Other 1322054: IRS revokes a charity's exemption over commercial operations and private benefit

View official IRS release (PDF)

Plain-English summary

The IRS revoked a charitable organization's exemption under section 501(c)(3), effective on the date stated in the final determination. The release says the organization operated primarily through taxable subsidiaries and disregarded entities in unrelated commercial activities, including property and business operations that were not furtherance of its stated charitable purpose. It also says the organization failed to file required information returns and did not provide records needed to evaluate its exempt status, unrelated business activity, and possible insider benefits. The IRS concluded that the organization served private interests and that part of its net earnings inured to a private shareholder or individual. Contributions were no longer deductible, and the organization was instructed to file Form 1120.

Ruling snapshot

• Question: Did the organization continue to qualify for exemption under section 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 509(a), 511, 6001, 6033, 6104(c), 7428, and 7701; Treas. Reg. §§ 1.501(c)(3)-1, 1.501(a)-1, 1.6001-1, and 301.7701-3.

Full text (IRS public release)

Department of the Treasury

Internal-Revenue Service
Appeals Office ;
Taxpayer Identification Number:
Person to Contact:
Number: 201322054
Employee ID#:
Release Date: 5/31/2013 pea
Contact Hours:

Tax Period(s) Ended:

Date: February 28, 2013 UiL: 513.00-00

Certified Mail

Dear ND

‘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 your qualification for exemption from Federal income
tax under section 501(c)(3) of the Code is revoked effective January 1, 2003.

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

1. You are not operated exclusively for exempt purposes within the meaning of Internal Revenue
   Code § 501(c)(3) and Treasury Regulation 1.501(c)(3)-1(d). You do not engage primarily in
   activities that accomplish one or more of the exempt purposes specified in.Internal Revenue

Code § 601(c)(3).

2. You are operated for the primary purpose .of carrying on unrelated commercial activities through
   your taxable subsidiaries and disregarded entities, which is not an exempt 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.

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

_ Sincerely Yours,

Appeals Team Manager

Enclosure: Publication 892

DEPARTMENT OF THE TREASURY
Internal Revenue Service

. MC 4900STP
_ 30 East 7th Street, Suité 11308
GOVERNMENT ENTITIES Saint Paul, MN 55101-4914
DIVISION
August 16, 2010
Taxpayer Identification Number:
ORG
ADDRESS , Form:

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

Contact Numbers:
Telephone:
Fax:

Certified Mail - Return Receipt Requested

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 shail 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 offi cials 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 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 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 heed 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 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer . Year/Period
Ended
ORG oo
. 20XX12, 20XXK12
& 20XX12 _
ORG - Organization name XX - Date Address - address City ~- city
State - state County - county Country - country District -
district University - university ~ Highway - highway | website -
website Program -— program Founder - Founder Founder-1 - Founder-1
CFO - CFO CPA - CPA Manager - manager Chairman - chairman ;
Director - director Revenue Agent - revenue agent Village - village
Capitol - capitol River - river Railway - railway Bay - bay
School - school DIR-1 through DIR-12 - 1°* through 12" DIR RA-1
through RA-24 - 1% through 24 RA CO-1 through CO-74 - 1% through 74%
COMPANIES .
ISSUE:

Whether the. ORG’s, exempt status under ILR.C. §501(c)(3) should be revoked because it is not
operated exclusively for exempt purposes? .

FACTS:

BACKGROUND

The ORG (“ORG”) was incorporated under the provisions of the State Statutes, and in particular
under Chapter 181 — State Nonstock Corporation Law on March.31, 19XX, In a determination
letter dated February 8, 19XX, ORG was determined to be exempt from federal income tax as an
organization described in IRC Section 501(c)(3) and further defined as not being a private
foundation within the meaning of section 509(a) of the Code, as an organization.described in
sections 509(a)(1) and 170(b)( 1)(A)(ii) as a private school. The ORG office is located at
Address, City, State. The organization’s incorporator is DIR-1, Esq.

In its Articles of Incorporation, ORG stated it is “organized exclusively for charitable,
educational, scientific, or religious purposes, within the meaning of section 9 SOREN) of the
Internal Revenue Code.” .

The organization’s founder is Founder also known as Founder, who recently legally changed his
name to Founder. According to an article dated October 10, 20XX i in the CO-1, gave some
background of the President of ORG.

“According to court documents that were part of his legal name change to

Founder in 19XX, he was born Founder on April 1, 19XX in the village of
| “|, District of District, State of City, State. In the petition for a name

change filed in County Circuit Court, Founder described himself, as “a minister _.
and pastor in a religious group know as yr

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

Department of the Treasury - Internal Revenue Service Schedule No. or
Form 886A Explanation of Items Exhibit
Name of Taxpayer Year/Period
. Ended
ORG
20XX12, 20X12
& 20XX12

~ “Founder came to the United States some time in the 19XX’s and has told
followers that he studied nuclear engineering at University.”

“He has seldom been seen publicly in County or the Town of Town. His last
known public appearance was in 19XX at a Town of Town planning and zoning
committee meeting. While the property at Address is called Founder’s home he
is believed to actually live somewhere on the East Coast.”

“The Town of Town has been the home of’ for 30
years but a growing number of property purchases i in the last four years has made
the group’s leader a | prominent figure i ina community that knows nearly nothing

‘about him.”

ORG uses a portion of Founder’s home as its office. During the Revenue Agents tour
August 21, 20XX, of the facility, ORG’s records were in complete disarray, no records
filed in cabinets. Per DIR-2, ORG is not charged rent for use of house. However, it is
very evident, that members of the religious group are residing at the residence.

ORG states in its Form 1023, Part II line 1, past, present and planned activities are as follows: |

“The purpose of the ORG is to provide the American system of education to
Country, a land that has been dominated by the Country method for centuries. We
feel that our American system is the best in the world. We propose to introduce

and influence the youth of Country to our way of education.

We propose sto demonstrate to the young that the American education system is
definitely better and superior to the Country method. Thousands of Country
student’s desire to study abroad, but most of them lack a good educational
foundation to enter American universities. Our aim is not to be a stepping stone
for students to go abroad, but rather to provide the same educational experience
right.in their own land. Students will be confronted with the same demand put
forth in the American System, which has proven to produce productive citizens.
These enlightened graduates of our Institute can raise up their nation out of

• poverty. and neglect, to a place of honor in the advanced technological modem

world.”
In Part II of the Form 1023 as filed, ORG indicates that its sole support will come from donations

-and contributions solicited from the general public. In 20XX and 20XX, per Form 990, ninety-
nine percent of revenue was derived from the operation of wholly owned disregarded entities.

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

FE 8 A Department of the Treasury - Internal Revenue Service Schedule No. Or )
orm 886 Explanation of Items | Exhibit
Name of Taxpayer Year/Period
Ended
ORG
=. 20XX12, 20KX12
. & 20XX12

CHANGE STATE OF CORPORATE STATUS — STATE TO STATE

ORG filed new articles with the Secretary of State of State as a non-stock corporation on
February 2, 20XX. The third article states: “The purpose of the corporation is to engage in any
lawful act or activity for which corporations may be organized under the General Corporation _
Law of State. The corporation. is organized exclusively for the furtherance and advancement of
charitable, educational, and scientific purposes, including for such purposes, the making of
distributions to organizations that qualify as exempt organizations within the meaning of section
501(¢)(3) of the Internal Revenue Code or corresponding section of any future federal tax code.”

-ORG filed with the State of State Certification of Conversion from a Foreign Corporation toa
State Corporation Pursuant to Section 18-265 of the Corporations Act, February 4,20XX.

1. The jurisdiction where the Foreign Corporation first formed is State.
2. The jurisdiction immediately prior to filing this Certificate is State.
3. The date the Foreign Corporation first formed March 31, 19XX.
4. The name of the Foreign Corporation immediately prior to filing this

Certificate is ORG

5. The:name of the State Corporation as set forth in the Certificate of

Incorporation is ORG

ORG on February 4, 20XX, filed Certificate of Conversion, with the State of State, Department
of Financial Institutions, which was received on February 10, 20XX. Prior to conversion, ORG
was registered under State’s Nonstock Corporation statute Chapter 181. The Plan of Conversion

_ was approved on February 13, 20XX by the State of State.
Based on . records obtained from the Seéretary of State of State, on February 20, 20XX; ORG is -
duly incorporated under the Laws of the State of State, is in good standing, and has a legal

corporate existence.
Additionally, it was found that ORG used the same determination letter 947, which granted it

tax-exempt status.as of February 8, 19XX even though they had reincorporated in another state.
ORG has retained its employer identification number (EIN) and name along with its assets and

liabilities.

Foreign Nonstock Corporation — Certificate of Authority Application - ORG filed with the State -
of State authorizing the organization to transact business in the state, effective March 16, 20XX.

SCHOOL IN COUNTRY

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

• • a . Pages -3-

Form & Department of the ‘Treasury - Internal Revenue Service Schedule No. or
om 886A ___ Explanation of Items Exhibit
Name of Taxpayer Year/Period
. _ | Ended.
ORG
. oo 20XX12, 20XX12
& 20XX12

Since the inception of the organization in 19XX, ORG has been providing financial assistance to
a school in Country (ORG). The campus is located near the village of Village, not far from the
River that flows to the Bay. Village is about 100 kms from Capitol, the capital of City, and about
80 km from Railray, a main railway center. ORG provided photos and literature substantiating
the existence and operation of the school..ORG’s administrative main office in Countryis

located in Country, Dist. Country.

Based on:fact sheet provided by ORG, the institute is affiliated with CO-2 for +2 Science with
128 seats, and with University for a +3 degree course with 32 seats. Courses include — English,
M.I.L(Village)(local language), Physics, Chemistry, Mathematics, Biology, Geology and
Electronics. Based on interviews conducted and records reviewed, the institute has an enrollment
of 60 — 80 students +2 & 50 — 60 students +3. The school employs 16 — 18 SSoulty and staff.

Classes held Monday thru Saturday from 9:00am to 4:30pm.

ORG provides some scholarships to students based on educational merit. Additionally, ORG
provides hostel facilities to a limited number of students. Selection for hostel accommodation
depends upon the distance a student must travel to the Institute, percentage of marks, and income

of parents.

Review of the Form 990 showed the following financial support for the stated primary purpose of _
operating a school in Country. During a seven-year period ORG reported gross revenue of $ per
‘Form 990’s and profit and loss statements, but only contributed $ toward the operations of tthe

school i in n Country per part III of Form 990 and. ORG financial records.

Total Revenue Per School ~~

; Form 990 Part I Form 990

/19XX
| 20XX

• [20XX

[ 20Xx
20XX__
20XX
20XX*

Total

• No return was filed for 0xK, information secured from CPA, CPA of CO-3 (“CO-3”) ©

workpapers, and profit & loss statements provided by ORG.

PROPOSED SCHOOL IN THE TOWN OF TOWN, NEAR COUNTY, STATE

Fotm 886-A (Rev.4-68) Department of the Treasury - Intemal Revenue Service
_ , Page: -4-

oR — Department of the Treasury Intemal Revenue Service Schedule No. or
orm 886A Explanation of Items Exhibit
Name of Taxpayer . Year/Period
Ended
ORG
20XX12, 20XK12
& 20XX12

Per minutes provided by ORG, on March 24, 20XX, the board of directors of ORG held a special
meeting to determine the merits of amending the non-profit mission statement of the corporation
to include the mission to build a science and technology school on the corporation’s property in

County. The board approved amending mission statement, however, no records v were provided to

the IRS indicating this change in focus / operations.

Per minutes provided by ORG, on March 21, 20XX, the board held a meeting and discussed the
status of development for the School in the town of Town. The board minutes state that land had
been purchased long ago. Per minutes provided by ORG, on May 26, 20XX, the board discussed
the status of the school and rezoning of property, where school is planned to be located.. On
November 28, 20XX, the board indicates that the organization does not have enough funding to”
hire‘an architectural firm, yet on a board meeting held on December 29, 20XX, the board decided

to purchase a gas station in City, State for $ to increase their financial portfolio.

