence investigation into the character or history of managing

members of CO-19, RA-5 and RA-7. In addition, the officers did not:

Assess the value of the down-line interest or report that interest as an asset on its

balance

sheet,

Question CO-19, RA-5, or RA-7' donative intent,
Question why the donor in CO-19 did not request a valuation for tax purposes,
Consider the implication of RA-5's failure to report the donation on her taxes,
Consider the advantages of selling the down-line interest,
Exercise its voting right to withdraw from or alter the Limited Liability Company

Agreement, or

Consider employing a different company to maintain the down-line interest.

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

Page: -26-

Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
ORG 12,/31/20XX,
RA-1 12/31/20XX,
Address 12/31/20XX, &
City, State 12/31/20XX,

After accepting the down-line interest, ORG promptly accepted what its officers have described
as a "junior partnership interest" in CO-19, the donor of the interest, and allowed the managing
members of the LLC to continue to manage the interest without question. Like the organizations
described in Harding Hospital, Inc. and Redlands Surgical Servs, ORG exercised no control over
the operations of the Company. Instead, the officers of ORG have continually maintained that as
a "junior partner", they have no authority to control the daily operations of the "limited

partnership."

There are no records of member or board of director meetings, requests for additional
information, or discussions concerning the low return on the investment. Like the relationship
between the partners in Housing Pioneers, Inc., supra, ORG had no management responsibilities
and could only describe vaguely the operations of the Company. In fact, ORG ceded control of
the Company to the donor, despite its voting rights.

And, like the for-profit partners of est of Hawaii, RA-5 and RA-7, through their alleged
managing interest in CO-19 and RA-5, were able to use the non-profit, CO-5 at ORG to further

their for-profit purposes.

ORG Burden of Proof

The courts have consistently affirmed the importance of compliance with the recordkeeping
requirements imposed by IRC §6033. The court in Church of Scientology v Commissioner
"found the taxpayer's argument to be unpersuasive in large part because the taxpayer presented
little documentation ..." Likewise in Bubbling Well Church of Universal Love v. Commissioner,
_ the failed to establish that it was not operated for private benefit because the taxpayer did not
make an open and candid disclosure of facts. The court found that there was no evidence
provided to show that payments were reasonable. And, in Church in Boston v. Commissioner, the
court concluded that the operational test was not satisfied where the taxpayer could not
adequately document grants that it made. In deciding New Concordia Bible Church v.
Commissioner, the court noted that complete information about disbursements was required to

ensure there is no inurement.

ORG has provided no documentation validating the exempt purpose of the payments to CO-19.
Instead, ORG has used its claim that it was not the management member of the alleged limited

partnership to explain its failure to adequately document the charitable purpose for the
disbursement of virtually all the income of the down-line interest to the control of the donor.

TAXPAYER POSITION

In correspondence dated December 3, 20XX, DIR-1 stated that ORG was inactive for several
years following its incorporation with the exception of its receipt of the CO-12 down-line

Form 886-A crev.4-68) Department of the Treasury - Internal Revenue Service
Page: -27-

interest. According to DIR-2, ORG sought to maintain the value of the interest via the only
means possible, payment of the costs necessary to sustain its ongoing value. DIR-2 continued by
quoting the Uniform Management of Institutional Funds Acct, and enumerated a list of
circumstances a board should consider in administering a fund.

During that same meeting, ORG attorneys expressed the belief that the exempt status should not
be revoked because ORG did not receive a "portfolio of blue-chip stocks which produced capital

gains and dividend to sustain its initial existence..."

ORG has denied knowledge of the existence of the RA-5 lien prior to acceptance of the down-
line interest and maintain that, as a "junior partner" in the Company, it had no rights to enforce
its request for documents related to actual expenses which it paid as requested by RA-5.

ORG has asserted that CO-12 account ## held by the RA-5 Foundation at CO-2 benefited from
the operations of the Company, as well.