Per-Forms 990 for 19XX through 20XX, no funds have been set aside to build this school.
Almost all business operational proceeds expended to leverage the purchase of additional

property; i.e. land, rental property and businesses operated by ORG through wholly owned
disregarded limited liability companies and corporations, and very little goes toward the school i in -

Country i its primary tax-exempt purpose.

Based on news articles, ORG has discussed for a long time the development of a school i in the
County area, yet it has not progressed further than discussion and some planning as the following

• atticle suggests. Ten years have past, and little has been done to show that a school will actually
  be built i in the Town of Town. .

In article from the CO-1, dated October 14, 20XX contained the following:

_ “Plans for an international boarding school in the Town of Town were first
detailed during three meetings of the Town Zoning and Planning Committee
in 19XX when Founder requested a rezoning of his residential property on

Address.
. According to the minutes of those meetings, representatives of Founder told

--” ‘the committee that the ultimate plan was for a K-12 facility that would be
-.. housed in three buildings on 110 acres of property owned by Founder.

moe They said the school would emphasize math, science and engineering - with |
foreign languages to be added at some point - and would be the only one of its

kind in the Midwest.

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

FE Department of the Treasury - Intemal Revenue Service Schedule No. or
orm 886A | Explanation of Items Exhibit
Name of Taxpayer Year/Period .
Ended
ORG | =
20XX12, 20XK12
& 20XX12

The school, which would be strictly secular, would cater to gifted students and
be a non-profit venture. Representatives said there was a tremendous need for
such a school, fashioned like the prestigious East Coast schools, to be located |

in the Midwest.

_ Expectations were that the maximum number of students that could be

• accommodated was 1,200, with 300 employees on the staff. .

Sketches showed that the campus would stretch across Highway to the south
with a proposed skywalk to.be built over the road. Two buildings were to be
located on the south side, one housing kindergarten through third grade, and

| the other housing fourth through eighth grade. A high school was to be located
north of the highway. The dimensions of the buildings were described as

200x200 feet.

Town Chairman said Monday while reviewing the sketch that he recalled
representatives saying there would also be dormitories located. at the northern

end of the property. They are not shown on the sketch.

The committee tabled the matter twice before taking it up again in November
19XX, at which time CO-4 and air photo maps were presented showing
approximate locations and sizes of buildings, and driveway and sidewalk

locations, according to minutes from that meeting.

The committee ultimately voted to recommend that the request for the zoning
change be denied. The following reasons were listed in the minutes:
Not enough project information was provided. |

The proposed proj ect and reason for the zone change would have too great an
impact on the township because of the large number of students and faculty.
The zone change would be unfair to nearby residents because it would devalue
their property.

_ The request includes too large an area for the amount of proposed
construction.

The area is already zoned so that the project could take place with the issuance
of a Conditional Use Permit rather than a rezoning of the entire block of land. _

‘\ the group has never returned to the Zoning and

According ite
Planning Coinmittee e with any alternative proposal for the school.

Department of the Treasury: Intemal Revenue Service

Form 886. Kansan
Page: -6-

Form Department of the Treasury - Internal Revenue Service Schedule No. or
om BRGA | Explanation of Items Exhibit
Name of Taxpayer Year/Period
ope Ended
ORG
20XX12, 20XXK12
& 20XX12

_ RA-1, of CO-5 said the consulting firm was approached by representatives of
Founder's group for advice about building a school. He said the group —
insinuated during one of its presentations before the committee that it was

working with the consulting firm.
‘RA-1 sent town officials a letter clarifying that situation.

"We had no contact with them," RA-1 told the Leader in a recent interview.
"We had a couple of discussions describing & how you created a school. So I
wrote that:letter to make sure the Town Board knew we-had no professional or

contractual relationship."
' - RA-I said the meetings were informal and held in a coffee shop, and that
" “'yepresentatives of the group asked questions such as what it might cost to
-. build a school and how it would be organized. .

_"Lthink they were just trying to tap our pool .of knowledge and weren't
_ intending to retain us," RA-1 said.

"They were researching and exploring and they took a lot of notes," he said. "I
think they were neophytes with a goal and purpose of trying to meet the long
range goal of some sort of science technology school, although they were

’ talking about a residential elementary school which seemed to me highly

impractical."
RA-1 said he doubted parents would send their children away toa residential
| school i in the second grade.

• The group has said it still plans to build the school and that commercial —
  properties it has purchased are intended to eventually fund its construction and

operation.”
FAILURE TO DISCLOSE REQUIRED INFORMATION ON FORM 990

Based on review of the Forms 990 from.19XX to 20XX, ORG failed to disclose changes in their
operations to the IRS. Line 76 of Form 990 asks whether the organization has engaged in any
activity not previously reported to the IRS and if yes to attach a detailed description to the return.
ORG responded no to this question on each of the Forms 990 it filed for the tax years 20XX
through 20XX. CFO, Chief Fiscal Officer, during 20XX & 20XX signed the returns declaring
that he had examined the returns and schedules for completeness and accuracy. CFO resigned

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

Department of the Treasury - Internal Revenue Service Schedule No. or
Form 886A Explanation of Items Exhibit
Name of Taxpayer Year/Period
Ended
ORG
oo 20XX12, 20XX12
& 20XX12

from ORG’s board of directors on June 1, 20XX, X, according to an affidavit he signed and filed i in
County: ‘Cirenit Court on June 22, 20XX.

On its application for exemption, Form 1023 question 2, Part II Activities and. Operational
information, ORG indicated that its sole support would come from donations and contributions
solicited from the public. Beginning late in 20XX and up through the present, the majority of the
funds raised by the organization were from various business operations and a very small amount
from fundraising. Prior to 20XX, the majority of funds raised by ORG were from contributions

from ORG group members and construction services and some rental income.

ORG failed to disclose that it had disregarded entities on its Forms 990 for the tax years 20XX
and 20XX: ORG had at least 13 Limited Liability Companies (LLC) registered in State and State
by 20XX, although not all were operational. Form 990, Part CX “Information Regarding Taxable
_ Subsidiaries and Disregarded Entities”, requires the disclosure of the names, addresses, and
Employer. Identification Numbers (EIN) of taxable subsidiaries, and if the entity is. a disregarded _
entity, the organization is obligated to-indicate if the disregarded entity is using the EIN of the
parent organization. Further, the organization is required to disclose percentage of ownership,
nature of activities, total income and end-of-year assets. The failure to include this information is
a material omission on the return. ORG failed to disclose on its Forms 990 that it operated a
Fudge & Gift Store, Gas Stations, a Go-Kart Amusement Park, and a Property Investment
Company; which held rental property and land, and a Department Store. Lastly, based on CPA
workpapers supplied by CPA of CO-3, and provided by DIR-1 to CPA on January 6, 20XX, |
reported loans from individuals of $. The following officers and board members provided ‘loans

to ORG in 20XX included i in the loan amount from individuals.

Officer / Board Loan Amount

.DIR-3
» DIR-2
DIR-4
| Founder Loan #1
Founder Loan #2

Total
Line 63 of Form 990 requires the disclosure of loans from officers and board, which was left

blank for 20XX.

FAILURE TO FILE FORM 990 & 990T - DEMAND LETTER

Based on review of IRS records, no Form 990 or 990T has been filed for the tax period(s) ending —
December 31, 20XX, 20XX, 20XX, 20XX or 20XX. Further, information secured from CO-3
indicates that the Form 990 for 20XX and 20XX have not been completed. CO-3 had _
commenced work on the Form 990 for 20XX, but ceased when CPA firm had not been paid by

Form S86-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -8-

NE A Department of the Treasury- Intemal Revenue Service Schedule No. or
Form 886A Explanation of Items Exhibit
Name of Taxpayer ‘ Year/Period
_— Ended
ORG
20XX12, 20XX12
& 20XX12

ORG. Lastly, CO-3 had not received the necessary documents to prepare the F orm 990 for 20XX
and rescinded its power of attorney Form 2848 representation of ORG.

On December 29, 20XX, IRS received a letter sent by ORG, CEO, DIR-2, the letter was dated.
December.23, 20XX and addressed to Director of Exempt Organizations, Director and Revenue
Agent, requesting additional time to file due to a number of extreme extenuating circumstances

and diligently working on the preparation of the returns.

On J anuary 14, 20XX, Manager, responded to the letter dated December 23, -20XX and received
on December 29, 20XX indicating that returns are past due including extensions for periods
ending December 31, 20XX through 20XX and need to be filed in order to retain tax-exempt
status and subject ORG to additional penalties for failure to file. Additionally, ORG. was advised

to. work with Revenue Agent to resolve the delinquent return filings.

On J uly 28, 20XX, Revenue Agent sent a letter to ORG requesting the filing of Form 990 and
Form 990-T for periods ending December 31, 20XX through December 31, 20XX within 30

days. This letter was sent to.serve a Notice and Demand as required by Section 6652(c)(1) of the
Internal Revenue Code. Failure to file the Form 990 and 990-T or respond in writing.will result _
in the termination of ORG tax-exempt status for failure to observe the conditions required for
continuation of under tax-exempt status under section 501(a)(1) and 501(c)(3). Additionally,

ORG was made aware of possible penalties for failure to file and the person responsible for filing -

the returns.

; On August 17, 20XX, Revenue Agent received a letter dated August.13, 20XX from CO-6, who
represent ORG in‘the Chapter 11 bankruptcy proceedings. Part of the letter states, “Please be
advised that S.LS.T. and CO-7 (collectively the “Companies”) filed their bankruptcy petitions
pursuant to Chapter 11 of the United States Bankruptcy Code in the United States. Bankruptcy
Court for the District of State on March 16, 20XX.” Additionally, RA-2 states, “Any inquires or
requests for information regarding the Companies, now that they are in a bankruptcy .
proceedings, needs to be done through proper channels of the Bankruptcy Court.”

On August 26, 20XX, Revenue Agent discussed by telephone with ORG DIR-1 that bankruptcy
proceedings did not apply to an audit by IRS pertaining to the notice of tax deficiency or demand

for tax returns.

On September 11, Revenue Agent received a response from ORG regarding the failure to file the
tax.returns for years 20XX through 20XX. DIR-2, CEO, declared that due to Chapter 11
bankruptcy proceedings were required to file a motion and seek permission of the court to retain
an accounting firm to prepare the request returns. ORG requested an additional 60 days to retain

an accountant to > prepare the returns and obtain permission from the courts.

Form 886-A (Rev.468) _ Department of the Treasury - Internal Revenue Service
| Page: -9-

Department of the Treasury - Internal Revenue Service Schedule No. or
Roun 886% Explanation of Items Exhibit
Name of Taxpayer Year/Period
. Ended
ORG
oe | 20XX12, 20XX12
& 20XX12

Over six months has passed and no Form 990 or 990-T has been filed for periods ending
December 31, 20XX through 20XX per IRS records.

List of known ORG % CONTROLLED LIMITED LIABILITY COMPANIES AND
CORPORATIONS:

Controlled Limited Liability Companies - Disregarded Entities -

(1). CO-8 7/1/20xx (State) Still active

(2) CO-9 srer20xx (State)
Terminated - 02/XX/20XX (State) Forelgn LLC 3/16/20XX. (State) LLC. 2/4/20XX

(Bankruptcy Chapter 11 — State 3/1 6/20XX)

(3) CO-10 7/1/20xx (State) Terminated - 020/20XX
(State) Foreign LLC 3/16/20XX (State) LLC 2/4/20XX (Bankruptcy Chapter 11 - State 3/16/20XX)

(4) CO-11 12/4/20xx (State) Terminated - 0200020XX
(State) Foreign LLC (State) LLC.2/4/20XX (Bankruptcy Chapter 11 — State 3/16/20XX)

(5) “C0212 5/8/20XX (State) Terminated - 02/KX/20XX
(State) Foreign Corp. 3/16/20XX (State) LLC 2/4/20XX

(6) CO+13 7/1/20xx (State) Terminated - 02/KX/20XX
(State) Foreign corp. 03/16/20XX (State) LLC 2/4/20XX (Bankruptcy Chapter 11 ~ State 3/16/20XX) .

• (7) CO-14 71120xx Admin dissolved - 02/XX/20XX
  (8) CO=15 s/26/20xx Terminated - 02/XX/20XX (State) 3/16/20XX
  (State) LLC 2/4/20xX: (Bankruptcy Chapter 11 — State 3/16/20XX)

(9) CO- 16 §/27/20xX (State) Terminated - 03/13/20XX
” (State) Foreign LLC (State) LLC 3/XX/20XX

(10) CO-17 6/13/20xx Admin dissolved - 11/1/20XX
(11) CO-18 s/26/20xx (State) — currently delinquent
(12) CO-19 s/27/20xx (State) - currently delinquent
(13) CO-20 s27/20xx (State) currently delinquent

_ ‘Controlled Corporations
(1) CO-7 1n0w20xx (State) EIN
. (Bankruptcy Chapter 11 - State 3/16/20XX)
(2) CO-21 10/13/20xx (State) EIN
(3) CO-22 10/16/20xx (State) EIN
(4) CO-23 11117/20xx (State) EIN
(5) CO-24 11/1 IN7120XX (State) EIN

PURCHASE OF BUSINESSES, RENTAL PROPERTY AND LAND BY ORG AND ITS
WHOLLY OWNED RELATED ENTITIES .

On Ji anuary 31, 20XX, ORG purchased a commercial building for $ at Address in County
through a land contract, which it ultimately intends to lease out toa fabric business. During the

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

Teen Department of the Treasury - Intemal Revenue Service Schedule No. or
Form 8864, Explanation of Items Exhibit
Name of Taxpayer . Year/Period
Ended
ORG
20XX12, 20X X12
& 20XX12 -

tour on August 21, 20XX, Agent noted that some renovations had been done on building but was
not complete and currently is not operational.

On February 28, 20XX, ORG purchased a vacant residential lot for $ for investment purposes as
well as.a restaurant building for $ at Address in County, which has a long-term lease with CO-25
Restaurant. The owner of the CO-25 franchise and ORG who leased the property could not reach
an agreement and the CO-25 closed operations on August 25, 20XX. Based on information _
provided:by ORG on its profit and loss statement detail and. through CPA CPA, ORG received $
in-rental income from the property in both 20XX and 20XX. The building is currently vacant,
and personal property such as signage and equipment was removed from the building by
franchise owner of CO-25. This now vacant building is causing a drain on cash flowofORG

charitable assets.

On April 24, 20XX, ORG purchased a residence at Address for $ that is.adjacent to the land on
which ORG indicated that it intends to build the School. ORG has stated this property will
ultimately be used to house a school faculty or staff, but in the meantime, the organization hopes
to lease it out for extra revenue. DIR-2, CEO of ORG has stated that no members who work in
their businesses reside at this residence. Based on ORG records reviewed and information ORG
provided to the Bankruptcy Court no record of rental income being derived from property. On the
report dated March 31, 20XX, Schedule A — Real Property, ORG lists the value at $ and a _

secured claim of $.

On June 1, 20XX, ORG purchased a commercial building located at Address in County for $ on
a land: contract. The property Seller continued to lease the building as a CO-26. Based on Form

990T for 20XX, ORG received $ i in rental income from property.

co-12 (MAP)

: ORG set up a subsidiary — -CO-12. In May 20XX for the purpose of owning and operating the
amusement park and go-kart, racing facility it subsequently purchased in June 20XX on a Land
Contract for $. The intention per ORG is that this facility will be able to generate substantial.
revenue for the school in the future. CO-27 was typically open from May through October and is
located at Address just outside the City of County on the east side. The park during 20XX &
20XX as stated by ORG was ‘open daily from 10:00am to 9:00pm, managed, and operated by
volunteers. ORG has attempted to extend hours to 10:00pm or 11:00pm on weekends. The
facility includes a video arcade & refreshments, water bumper boats and outdoor heated pool. It
also includes an18-hole mini-golf and four go-kart courses. Per interview with DIR-2, the
amusement park staff included six workers during week and twelve on the weekends. No
records provided to substantiate volunteer labor or records of scheduling staff.

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

§ Department of the Treasury - Internal Revenue Service Schedule No. or
Form 886A Explanation of Items Exhibit
Name of Taxpayer Year/Period
Ended
ORG
| 20XX12, 20XX12
& 20XX12_

ORG has renovated the amusement park into a CO-28 (CO-28), a world-class go-kart and
motorcycle track outside of County. The racetrack is the newest, longest, and best of all tracks in
the CO-29. Based on their website for racetrack, the CO-30 held its annual race at CO-28 for the.
third consecutive year. This event brings people from all over the country, and has been
supported by events such as a car show, a circus, and a celebrity race benefiting | the CO-31 and

featuring retired CO-32 players RA-3 and RA-4, and SnowCO-10 champion racer RA-5.

Information about the racetrack can be found at website. Additionaily, information about the
_ racetrack was found in 20XX at www. and website website.

“CO-28 is.a paved Road course for karts located just east of County. The raceway was designed

by RA-6, who is vice president of the CO-29 (ROAD). To say that what was created is a
masterpiéce i is an understatement. The raceway is a tremendous challenge: from the high-banked

_ comets; to.the big sweeper, to the slightly off-camber turns, to the 1,000 straight-a-way down
two deep ravines, this track will leave the driver breathless. Here’s what racers have to say about
this phenomenal track. After the completion of the raceway, RA-6 was quoted as saying: "There
is not another track like this in the whole country - it's unparalleled.“ "It's a world class CO-33
track," said CO-33 contender RA-8 of CO-28. It’s a mile long 24-tur track. Team owner and
CO-33 racer RA-7. "Everyone told me how great the track and facilities were, but it went beyond
__ my expectations, There are elevation changes and.in some areas spectators should be able to see
nearly the entire track. We're lucky to have a track like this as part of the series.“ As visitors
check out not only the races but also the Program. They will suit you up, give you a kart to drive
and. you will experience the ultimate thrill! Call # for more information. Address, City, State” ;

Per CPA CPA’s workpapers, ORG reported sales from the CO-27 of $ for 20XX and $ for

20XX. The balance sheet provided by ORG-to CPA, indicates capital improvements of $.

Subsequent additional capital improvements made since 20XX. Income generated from this

__. disregarded entity not used for charitable purposes. There is no reliarice that these sales figures
are accurate as no sales records provided or any break down in types of revenue generated by the

various activities within the amusement park. The bank deposits for the amusement park account.

do not match the reported income for 20XX. The bank deposits show $ and the reported sales are

$:

Based ¢ on Bankruptcy Court transcript of proceedings on September 21, 20XX, DIR-2 testified

that hot all monies from gate receipts are deposited in bank accounts, rather, cash is put in a safe

at one of its gas stations located at Address in County. Per transcript the bank statements had a

discrepancy i in excess of $ compared with gate receipts.

In 20XX, based on ORG profit and loss statement, CO-27 reported rental and sales revenue of $.
_ In 20XX, ORG spent $ on various forms of advertising the amusement park and racetrack.

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

7 Department of the Treasury - Internal Revenue Service Schedule No. or
Form 886A | Explanation of Items Exhibit
Name of Taxpayer . Year/ Period
. . Ended.
ORG
7 20XX12, 20XK12
& 20XX12

Additionally, based on 20XX detail of profit and loss statement, ORG paid $ in temporary help at
the CO-28, namely RA-9 who managed the racetrack. ORG expended in excess of $ dollars on
building, property improvements and equipment purchases mainly during 20XX and 20XX.

In 20XX, ORG formed CO-7 a State Corporation, to hold title to property at Address, City, State.

Based on information provided by ORG on March 31, 20XX in Bankruptcy Court it showed _
ownership in asset located at Address, City, State, known as CO-27. The property is given a-

_ value by ORG of $ a secured claim of $. CO-7 collects rent through a lease agreement and uses
proceeds to reduce outstanding debt on property. CO-27 is not listed as a debtor entity: but the

operating entity of racetrack and amusement park.

On j uly 27, 20XX as s part of Bankruptcy proceedings, proposed finding of facts and conclusions
of CO-38 of CO-34, CO-35 CO-36. and CO-37 included the testimony of RA-10, employed by

CO-39, expert for the Lenders. RA-10 testified that ORG and related entities provided sales
figures relating to the operation of the amusement park ¢ and racetrack. The following figures were

provided:

20XX - $
20XX - $
20KX - $

On j une. 13, 20XX, ORG organized a subsidiary, CO-40, to be a holding company for. additional
‘investment properties. To date, this entity is not active and holds no assets. The entity v was - .

administratively dissolved on November 11, 20XX.

In July. 20XX, ORG organized four additional entities; CO-10 to be the operating c company: for.
the-station at Address; CO-12 — to be the operating company for the gift and fudge store; CO-13 _
to be. the holding company for additional investment ptoperties purchased in the County area; and.
CO-14 — which was intended to handle the construction and remodeling projects for ORG’s

various projects.

On October 17, 20XX, ORG approved a purchase by CO-13 of commercial lot for $ at Address
in County and a $ for a residence at Address. The lot will be used by the tenant at Address and is

an additional school investment. On November 20XX, CO-13 also purchased a small
commercial office building for investment purposes for $ at Address. This property is leased and

ORG reported rental income of $ for 20XX and $i in 20XX.

On January 30, 20XX, ORG purchased property at Address in County for $ with a mortgage at -
CO-41 of $, listing CO-13 as buyer using the EIN of ORG. Also on January 30, 20XX, ORG

purchased a vacant lot for $ at Address in County.

| Fonn 886-A (Revt-68) Department of the Treasuty - Internal Revenue Service’
. Page: -13-

Department of the Treasury - Internal Revenue Service Schedule No. or
Form 886A | Explanation of Items _ Exhibit
Name of Taxpayer . Year/Period
. . Ended
ORG .
20XX12, 20XX12
& 20XX12

On June 1, 20XX, ORG purchased an eight unit rental property for $ at Address in County with a
loan from CO-41 for $. ORG reported rental income received. from this property in the amount
of $:for 20XX and $ for 20XX. Property is not listed as owned by ORG or related entities per

bankruptcy summary schedules or any record of revenues are provided.

On July 30, 20XX, ORG purchase land/building for $ at Address in County with a mortgage
from-CO-41 of $$. Also on July 30, 20XX, ORG purchased a rental apartment building at
Address in County for $$ in a land contract with CO-42. ORG reported rental income received
from this property of $$ for 20XX.

On October 13, 20XX, ORG purchased a single-family residence for $$ at Address in County ir in
a land contract with CO-45. On October 30, 20XX, ORG closed on the purchase of vacant land
next to hotel (CO-43) for $2$ at Address in County i in a land contract with CO-44. co

On November 1, 20XX, ORG purchased a vacant land at Address in County for $ land contract
with CO-46.. On November 1, 20XX, ORG through CO-45 purchased land for $$ in a land
contract with CO-47 On November 1, 20XX, ORG through CO-45 purchased building on a land
contract from CO-46 for $$ at Address in County, rented to CO-48. In 20XX, ORG reported
rental income of $$ on the property that is debt financed. ORG on March 31, 20XX reported

commercial rental income on bankruptcy report of $$.for 20XX, $$ for 20XX.

On December 1, 20XX, ORG through CO-45 purchased a lake home for $ at Address in County
ona land contract with CO-44. During bankruptcy proceedings on September 21, 20XX, DIR-2,
stated that this property is used for overflow lodging in situations in which patrons would stay
long term at one of ORG hotels, such as big racing events. The last time per DIR-1, the property
was rented in 20XX for a large race in which they rent out multiple properties for overflow of
‘hotels. This property was not included in the Chapter 11Bankruptcy filing by ORG. and related

entities.

. GAS STATIONS

The Gas station and convenience store (“CO-49”) was purchased in July 20XX in County, State..
CO-49 at Address in County i is open to the public 24 hours and year round. ORG states that at
present time, the station is managed and run by volunteers. The gas station contains a ‘small
convenience store, CO-50 bus stop, and a CO-51 wire transmitter. Currently, ORG has two
additional gas stations in the County area located at Address, and Address. These gas stations are
operated under CO-10. Reported sales from CO-10, including CO-50, CO-51, Lottery and ATM
were $ for 20XX and $ for 20XX. Only one gas station was operational in 20XX and 20KX.