GOVERNMENT POSITION
Based on the facts in this case, the IRS has determined that:

RA-5 built a successful business through her association with CO-12. In the mid
19XX's, RA-5 stopped filing Federal Income Tax Returns to report her income. As a
result, RA-5 amassed an unpaid tax liability exceeding $. In 20XX, RA-5 removed a
portion of her income from IRS collection efforts by transferring CO-12 account ## to the
RA-5 Foundation at CO-2. Subsequently, in 20XX, her efforts to protect the CO-12
account ## from taxation and collection led her to discussions with ORG, a relatively
new donor advised fund organization controlled by the same individuals who ran CO-2.
ORG officers were aware of RA-5's outstanding tax liability and the attention that the
IRS was focusing on RA-5 and her assets prior to accepting the CO-12 down-line
interest. J
The preliminary discussions between ORG and RA-5 focused on how to best structure

the ORG subaccount to deflect IRS attention from the income received from CO-12 CO-
22 account ##. Then, ORG proceeded to accept ownership of the down-line interest, but

did not report the value of the donation as a contribution or an asset.

ORG has failed to demonstrate due diligence in accepting % ownership of the Company
(CO-19) and in documenting the exempt purpose of subsequent payments to the
Company.

Form 886-Acev.4-68) Department of the Treasury - Internal Revenue Service

Page: -28-

ORG demonstrated little knowledge concerning the operations of the LLC which
allegedly supported the organization's valuable asset.
Over the 3+ years after the Company donated the down-line interest, virtually all the
income received was returned to the donor, the Company (LLC). And, because the
Company was controlled by RA-5 and RA-7, much of the income was used to support the
operations of businesses owned by RA-S and RA-7.
ORG alleged that additional charitable benefits were served through its support of the
RA-5 Foundation at CO-2. However, ORG has failed to meet its burden of proof by
providing any detailed explanations or financial records of the relationship between the

RA-5 subaccount at CO-2 and the Company.

ORG did not provide evidence of-the structural controls necessary for donor advised funds- as
set forth by CO-18. Instead, after accepting the down-line interest, ORG promptly accepted an
ownership interest in CO-19, the purported donor of the CO-12 CO-22 interest, and allowed the
Company to continue to manage that interest. Then ORG disclaimed any control over the
operations of the Company.

ORG that allowed RA-5 and RA-7 to freely and effectively employ the transferred assets and
income derived there from in furtherance of their own private interest and benefit. ORG's pattern
of returning the income generated by the CO-12 account as operating expenses to CO-19, which
continued to be managed and controlled by RA-5 and RA-7, suggests that the donor did not truly
relinquish ownership and control over the donated funds and property. Rather, the CO-19
managers were allowed to treat ORG as a conduit to shield CO-12 income from IRS tax
collection efforts against RA-5. Salary payments to RA-7 and ORG income that was diverted to
CO-13 and RA-7 RA-5 have resulted in substantial private benefits to both RA-5 and RA-7.

CONCLUSION

The Internal Revenue Service has concluded that ORG does not operate exclusively for
charitable, educational, or other exempt purposes. Therefore, the Internal Revenue Service
should revoke its exempt status effective January 1, 20XX.

Form 886-A crev.4-68) Department of the Treasury - Internal Revenue Service
Page: -29-

Get today's answer for your situation

You just read what the IRS ruled for one taxpayer in 2013, and it can't be cited as precedent. Ezel checks the current Internal Revenue Code and IRS guidance and answers your specific situation, with citations.

Opens in Ezel Pro. Every answer cites the authority it relies on.

Apply this to your situation

This page covers one taxpayer's ruling from 2013, which can't be cited as precedent. Ask about your situation and see what the current Code and IRS guidance say, with citations.

On this page

Document type

Determination Letter

IRS subject

Exemption From Tax on Corporations, Certain Trusts, etc. (Exempt v. Not Exempt); Private v. Public Interest Served

Topics

Tax-exempt organizations

Code sections

§ 501, § 170, § 507, § 6033, § 6104, § 7428, § 6110

Ruling dated

December 5, 2012

Publicly released

March 29, 2013

View Official PDF