The information below was obtained from the website: website

Form 8 86-A (Rev.4-68) | . : Department of the Treasury - Intemal Revenue Service
Page: - 14-

Department of the Treasury - Internal Revenue Service Schedule No. or
Form 886A Explanation of Items Exhibit
Name of Taxpayer Year/Period
Ended
ORG
. ~ 20X12, 20XXK12
& 20XX12

“The CO-52 gas station offers a wide variety of services and is open 24 hours.
Not only that, they provide free coffee, soda, and cappuccino for the town's

_ residents. This is much appreciated by many customers, especially those from
low-income areas who often come in with change to make their purchases.”

“Take a look at these great services at our main location—
Gas -- Cigarettes -- Gourmet & Snack Foods —

Coffee -- Cappuccino -- Hot Chocolate -- Soda

Large Grocery Selection -- Popcorn
Specialty Foods such as Fudge and Caramels

Great lunch and snack items -- Nacho's, sandwiches, pizza, and more!
10 Ib. bags of ice for only ¢
Unique Gifts Ideas & Beanie Babies _

UPS ~ FED EX - DHL -- US Postal Service drop off location
We offer copy, print, fax services (there's no in town!).
Cco-51
Postage Stamps

Endless in-store discounts for senior citizens
Souvenirs of the Green Bay Packers and the County, State area!

Lottery
Shuttle Service -- inquire about rates and destinations”.

On December 4, 20XX, ORG organized CO-11, which it later registered to do business in the
‘State of State. The purpose of this entity was to hold ownership of a convenience store and gas
station the organization was planning to purchase in City, State for generation of revenue similar
to that of the station operating in County, State. On January 8, 20XX, ORG purchased the City,
gas station for $ located at Address and secured a loan through CO-53 for $. Per CPA records,
gas station was not operational until 20XX. Based on ORG profit and loss statement for period

ending December 31, 20XX, it recorded Bross. profit from this gas station of $.

• On December 30, 20XX, ORG, through CO-11 purchased a gas station with a sales price of $
  ‘with a mortgage of $ through Co- 54. The gas station is located at Address, City, State. It was
  operational i in 20XX. Based on ORG profit and loss statement for period ending December 31,

. 20XX, it recorded total income of $.

On February 15, 20XX, ORG through Co-11 purchased a gas station at Address, City State with
a sales price of $ and a CO-55 of $ with a mortgage through CO-56 for $ and CO- 53 for $ for a

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

E Department of the ‘Treasury - Internal Revenue Service Schedule No. or
Form 886A Explanation of Items Exhibit
Name of Taxpayer Year/Period
Ended
ORG
20XX12, 20XX12
. 8 20XX12 |

total of $ in. financing. ORG reported income of $ for gas station operations and $ in income
from CO-55 operations, Based on detail of profit and loss statement, CO-55 had temporary help

totaling $ from March through November of 20XX.

In 20XX, ORG through CO-11 purchased another gas station at Address, City State for $$. No
records provided by ORG to show date of purchase, financing, when operational or a profit and
loss statement. However, based on records secured, CO-57 had delivered fuel to CO-58 station
for $: {from June through September in which no records of sales of fuel reflected on

profit and loss statements secured from ORG for 20XX.

From 20XX through present, ORG operated as many as seven gas stations, three in the County,
State area and four in State. The State gas stations were located in the city of City, City, City and

CO-58. All operated in direct competition with for-profit gas stations. Four State gas stations
were operational in 20XX. There has been much litigation over the price ORG gas: stations were
charging customers in State and State. Suites were filed by competing gas stations and. regulatory

agencies in State and State. These gas stations generated in excess of $ dollars in revenue in
20XX for ORG. | .

An article i in the CQ-59 dated February 24, 20XX, states in part the following:
“The State Commerce Department on Thursday announced plans to fine a gas station
chain $ for repeatedly selling gas below the state's legal minimum price.

: The fine against CO-10 of State is twice as large as any imposed on a company since
' 20XX, when the state established a formula based on wholesale prices, fees and taxes to
.. determine a daily floor for gas prices. -
. . The price law was intended to prevent large oil companies from. driving smaller _
: competitors out of business, but some critics argue it fails to protect consumers.

According to the Commerce Department, the Midwest-owned stations in City, CO-58 and.
City sold gas below the minimum price on 293 days in 20XX. . . .

_RA-11, deputy commissioner of the department, called the violations “willful, } continuing,
and egregious and warrant a substantial penalty."

“Another article from the CO-1, dated March 3, 20XX contained the following:

“CO-10 of State has been ordered by the State Department of Commerce to pay a
$$ civil penalty for charging too little for gasoline at three stations in the state.

Form 886-A (Rev.4-68) . Department of the Treasury - Intemal Revenue Service

• ° Page: -16-

. Department of the Treasury - Intemal Revenue Service Schedule No. or
Form 886A Explanation of Items Exhibit
‘Name of Taxpayer - - | Year/Period
. Ended
ORG |
| | 20XX12, 20XX12
| 8¢ 20XK12-

The subsidiary of the ORG (ORG) was accused of violating the Unlawful.
Gasoline Sales Act, enacted in 20XX, which prohibits retailers in the state. from |

offering gasoline for sale at a price below cost.

“The record indicates 293 instances of below cost pricing and at least two failures
to respond to the Department’s requests for information,” stated a memorandum

from Department of Commerce deputy commissioner RA-11.

“Respondent’s violations are willful, continuing, and egtegious and warrant a

substantial penalty,” RA-11 wrote.
“The record indicates that respondent’s below-cost gasoline sales have
_. damaged competitors in City, and CO-58, causing the loss of as much as one
~ third of their monthly sales, RA-11 wrote. The record further indicates that
because Respondent’s prices were so much lower than other retailers could
~ legally charge, some customers concluded incorrectly that other retailers had

_ been overcharging for gasoline.”

ORG had an unfair competitive advantage in that it used its tax-exempt status, which enabled it

to charge lower gas prices to its customers. This article also shows a continued pattern of being

uncooperative using delay tactics, including failure to respond.to the Commerce Departments

• request for documents and failure to respond to subpoena which are a violation of State statutes.

CO-22

Advertisements found on various websites and brochures for:

“Stop by the CO-22 fora sample of their delicious, award-winning
fudge. Their fudge is shipped all over the world and is made right at ©
the store. This store is in a historic building that was once a one-room
schoolhouse. Take some time to browse their unique gift and home
décor collections. There is something in this store for everyone!”

. “We have gifts ranging from wall paintings.to Native American souvenirs,

• knick knacks and figurines made from pewter, china, crystal, and more.

~ They range in theme from sports to nature, from teacher's gifts to special

_ occasions and holidays. We also have many stuffed animals and hard-to-
find Ty beanie babies. Other merchandise includes kitchen decor and

blankets or wall hangings designed for family members.”

Address. -Address, City, State
Phone:

ww

Form 886-A (Rev.4-68) : Departinent of the Treasury- Internal Revenue Service
an . _ Page: -17-

E ; , Department of the Treasury - Internal Revenue Service Schedule No. or
orm 886A : Explanation of Items Exhibit
Name of Taxpayer Year/Period
. Ended
ORG
20XX12, 20XXK12
& 20XX12

Website: -website
Hours of Operation: Sunday-Saturday: 9AM-9PM

ORG in 20XX had also sold fudge and other items at various, festivals throughout State and

State and.through internet sales. Based on financial records for CO-22 expenses, they expended —

$.in 20XX and $ in 20XX on various forms of advertising such as radio, TV, internetand
billboards. CO-22 per CPA adjusted trial balance reported revenue of $ for 20XX and $ for

20XX. Lastly, during tour of facilities, ORG CEO DIR-2 stated they did not maintain inventory —

records.

THE CO-60:

On December 31, 20XX, ORG, through CO-45 purchased inventory, building and land for $
through a land contract with RA-12. Location of property is at Address in County. ORG reported
$ in gross profit per profit & loss statement for period ending December 31, 20XX. Per _

Bankruptcy summary provided by ORG they reported income of $ and rental income of $ in
20XX and for 20XX, gross revenue of $ and rental income of $. No record of inventory being

maintained by ORG.

“The CO-60i is.a downtown department store in County open from 9 am
to 9.pm, seven days a week. In addition to its unique and wide variety of
merchandise, CO-60 has the distinction of being the only downtown store
with these hours. This store attracts customers from State and. beyond, t to
browse and purchase the unique items found nowhere else.” .

Website states the following: website

__- “Hi! Welcome to CO-60. My name is RA-13. I work in the back receiving
area. In a minute, I am going to give you a guided tour of our store, but
first let me tell you about the store. We are located at Address in County,

• State. The building is three store fronts melded together, to give a little
  over 8,000 square feet on the main floor. It is a little-bit-of-everything .
  store, from antique hat pins to bathroom décor. Many visitors are
  impressed by the great gift selection, especially those looking for the

“CO-60 - This store has a wide variety of gift and home décor items with a —
special focus on State. Thus, wildlife and nature are a wonderful theme
throughout this store. If you only have time for one stop, this is a store that
comes highly recommended. CO-60 also provides unique gifs, gift

Form 386-A (Rev 68) a _ Department of the Treasury - Internal Revenue Service
. Page:- -18-

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

ORG . |
20XX12, 20XK12
& 20XX12

baskets, and gift ideas, as well as country style and CO-60 home and cabin
decor, wall decor, bathroom decor, and more. Antiques and consignments
are also a large part of the merchandise. It’s hard to walk away without —

making a purchase.”

Address: Address, City, State

Phone: _
Hours of Operation: Sunday-Saturday: 9am-9pm

PURCHASE AND OPERATION OF HOTELS

On October 30, 20XX, ORG purchased a 46-unit hotel (CO-61) for $ at Address in County. The
method of purchase was a land contract with ~ _ \The terms of contract is %
compounded monthly with initial loan amount of $$ to be paid monthly at a rate of $$ over 57
months starting on December 1, 20XX and ending August 1, 20XX. Total payments per .

| amortization schedule will be $$ with total interest of $.

This CO-61 is a franchise operation, which advertised to the public similar to other hotels. This
property/business was purchased through CO-25 a disregarded entity wholly owned by ORG. Per
CPA’s adjusted trial balance for 20XX, ORG reported income for two-month period of $$. Per
-DIR-2, ORG volunteer members operate the hotel. The hotel is open 365 days a year. In 20XX,
ORG reported $$ in rental and use revenue per profit and loss statement. Additionally, in 20XX,
ORG paid CO-62 $$ to operate the hotel per detail of profit and loss statement that contradicts

the statement that all volunteers operate the hotel:

Currently, based on internet websites and newspaper articles, ORG also owns another hotel in |
County, The CO-43, currently named CO-43, located at Address. Based on CPA, CPAs
workpapers, ORG purchased the hotel for $$ on April 16, 20XX with a down payment of $$.

In 20XX, ORG reported gross rents of $ and sales of $ for total : revenue of $. Per profit and loss
statement provided by ORG, they paid CO-62 $. In the memo section of the detail, the payments
were characterized as commissions, payroll.advance, and advance. for insurance. Many of the —

Payments made via a cashier check.

| An excerpt from internet states that the “Restaurant has the best steaks in the Midwest, attracting
diners from State, State, City, and the City. If you've never had 100% pure Black Angus USDA
Prime beef, don't miss out on the dining experience of a lifetime. Their secret recipe meatloaf and
mashed potatoes will have your mouth watering for more.” The hotel also includes a bar and
indoor swimming pool. Information on both hotels can be located on many internet search sites
for hotels. These two hotels are competing with other for-profit hotels within County, such as

Form 886-A (Rev.4-68) . Department of the Treasury - Intemal Revenue Service
Page: -19-

— Department of the Treasury - Internal Revenue Service Schedule No. or
Form 8864 Explanation of Items Exhibit :
Name of Taxpayer Year/Perio.

*P » Ended .
ORG
20XKX12, 20KXK12

& 20XX12

CO-63,,CO-64 and CO-65. The CO-43 (CO-43) and CO-61 of County advertise similar room
rates and amenities as other hotels in the area. Over the past few years the hotels have been

embroiled in suites including unpaid real estate and room taxes, operating hotel and restaurant
and selling alcohol without the necessary permits.

The. table below shows the extent of ORG and related entity purchases of land, buildings and
businesses during a six year period.

Vacant

Purchase {| Purchase/ Property Description Business | Rental.
Date | Book Cost/ | Address building
. Real Estate or Land.
Records : .
i Address ORG Office —
County, State \Founder
. owned property -
House =
7/28/20XX Address Farm House - Xx
. . Town, State | =
11/3/20XX - | Address | | Land X
‘Town, State _ *
TIBROXX : | Address Warehouse Xx
— | Town, State -
T2/i8/20X Address — | CO-25 X
X° | County, State’ =
Total | . -
Purchase | Purchase/ - ‘| Property Description Business | Rental | Vacant —
| Date. Book Cost/ | Address building
7 Real Estate or Land
Records a
6/15/20XX Address Vacant x
12/28/20X Address Vacant xX
Xx . . Restaurant
| 12/28/20K Address Vacant — x
x
12/28/20X: Address Vacant Building X
xX future plan -.
2 High-end gift &

Form 886-A (Reve

Department: of the Treasury - Intemal Revenué Service

Page: -20-

Form 886A

Department of the Treasury - Intemal Revenue Service

Schedule No. or

Explanation of Items Exhibit
Name of Taxpayer Year/Period
Ended
ORG
20XX12, 20X X12
& 20XX12
| house wares *
20XX . Address -
Total i
3/8/20XX |$ 20XX Total Bldg Remodeled 20XKX
(planned athletic Total
oo club per *
3/8/20XX: Address Restaurant X
WHXX/20XK Address Gas Station X
7/3 1/20XX Address Building — x
a Remodeled
| (News Center —
7 | plan) not finished |- a
Unknown | Unknown | Address | Vacant Lot XK.
Total $.
20XX |
Purchase | Purchase/ | Property Description Business } Rental. | Vacant
Date __ Book Cost/ | Address - | building
| Real Estate or Land
1731/20XX | | Address Land Contract xX
ae County, State | planned fabric
store per RA-14*
= Int. rate % oo
|2/28/20KX Address -Vacant Lot X:
8/21/20KX Address — {| CQ-25 restaurant xX
nn County, State | — triple net lease
Restaurant closed
| August 25, 20XX
(Lease terminated)
| 4/23/20XX Address - House being Xx
Town, State Renovated
6/1/20XX Address, CO-66 /store Xx
. | County, State {| Land Contract
| RA-15
Interest rate
= %
6/2/20XX Address CO-12 . »,«
Land Contract -_-

Form 886-A (Revs)

Department of the Treasury - Intemal Revenue Service

Page: -21-

vey R Department of the Treasury - Internal Revenue Service Schedule No. or
Form 886A Explanation of Items Exhibit |
Name of Taxpayer Year/Period
. Ended
ORG
20XX12, 20XX12
& 20XX12
10/17/20X Address Vacant Lot
a >. County, State
| 10/17/20X | Address Run-down House
—6/25/20KX Address, Rental Property . x
oo, County, State | Purchase of lease
/ - $included in
oo ; purchase price | -
Purchase | Purchase/ Property Description Business | Rental | Vacant
{Date ——'| Book Cost/ | Address | building
: Real Estate or Land
Records
Total — .
20XX_si. =
1/6/20XX Address Gas Station ‘
_ Operational
‘| 20XX
(Currently. .
et . nonoperational) _
| 1/30/20KX Address Plan to rent x
. County, State | property per RA-
_ 14*
| 1/30/20XX Address ‘| Paved Empty Lot X
foo County, State
6/1/20XX Address, Eight Unit Xx
oe, County, State | Condominium -
. Property 6/1/XX
7/30/20XX Address Land/Building
oe County, State
7130/20KX Address Eight Unit Apt. X~.
County, State | Building — Land oo
Je Contract CO-42 8/1/XX
7/30/20XX Address Eight Unit Apt. X
SS -| Building Land
| Contract CO-42 .
7/30/20KX Address Property X
10/13/20K Address | Single Family xX
xX County, State | Residence — Land

: Form ‘886-A (Rev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -22-

Department of the Treasury - Intemal Revenue Service

Schedule No. or

Form 886A Explanation of Items Exhibit
Name of Taxpayer Year/Period
Ended
ORG .
20XX12, 20XX12
& 20XX12
Contract CO-45
Bank loan Int.
Rate %
10/13/20X Address, Vacant Land — x
xX | County, State | Land contract
with CO-44
cane Interest rate % en i
Purchase | Purchase/ | Property Description | Business | Rental | Vacant .
Date Book Cost/ | Address ‘building
| Real Estate . or Land >
.| Records .
10/30/20X . Address CO-61 — Hotel - xX X.
X . Land Contract
Interest rate fo | 11/1/XX
11/1/20KX Address Land — Land x
County, State | contract CO-34 ,
_ Interest rate.
11/1/20XX Address: Commercial x
County, State | Building - CO-48
Land Contract 11/1/X
Int. rate % xX
11/1/20KX | Vacant Lot Land Contract — Xx
on . CO-67
ae Int. rate a
11/1/20XX | Address Home Land xX
County, State { Contract with
CO-44
a Interest rate %
-12/30/20K Address Gas Station xX
LX - Operational
- 20XX
Total
20XX. .
20XX Address Gas Station xX
Operational
20XX

Form 886-A (Reve |

Department of the Treasury - Internal Revenue Service

Page: -23-

Department of the Treasury - Internal Revenue Service - | Schedule No. or
Form 886A Explanation of Items | Exhibit
Name of Taxpayer | | Year/Period
_ | Ended
ORG .
. 20XX12, 20XX12
& 20XX1i2 -
Purchase | Purchase/ | Property Description Business | Rental | Vacant
Date — ——‘| Book Cost/| Address . . building
| Real Estate: or Land
2/15/20XX | Purchase of | Address, City | Gas Station/CO- xX
. Property . 55
$ .
CO-55 Operational
| 20XX
2/28/20XX Address Duplex 4
Apartment
Contract for .
en 7 Deed -RA-17__ |
| 4/16/20XX | $$ Address Hotel—CO-43 | X x
County, State | (CO-43 Hotel) |
Land Contract —
. . CO-68
2/17/20XX | Address Two Buildings
. | on (ware house) |
3/23/20XX Address Gas Station 4
3/23/20XX "| Address: Gas Station X
5/2/20XX Address - Building/Land
| 5/28/20KX Address Land Contract —
oe CO-69
-| Purchaser — CO-
Purchase | Purchase/ ‘|| Property Description Business | Rental | Vacant |
-| Date’ Book Cost/ | Address . building
' | Real Estate | | or Land
7/16/20XX | '$ Address Building/Land X
— (CO-70 ):
Total’; | $
20XX

Total 20XX — 20XX total purchases of business, residential property and Land i in the

amount of $ based on known information, some properties no records on purchase price
-| or value was available. The list does not include properties purchased after 20XX or

| improvements to property.

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

Department of the Treasury - Internal Revenue Service Schedule No. or
Form 886A __ Explanation of Items Exhibit
Name of Taxpayer Year/Period
. Ended
ORG . .
. 20XX12, 20XX12
&20XX12 ..

• Information based on tour of facilities on 8/21/20XX and newspaper article dated October 11,
  | 20XX from CO-1.

BANKRUPT CY — PROCEEDINGS CHAPTER 11

• On March 16, 20KX, ORG and six of i its affiliated entities filed petitions for relief under Title i

of the United States Bankruptcy Code. The affiliates are:
CO-7

CO-15

CO-10

CO-11 .

CO-13

¢O-9

DIR-2 has stated that she has been associated with the above entities since 2 20XX and i is familiar
with operations, business affairs, and books and records. The above entities are corporations
and/or limited liability companies incorporated in the State of State and with a principal place of

vyvvvve

7 business at Address, County, State.

_ Ina sworn Affidavit of DIR-2 i in support of Chapter 11 Petitions and First Day Orders included
the following paragraphs: eo

• “The debtors are in the business of property acquisition and management, sales of
• ‘gasoline and petroleum products, and funding for charitable activities.”

“ORG, hereinafter (“ORG”) was incorporated in 19XX. Its mission was to bring -
the American system of education to the people of Country and to build a school
for the gifted and talented in the Midwest, ideally State. With that vision in mind,
in 20XX, I was elected Chief Executive Officer. Beginning in 20XX, Debtor ~
ORG began acquiring a number of businesses. My role with the company was to
oversee the business operations of the company. As more businesses and
properties were acquired, for liability, tax, and financing purposes, we set up a
number of wholly owned subsidiaries including the following debtor companies:

CO-7, CO-15, CO-10, CO-11, CO-13, and CO-9.” —

‘Due to Debtors’ dynamic approach to business and Debtors’ diverse business
holdings, in the early years Debtors’ businesses boomed and flourished. Since

Form 886-A (Rev.4-68) | a Department of the Treasury - Internal Revenue Service
7 . Page: -25-

Ferm & Department of the Treasury - Intemal Revenue Service Schedule No. or
Form 886A Explanation of Items {Exhibit
Name of Taxpayer | Year/Period
. Ended
ORG
20XX12, 20XX12
& 20XX12

then, the debtors have experienced a material degradation of its operations
resulting from intentional business interference, organized negative publicity, and
the general economic downturn in the United States. Then in October 20XX,
Debtors were approached by an investor from Canada who was going to lend
Debtors $. As part of the deal, Debtors had to pay a significant advance fee.
Debtors paid said fee on October 28, 20XX. Unfortunately, it turned out to be
worse than a scam and Debtors lost the advance fee. This incident started possibly

the worst publicity imaginable which obviously has affected our businesses and
_ our loan relationships.”

“Given their current financial situation, the Debtors concluded that it was in the
best interest of their creditors and vendors to seek relief under Chapter 11 of the

United States Bankruptcy Code.”

Based on news article the Canadian who proposed serving as a promoter for the ORG owned
CO-28 and promised ORG a $ loan in exchange for an upfront fee of $. This is the fee DIR-2

indicated was paid on October 28, 20XX.

• The following excerpts were taken from the transcript of Proceedings before the Honorable RA-
  18 United States Bankruptcy Judge on September 21, 20XX. These responses to questions were.

‘given under oath by! DIR-2, CEO of ORG.

“By the Court: Q. Let me ask DIR-1 if] just for a moment. The operating reports that have been
filed in the case and I’m looking specifically at the most recent reports file for July show losses
for virtually each of the operations. And by losses, I’m talking about earnings losses. What is the
situation with respect to the debtors’ operations if you could describe the various businesses. and
‘what your business operations are at those — in those businesses.” (page 21 — 22) So ,

• “Kind of complicating the fact is that a number of the -- all of the real-estate
  -holding entities are in bankruptcy, but the operating ¢ entities are not in bankruptcy
  for the most part. The only Operating entity that is in bankruptcy i is Midwest of.

County.” (page 22)

.“And I think one thing that-may — one thing I would like to clarify f from last week,
Midwest of County is not the operating entity for the State Stations. Was not the
operating entity for the CO-58 location. That is-solely the operating entity for the

_ three gas stations in County.” (page 22)

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
, . Page: -26-

• "Department of the Treasury - Intemal Revenue Service Schedule No. or
  Form 886A Explanation of Items _ Exhibit

Name of Taxpayer . . . Year/Period

. . Ended

ORG | 7
| | 20XX12, 20XX12
8 20XX12 _

“USANO at this time, the sole asset is the racetrack........” “With regards to Co-
26, that is the real estate holding entity for the two hotels. Both of the operating

entities are non-debtor entities. (page 22 & 23)

“With regards to CO-10 of State, the — at this time, we have one station operating
in State which is paying rent to CO-10 of State and CO-10 of State isin tur
paying two of the lenders. The CO-58 Station of course is not operating. And the
other one operated for a short period of time and really is in a position that I mean,

‘could be opened any day again.” “City, State” (page 23)

~“CO-10 of County is solely an operating entity for the three gas stations. ” (page
23 & 24) .
Cross examination of ORG CEO DIR-2 by RA-19 — representing City of County, County
Municipal Utilities and County of County. Below are some of the Q & A of the cross .
examination.

Q. ........ You said that you, I guess the corporation or corporations own approximately 50 pieces

“of real estate?
_A. Fifty-five, I believe.

Q. Okay and are those all listed in your schedules?
A. The ones owed by debtor entities are listed.

Q. What type of real estate do the nondebtors own?
A. Some single family residential land, that’s about it.

Q. Are members of the group, the residents of those properties?
A. No.

Q. Which entity is a 501(c)(3)?
A. ORG isa 501(c)(3).

Q. Does it file a 501(c)(3) tax return each year?
. A. It has. We have not filed the current returns. We’re in the selection process for finding ar an

accountant right now r but it will.

Q. When i is the last time ORG filed a 501(0)3) return?
A. 20XX.. .

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

ae . Department of the Treasury Intemal Revenue Service Schedule No. Or
Form 886A Explanation of Items Exhibit
Name of Taxpayer —_ | | Year/Period
Ended
ORG
20XX12, 20XX12
& 20XX12

Q
A.
Q
A

Q.
A.

Q
A.

(PO PD PO

That means you haven’t filed if I understand it 20XX, 20XX, 20XX, or 20XX?
Right We—-. | .

Is that. correct?’
That’s correct. There is other circumstances, but yes.

Are any of the other entities 501(c)(3) organizations?
They. are not, but they are wholly owned, single member entities so they : file a consolidated —

with the exception of a couple entities, they file a consolidated return with ORG.

. Do you know whether non 501(c)(3) organizations may file a consolidated return with a

501(c)(3) organization?
I know that’s how the accounting firm has filed thém for the last decade.

When you had an accountant was an audit « ever done of the — of ORG?

.. We’ve been in an audit for a couple of years.

By audit you’re talking about the IRS?

Right.

Pm: talking about did the company ever do an audited financial statement? ©
We never had to.

But according to our reading of this, if you look in May, the weekly earnings were$.
. And you’ll find that support is the.first page in here, but yet your bank statement for — that.

_ ends in the month of May has $ in it. Can you explain to us what happened to the .
difference between the money that came in at the gate and the money in the bank account?

A.

Q.
A.

Q
A.

9

The cash is in the safe.

In what safe?

The drop safe on the property,

Okay, so in May if, in fact, $ came in, the balance between g, that the balance is
sitting in cash ina safe?

Yes.

Okay. And: then for J une, the records show that there were $ at the gate. Does that
sound right to you?

Department of the Treasury - Intemal Revenue Service

Fon B6-Ac (Rev.4-68) .
. age: ~28-

Form 886 Department of the Treasury Internal Revenue Service Schedule No. or

om A Explanation of Items Exhibit
Name.of Taxpayer _ Year/Period

tt ; Ended

ORG
; : 20XX12, 20X12
& 20XK12
A. Yes.

Q. And the bank account only went up by $. So is the difference also sitting in cash in a

safe?
A. Right. The only thing that was deposited in the account was credit cards which of course

automatically go to the account and checks. We don’t generally take much for checks so.

Q. If you look at the — I think it was in our pleadings actually, our review of the materials shows
_ that $ was not in the bank account as opposed to what was brought in at the gate. So do

you believe that there is approximately $ of cash at least in the safe?
A. Yes.

Q. Doy you have a ledger for this safe for the contents of it?
AS No, just the daily tickets are dropped in the safe and we just left them there.

DIR-2 goes on to explain that the safe is located at a gas station at Address in County i in which it
is open 24 hours a day with no guard or security. .

. DIR-2 also explains how the cash is handled at the amusement park, in that people working at
park, reports the cash and counts it and puts the cash in safe. She and DIR-S the general manager
have access to the safe. DIR-1 goes en to explain that there is no reason to deposit the cash in the.

bank because they don’t earn interest on checking account at bank.

After the Court conducted an evidentiary hearing on the Show Cause Order on September 21,
20XX, Judge RA-18, considered the facts and on September 22, 20XX, dismissed the stay order »
on the Chapter 11 bankruptcy of ORG and related entities. ORG had over six months to develop
a business plan, and did not hire an advisor to develop a business plan until August 18, 20XX |
and only when ORG was seeking the first extension of exclusivity was about to expire and a

request for further extension was pending.

During this period ORG and related entities did not respond to a party interested in purchasing
valuable real property, which was vacant, and therefore a financial drain rather than an income

producing asset while ORG continually had operational losses on the amusement park.
The Court dismissed the case under chapter 11 (emphasis supplied) for cause, which includes:

1. substantial or continuing loss to or diminution of the estate and the
   absence of a reasonable likelihood of rehabilitation;

2. gross mismanagement of the estate; .

3. failure... to file tax returns due after the date of the order for relief:

ack

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

Department of the Treasury - Internal Revere Service Schedule: No. or
Form 886A Explanation of Items | Exhibit
Name of Taxpayer . Year/Period
. Ended
ORG -
, ; 20XX12, 20X12 -
& 20XX12:

ORG on October 2, 20XX appealed the order of dismissal of stay order. ORG was granted a .
motion by the bankruptcy court to extend the exclusive right to file a Plan or Plans of —
Reorganization until January 14, 20XX, and that the period to solicit votes for the Plan or Plans

of Reorganization shall be March 12, 20XX.

On May 24, 20XX , the Bankruptcy Court in the District of State affirmed the Bankruptcy

Court’s September 22, 20XX Order of Dismissal.
“The court finds that dismissal was not an abuse of discretion and was appropriate

for the reasons stated i in the Bankruptcy Court’s Order of Dismissal. ”

“The Bankruptey Court properly found gross mismanagement warranting
termination of the automatic stay and dismissal of the case upon, among other
things: 1) the debtors’ failure to consider the purchase offer for the property
located in CO-58, State; 2) the debtors’ failure to file tax returns both before and —
after filing of their petition; and 3) the debtors’ failure to report ‘and account for ©
nearly $ lin cash that they were holding in a gas station safe. The court finds
that the appellants’ assertions that the Bankruptcy Court committed legal error are

without merit.”

REAL ESTATE TAXES

Basedo: on, 1 ORG records secured for 20XX, it was determined based on real estate documents the
following properties listed as owned by Founder and Founder-1 in which the taxes were > paid by

ORG.

Owner of Proparty 7 | Parcel# — Date Amount of | Assessed -
; _. Payable | Tax - | Value
FOUNDER & Founder-1 . 1/3 1/20XX
Founder@ 1/3 1/20KX
FOUNDER & Founder-1 | 1/31/20XX
FOUNDER & Founder-1 1/31/20XX |
FOUNDER & Founder-1 1/3 1/20XX .

FOUNDER & Founder-1 _ 1/31/20XX
FOUNDER & Founder-1 — 1/31/20XX
FOUNDER & Founder-1 1/31/20XX
FOUNDER & Founder-1 1/31/20XX
FOUNDER & Founder-1 1/31/20XX |

Totals __

Form 886-A (Rev.t-68) , . Department of the Treasury - Tateral Revenue Service
Lene | Page: -30-

i TG, Department of the Treasury - Intemal Revenue Service Schedule No. or

“om 886A Explanation of Items _| Exhibit

Name of Taxpayer Year/Period

. Ended
ORG
. 20XX12, 20XX12 |
& 20XX12

@ Founder i is AKA as Founder
Real Estate taxes of $ paid by ORG on property listed as owned by President Founder and his -

| spouse based on State Property Tax Bill statements.

FAILURE TO PROVIDE REQUESTED RECORDS TO REVENUE AGENT DURIN' G

EXAMINATION. ;

ORG has failed‘on numerous-occasions over a period of time to provide requested records i in
order for IRS to determine if ORG continues to qualify for tax-exempt status as a 501(c)(3) ©

-school, whether ORG is subject to unrelated trade or business tax, inurement to insiders and
whether an excess benefit transaction has occurred. The following are examples of records -

requested by Revenue Agent.

On: October 25, 20XX,, Revenue Agent submitted Information Document Request (IDR) #9
‘Request the following information with no response from taxpayer:

Previously in IDR # 3 the Revenue Agent requested all bank statements for 20XX.

During the review of the bank statements it was noted that page 2 of August statement is missing
for CQ-27 account number. .

| 1) Please provide a copy of missing page of bank statement
During review of cancelled checks provided by ORG it was noted that some checks were not:

provided for the ORG account number #. It was also noted that several checks did not have a
check number.

. 2) Please provide copies of front and back of all checks or originals for January 20XX -
July 20XX for account number #

Please provide the following for the list of checks below:
' (Account Number #)
a) Purpose of check
--b) Invoice or receipt, etc. to show purpose of check
c) How expenditure is related to ORG exempt purpose

. Date J anuary 28, 20XX Check — no number $
_ February 28, 20XX .. Check — no number — §

March 5, 20XX. Debt Memo . ae:

$

April 28, 20XX Check — no number

Form 886-A (Rev.4-68) Department of the Treasury Intemal Revenue Service
oo ; Page: -31- —

Department of the Treasury - Internal Revenue Service Schedule No. or
-_ Form 886A _Explanation of Items Exhibit
Name of Taxpayer ~ | Year/Period
. . Ended
“ORG a
a : 20XX12, 20XX12
& 20XX12
May 28, 20XX Debt Memo $
~ June 3, 20XX Check — no number. $
July 1, 20XX Check # $
Please provide the following information for the deposits listed below:
(Accourit Number #)
a) Who are the funds received from?

b) Which business activity are these funds derived from? ~
c) Provide documentation to show source of funds, i.e. loan proceeds -

loan documents

Date - January 24,20XX Deposit - $
February 27, 20XX Deposit $
May 15,20XX Deposit $
June 3, 20XX Deposit $
June 27, 20XX Deposit $
August 25, 20XX Deposit $

On October 25, 20XX, Revenue Agent submitted IDR #10 request the following information —
with no > response from taxpayer: .

During review of cancelled checks provided by ORG it was noted that some checks were not
provided for the ORG account number #. It was also noted that all checks did not have a check

number.

1) Please provide copies of front and back of all checks or originals f for J. anuary 20XX -
December 20XX for account number #

Please provide the following for the list of checks below:

(Account Number #)
a) Purpose of check .
b) Invoice or receipt, etc. to show purpose of check and who
was ultimately paid funds
c) How expenditure i is related to ORG exempt purpose
Date - February 28, 20XX . Check-nonumber $ |
_ February 28, 20XX. Check-nonumber $ |
| “June 30, 20XX Debit Memo _§$

-. October 23, 20XX Telephone transfer $$- Which

account are these funds transferred to?
Form 886-A (Rev.4-68) _ Department of the Treasury - Internal Revenue Service

Page: -32-

• , Department of the Treasury - Internal Revenue Service Schedule No.-or
  Form 886A Explanation of Items Exhibit
  Name of Taxpayer Year/Period
  Ended
  ORG
  20XX12, 20XX12
  & 20XX12

Please provide the following information for the deposits listed below:

(Account Number #)

a) Who are the funds received from?

b) Which business activity are these funds derived from? —

c) Provide documentation to show source of funds, i.e. loan proceeds —

-loan documents

. Date - February 28, 20XX Deposit $
June 9, 20XX Deposit $
October 20, 20XX Deposit $

On October 25, 20XX,. Revenue Agent submitted IDR #11 requesting specific information
regarding the reported revenue of $ on line 11 of Form 990 for period ending December 31,
20XX. No records were provided to establish whether this activity was related to ORG exempt
purpose or whether the number was accurate. Per interview with DIR-2, CEO, the construction
volunteers who are members of ORG conducted services. No records provided to establish
whether amount: reported was a gross figure or net. Additionally, no evidence of what type of |
work was conducted, since invoices or receipts were not provided. No documentation was
provided as to what forms-of payment, i.e. cash or check, if check, whom the check was written
too. ORG failed to provide required documentation in order for Revenue Agent to make a
determination as to whether activity is subject to unrelated business income tax, whether related

to exempt purpose, whether truly conducted by volunteers or whether any private
benefit/inurement conveyed to individuals.

On October 25, 20XX, Revenue Agent submitted IDR #12, regarding journal. entry #30, showed

a property asset (demolition/trash removal) of $$. Taxpayer failed to reply to information —

requested, such as supporting documentation, including i invoices, closing documents, i.e.

On October 27, 20XX, Revenue Agent submitted IDR #13 requesting the following information

with no response from taxpayer:

. During my tour of your County properties, with DIR-2 and RA-20 we had discussed the
providing of a sample of daily receipts for the CO-10 gas station located in- County. —_

Please provide daily sales records for the following dates for CO-10 (CO-10 gas station of

County): .

January 4, 20XX |

February 14, 20XX

April 15, 20XX
May 30, 20XX .

Form 886-A (Rev.4-68) | Department of the Treasury - Internal Revenue Service
ce ; a Page: -33-

{ Deparment of the Treasury - Internal Revenue Service | Schedule No. or
Form 886A | Explanation of Items Exhibit _
Name of Taxpayer Year/Period
. Ended
-ORG. .
| 20XX12, 20XX12
& 20KX12
~ June 21, 20XX

July 2, 20XX
August 8, 20XX

October 6, 20XX
November 28, 20XX
December 11, 20XX

CO-73

ORG purcliased/leased three vehicles in 20XX-20XX with a purchase ptice over $$ that per DIR-
_ 2 were rarely used. Vehicle-one, purchased on September 27, 20XX, a 20XX Vehicle for $,
Vehicle-two, purchased on December 12, 20XX for $. Vehicle-three, purchased on March 21,
20XX, a 20XX Vehicle for $$. Mileage at the time of sale per response to Information Document

Request (IDR) #7 was 162, 162-and 148 miles respectively. No mileage log was maintained to
track personal-and business miles. In 20XX, three individuals were allowed.to use vehicles, DIR-

2, CEO, RA-14, Treasurer, and RA-21. Taxpayer gave no apparent reason for purchasing
"vehicles stored in a warehouse with no apparent exempt purpose. On October 25, 20XX,
Revenue Agent submitted IDR #12 to ask for explanation on the purpose of purchasing CO-73
' for no apparent charitable purpose. ORG provided no response or explanation to questions asked |

by Revenue Agent.
On August 13, 20XX Revenue Agent mailed IDR # 15 requesting the following:

DIR-1, in your response to Information Document Request (DR) #7, you indicate: that ORG had

three vehicles in 20XX.
a) Under response 1c you indicate that all vehicles were sold in 20XX, is this correct? .

b) It appears that I did not receive all page(s) for the vehicle purchased in September of

20XX.
Could you please provide that information.

~ Based on Motor Vehicle Registration re records and Retail Installment Sale Contract the following
information was found: ,

20XX Vehicle which was purchased by ORG for $ and with five year finance charges for. a total
of $$.. Based on records ORG had: previously provided it was purchased on March. 21, 20XX

from CO-74.

Based o on research of Motor Vehicle Registrations this vehicle is currently registered to RA-22,
who was listed as a board member on the Form 990 filed for periods ending December 31, 20XX

& 20XX by ORG.

Form 386-A (anaes Department of the Treasury - Internal Revenue Service a

• Page: -34-

F 886A Department of the Treasury - Internal Revenue Service Schedule No. or
orn 886 Explanation of Items Exhibit
Name of Taxpayer Year/Period
Ended
ORG
| , | 20XX12, 20XX12
& 20XX12

The original registration date was December 8, 20XX.

Please provide the following information for this vehicle
a) Date vehicle was sold, leased or gifted to RA-22
b) Purchase price and finance agreements between ORG and. RA-22

c) Title transfer information
d) If purchased please provide evidence of payment by RA-22; i.e., a cancelled
check, money order and evidence that amount was deposited into an ORG bank account

Based on n Motor vehicle registration records and Retail Installment Sale Contract the following
information was found:

20XX Vehicle which was purchased by ORG on November 12, 20XX for a total of $ incding
finance charges. .

Based on research of Motor Vehicle Registrations this vehicle is ; currently registered to RA-23,
who was listed as a volunteer based on previous documents provided byORG.

Please provide the following information for this vehicle
a) Date vehicle was sold, leased or gifted to RA-23
b) Purchase price and finance agreements between ORG and RA-23

c) Title transfer information
_ d) Relationship between RA-23 and board member RA-24.
e) If purchased please provide evidence of payment by RA-23; i.e., a cancelled
: check, money order and evidence that amount was deposited into an ORG bank account

and date it was deposited into account.

ORG provided no response or explanation to questions asked by Revenue Agent.
On August 13, 20XX, Revenue Agent mailed IDR #16 requesting the following information with
no response from taxpayer:

Review of CPA workpapers for period ending December 31, 20XX noted information provided
by ORG CEO, DIR-2, regarding loans from individuals and board members. .

N ame ‘Loan Amount . Board / Officer
DIR-3 $ Board Member »
DIR-6 — — $.
DIR-7. og .
CEO / Board Member

DR2 © §$

Form 886-A (Rev.4-68) Department of the Treasury: Internal R Revenue Service
. ee : Page: -35-

18 “Department of the Treasury - Internal Revenue Service Schedule No. or
Form 886A Explanation of Items Exhibit. —
; Year/Penoc
Name of Taxpayer Year/
ORG
ee | : 20XX12, 20XX12
& 20XX12

DIR-8° $ Board Member
DIR-9 $
DIR-4 ae Board Member
DIR-10 ~ $ .
DIR-11 . $ - Board Member
DIR-12 $$
Total . S|

Please provide the following information and documents for each loan listed above:
1) Date funds loaned to ORG .
2). Which ORG account and date deposited

3) Term of loan (written agreement)
4):Type of assets transferred such as cash, noncash property

5) Relationship of individual listed above to ORG’
6) Did ORG fully or partially repay any of the loans listed above? If yes, provide detail such as

repayment schedule
7) Are all the loans listed above unsecured? If no, , provide description of collateral

On August 13, 20XX, Revenue Agent mailed IDR #17 to ORG requesting the following
information with no response. from taxpayer:
Please provide a copy of the following documents filed with the State Department of Financial
. Institutions:

1) Articles of Termination for ORG

: -2) Change of Registered Agent for ORG

3) Certificate of Conversion for ORG _
4) Copy of Annual Report and Certificate of status as a Foreign Non-Stock Corporation

Please provide a copy of the following documents filed with the State of State - Department of '
State: . .

1) Atticles ofi “incorporation as a non-profit or religious organization -
2) Name and address of registered agent

Please provide a copy of the following documents for all Limited Liability Company(s) (LLC) i in .
7 which ORG has a % or more ownership in Company.

*Please include organizing documents filed with the State of State, State and State

Form 886-A (Rev.4-68) Department o of the Tress Internal Revenue Service
. _ Page: -36-.

Department of the Treasury - Intemal Revenue Service Schedule No. or
Form 886A Explanation of Items | Exhibit
Name of Taxpayer Year/Period
Ended
ORG
20XX12, 20XX12
&20XX12_
1) Articles and bylaws
2) Articles of Termination _
3) List of Officers for all LLC

Revenue Agent secured some documents requested from the State of State and State since ORG
failed to comply with IRS request for records.

On August 13, 20XX, Revenue Agent mailed to ORG IDR #20 requesting the following

information with no response from taxpayer:
Tax - Exempt status concerns:

In your application 1023 filed with the IRS you stated your purpose as follows: |

The purpose of the ORG is to provide the American system of education to Country, a land that.
has been dorninated by the Country method for centuries. We feel that our American system i is
the best in the world. We propose to introduce and influence the youth of Country to our way of -

education.. secvccsesceseses

Additionally, on your application 1023, stated that your main funding source would be

contributions, which is clearly not the case.
Per minutes provided by ORG, on March 24, 20XX, the board of directors of ORG held a special

ineeting to determine the merits of amending the non-profit mission statement of the corporation
to include the mission to build a science and technology school on the corporation’s property in
~ County. The board approved amending mission statement, however, no records were provided to

the IRS indicating this change in focus / operations formally transpired.

Based on news articles and interviews, ORG has long discussed plans for the development of a
school in the Town of Town, yet it has not progressed further than discussion and preliminary

planning. It has been nearly ten years since the proposed change in mission, and no evidence of
any progress toward the completion of a school in the Town of Town. Per Form(s) 990 for 19XX

through 20XX, no funds have been set aside to build this school. No evidence is available for — .
20XX - 20XX since no Form 990's have been filed by ORG. Almost all business operational

‘proceeds are used to purchase additional property, i.e. land, rental property and businesses.
operated by ORG through wholly owned disregarded limited liability companies, and very little

goes toward the school in Country its primary tax-exempt purpose.

Since 20XX, ORG's primary activities have been the purchase of land, buildings and going
businesses of which substantial revenues have been derived from these operations. ORG has

established limited liability company’s to run the businesses.

Form 886-A (Rev.468) ; Department of the Treasury - Internal Revenue Service
— . 7 “Page: -37-

Department of the Treasury - Internal Revenue Service Schedule No. or
Form 886A Explanation of Items Exhibit 7
‘Namie of Taxpayer Year/Period .
“pay . _ | Ended.
ORG
20XX12, 20XX12
8 20XX12

Review of the Form(s) 990 showed the following financial support for the stated primary purpose
of operating a school in Country. During a six-year period ORG reported gross revenue of $ per
Form(s) 990, but only contributed $ toward the operations of the school i in County per part I of

Form 990.

Year Total Revenue Per Form 990 School Support Part [II Form 990

19XX . $
20KXX §$

20XX™ $

Total Ԥ$

Although ORG’s, wholly owned disregarded LLCs might be disregarded as separate entities, they
are not disregarded as an activity of its sole owner. Rather, the disregarded LLCs’ activities are

treated as the activities of the owner. Therefore, if the disregarded entity’s activities are contrary
to the tax-exempt purposes of its sole owner, they may adversely affect the owner’s tax-exempt

Status or create tax liability for the owner.

The commercial operations of these LLCs are substantial in nature and none of the activities are
related to ORG's exempt purpose. There.is no record that these LLCs:are being treatedas Stir
separate entities for tax purposes, nor any evidence that they are tax-exempt stand alone entities.

At various times, ORG has purchased for investment vacant buildings it intends to renovate and.

• rent or operate. Many of these buildings sit idle after three or more. years. from the purchase date.
  These buildings continue to be assessed real estate taxes, accrue interest and mortgage payments
  continue to be due, which is a substantial drain on assets that could be used for charitable
  purposes. Additionally, while these. buildings remain unfinished, ORG continues to purchase
  ‘ additional property for commercial purposes incurring additional debt and jeopardizing its

charitable assets.

1) Please provide the following information
_.a) Please provide evidence that you have secured the proper zoning and | permits to construct

_ aschool in the Town of Town

; b) Architectural drawings / floor plans
ec) Evidence that funds have been set-aside to fund construction of school

_ d) Evidence as to when this school will be constructed:
e) Copy of proposal submitted to zoning committee

Form 886-A (Rev.4-68) . _ Department of the Treasury - Intemal Revenue Service
. Page: -38-

Department of the Treasury - Internal Revenue Service Schedule No. or
Form 886A __ Explanation of Items Exhibit
Name of Taxpayer Year/Period
Ended
ORG | :
20XX12, 20XX12
8 20XK12

~-£) Curriculum
' g) Evidence of how you arrived ’at the number of faculty and students

• h) Who owns land were proposed school is to be built
  i) Estimate cost of tuition, room and board per student
  j) Explain if any scholarships will be offered and is yes, explain criteria

2) Please explain in detail how the operations of the businesses are in furtherance of your tax-
exempt purpose.
3) Please explain why ORG used its funds to purchase vacant buildings of which are in various

forms of reconstruction; which have remained vacant for over three years incurring real estate _
taxes accrue interest and debt payments with no return on investment? Co

4) Please explain how ORG is safe guarding its assets and not putting them at risk...

On August 13, 20XX, Revenue Agent mailed to ORG IDR #21 requesting the following
information and again ORG failed to provided records to the IRS. .

= A) Please provide all Board and Committee meetings for 20XX

B) Please provide a current list of all properties purchased by ORG and subsidiaries they control
. and include the following information: a

=) Date Purchased
2) Cost

3): Property address
4) Description, i.e., land, building, business, such as hotel, gas station —

| 5)’ Use/purpose - going business, leased space, rental. property, vacant land, building
_ 6) Date of operation - beginning date placed in use/service and ending date or currently.

• operational
  7) If property sold - sales price, date of sale and buyer

ORG failed to provide materially important records to the Revenue Agent in order for the IRS to
make a complete and proper determination of tax-exempt status and whether ORG is subject to
unrelated trade or business tax and whether any excess benefit transactions occurred with
insiders. As evidenced by failure to provide requested documents, ORG has not been cooperative

_ with the IRS.

Law

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
BO Page: -39-

F Department of the Treasury - Internal Revenue Service Schedule No. or
orm §86/. Explanation of Items Exhibit
Name of Taxpayer Year/Period
Ended
ORG
20XX12, 20XX12
& 20XX12

IRC § 501(c)(3) exempts from Federal income tax: 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 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, no substantial part of the activities of which is carrying on propaganda,

or otherwise attempting to influence legislation and which does not participate in, or intervene in
(including the publishing or distributing of statements), any political campaign on behalf of. any |

candidate for public office.

Educational purposes include instruction or training of the individual for the purpose of
improving or developing his capabilities and instruction of the public on useful and beneficial

subjects. Treas. Reg. § 1.501(c)(3)-1(d)(3).

. Regulation section 1. .501(¢)(3)-1(a)( 1) provides that, i in order to be exempt as an organization
described in section 501(c)(3), an organization must be both organized and operated exclusively
for one or more of the purposes specified in such section. If an organization fails to meet either

the organizational test or the operational test, it is not exempt.

Regulation section 1.501(c)(3)-1(c)(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 beso regarded if more than an insubstantial part ofi its activities is notin

furtherance of an exempt purpose.

Section 6001 of. the Code provides that every person liable for any tax imposed by the Code, or
‘for. the, collection thereof, shall keep adequate records as the Secretary of the Treasury or his

delegate may from time to time prescribe.

Section 6033(a)(1) of the Code provides, except as provided in section 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.

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

Form 886-A (Rev.4-68) ‘Department of the Treasury - Internal Revenue Service -
. . Page: -40-

F Department of the Treasury - Internal Revenue Service Schedule No. or
om 886A Explanation of Items Exhibit
Name of Taxpayer Year/Period
_ my Ended

• ORG .
  20XX12, 20XX12
  & 20XX12

such tax. Such organization shall also keep such books and records as are required to substantiate
_ the information required by section 6033.

Section 1.6001- 1(e) of the regulations states that the books or records required by this section

shall be kept at all times available for inspection by authorized internal revenue officers or
employees, and shall be retained as long as the contents thereof may be material in the

• administration of any internal revenue law.

_In accordance with the above cited provisions of the Internal Revenue Code and Treasury
Regulations under sections 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.

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 section 6033 of the Code and the regulations which implement it,
may result in the termination of the exempt status of an organization previously held exempt, on
the grounds that the organization has not established that it is observing the conditions required

for the continuation of exempt status.

In Better Business Bureau v. United States, 326 U.S. 279 9 (1945), the United States Supreme
Court held that regardless of the number of truly exempt purposes, the presence of a single
substantial non-exempt purpose will preclude exemption under section 501(c)(3). The Court
found that the trade association had an “underlying commercial motive” that distinguished its
educational program from that carried out by a university. See also American Campaign
Academy y. Commissioner, 92 T.C. 1053, 1065-66 (1989) (when an organization operates for
the benefit of private interests, such as designated individuals, the creator or his family, or

persons directly or indirectly controlled by such private interests, the organization by definition
does not operate exclusively for exempt purposes); Old Dominion Box Co.., Inc. y. United States,
477 F2d_ 340 (4th Cir. 1973) (operating for the benefit of private parties who are not members of .
a charitable class constitutes a substantial nonexempt purpose).

Under Reg. 301.7701-3(b)(1), an eligible entity (which includes most LLCs) with a single owner
is disregarded unless it elects otherwise. An LLC wholly owned by a single exempt organization.
(exempt under IRC 501(a)) may be disregarded as an entity separate from its owner.

. Forn 886-A (Rev.4-68) Department of the Treasury - Intemal Revenue Service.
. . Page: -41-

Department of the Treasury- Intemal Revenue Service Schedule No. or
Form 886A Explanation of Items Exhibit
Name of Taxpayer : Year/Period
Co Ended
ORG ; .
| | 20XX12, 20XX12
& 20XX12

Announcement 99-102, 19XX-43 LR.B. 545. When an entity is disregarded as separate from its
owner its operations are treated as a branch of division of the owner. Therefore, an owner that is
exempt from taxation under section 501(a) of the Internal Revenue Code must include, as its
own, information pertaining to the finances and operations of a disregarded entity in its annual
information return. There are two ways for the eligible entity to elect separate entity treatment:
by filing for separate entity treatment on Form 8832 (Reg. 301.7701-3(c)(1)(i)), or by claiming
exemption as an entity separate from its owner, as by filing a separate Form 1023 or Form 990
(Reg. 301.7701-3(c)(1)(v)(A)). In the latter case, the eligible entity is treated as having made the

election for the period it claims exemption or is determined to be exempt.

In American Institute for Economic Research v. United States, 302 F. 2d 934 (Ct. Cl. 1962), the
Court considered the status of an organization that provided analyses of securities and industries
and of the economic climate in general. The organization sold subscriptions to various.
periodicals and services providing advice for purchases of individual securities. Although the
court noted that education is a broad:concept, and assumed for the sake of argument that the.
organization had an educational purpose, it held that the organization had a significant non-
exempt commercial purpose that was not incidental to the educational purpose and" was not

entitled to be regarded as exempt.

In B.S.W.. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), the court found that a corporation
formed:to. provide consulting services was not exempt under section 501(c)(3) because its
activities constituted the conduct of a trade or business that is ordinarily carried on by:

commercial. ventures organized for profit. Its primary purpose was not charitable, educational,
nor scientific, but-rather commercial. The court found that the corporation had completely failed

to demonstrate that its services were not in competition with commercial businesses. The court
found that the organization’s financing did not resemble that of the typical 501(c)(3).
organization. It had not solicited, nor had it received, voluntary contributions from the public.

• Its only source of income was from fees from services, and those fees were set high enough to
  recoup all projected costs, and to produce a profit. Moreover, it did not appear that the -
  corporation ever planned to charge a fee less than “cost.” And finally, the corporation had: failed
  to limit its clientele to organizations .that were section 501(c)(3) exempt organizations. ._—

In Living Faith, Inc. v. Commissioner, 950 F.2d 365 (7th Cir. 1991), the Court of Appeals upheld
a Tax Court decision, CCH T.C. Memo. 19XX-484, that an organization operating restaurants

and health food stores in a manner consistent with the doctrines of the Seventh Day Adventist
Church does not qualify under IRC 501(c)(3). The court found substantial evidence to support a
conclusion that the organization’s activities furthered a substantial nonexempt purpose,
including;

-a.. The organization’s operations were presumptively commercial;

Form. 886-A (rev.+-68) | Department of the Treasury - Internal Revenue Service
oe Page: -42-

’ Department of the Treasury - Intemal Revenue Service Schedule No. or
Form B86A Explanation of Items_ Exhibit |
Name of Taxpayer | Year/Period —
Ended
ORG
20XX12, 20XX12
, & 20XX12

b. The organization competed directly with other restaurants and food stores;
The organization used profit-making pricing formulas common in the retail food

. business;
d. The organization engaged in a substantial amount of advertising;

e. The organization’s hours of operation were competitive with other commercial

enterprises; and
f.. The organization lacked plans to solicit donations.

In United Missionary Aviation, Inc. v. Commissioner, T.C.M. (CCH) 1990-566, the Tax Court

held an organization formed to support religious missionary work not exempt under IRC
501(c)(3) because it had a substantial nonexempt commercial purpose. The court focused on how
the organization carried on its primary activity, a tape and equipment supply division. Although:
no one factor was determinative, the court considered the following particularly relevant:

a. The supply division was operated in the same manner as any profitable commercial

_ enterprise; - ae
‘b. The majority of equipment and tapes sold by the organization were also sold by
’ commercial firms; a
". ¢, The organization priced its merchandise approximately 20 percent above cost, which
produced net profit margin of approximately eight percent; —
d. The organization had substantial annual and accumulated profits.

In Airlie Foundation v. Commissioner, 283 F. Supp. 2d 58 (D.D.C.. 2003) |, the court relied on
the “commerciality” doctrine in applying the operational test. Because of the commercial
manner in which an organization conducted its activities, courts have. found that an organization
was operated for a non-exempt commercial purpose, rather than for a tax-exempt purpose.
“Among the major factors courts have considered in assessing commerciality are competition
with for profit commercial entities; extent and degree of below cost services provided; pricing
policies; and reasonableness of financial reserves. Additional factors include, inter alia, whether
the organization uses commercial promotional methods (e.g: advertising) and the extent to which
the organization receives charitable donations.”

In Easter House v, United States, 846 F. 2d 78 (Fed. Cir. 1988), afPg 12 Cl.Ct. 476 (1987), the
court found an organization that operated an adoption agency was not exempt under section
501(c)(3) of the Code because a substantial purpose of the adoption activity was a non-exempt
commercial purpose. It found that the adoption services did not further the exempt purposes of
providing educational and charitable services to the unwed mothers and children. Rather, the
services for unwed mothers and children were merely provided “incident” to the organization’s
adoption service business. Moreover, the court found that “adoption services do not in and of

themselves constitute an exempt purpose.”

Form 886-A (Rev.468) Department of the Treasury - Internal Revenue Service
. ~ Page: -43-

F Department of the ‘Treasury - Intemal Revenue Service Schedule No. or
orm 886A Explanation of Items | Exhibit
Name of Taxpayer Year/Period
Ended
ORG | | | |
20XX12, 20XX12
~ & 20XX1i2

The court also agreed with the IRS’ determination that the agency operated in a manner not
“distinguishable from a commercial adoption agency” because it lacked the following traditional
attributes of a charity. First, the agency’s operation made substantial profits, and there was a
substantial accumulation of capital surplus in comparison to direct expenditures by the agency
for charitable and educational purposes. Second, the agency’s operation was funded completely
by substantial fixed fees charged adoptive parents. It relied entirely on those fees and sought no
funds from federal, state or local sources, nor engaged in fund raising programs, nor did it solicit
contributions. In fact, the agency had no plans, nor intention to seek contributions, government

grants or engage in fund raising relative to its operations. Third, the fixed fees the agency
charged adoptive parents were not subject to downward adjustment to meet potential adoptive

parerits’ income or ability to pay. Fourth, the agency’s single life member had near total control
of the operations of the agency. And fifth, the agency functioned by means of a paid staff of 15

to 20 persons, with‘no volunteer help.

In addition to furthering a substantial non-exempt purpose, the court found that a portion of the
organization’s net earnings inured to the benefit of a private shareholder or individual as defined
by sections 1.501(c)(3)-1(c)(2) and 1.501(a)-1(c) of the regulations. The organization provided a a
soutce of credit (i.e. loans) to companies in which the private shareholder was either employed

~ by or owned. The fact that the loans were made showed that the companies controlled by the

private shareholder had a “source of loan credit” in the organization.

TAXPAYER’S POSITION:
"At the time of issuance eof the report, 1 no © position statement had been provided by the —
organization.

GOVERNMENT'S POSITION:

The IRC § 501(c)(3) tax exempt status of The ORG (the “Organization”) should be revoked - .
because it is not operated exclusively for tax exempt purposes. oe

Operational Test.

The Organization provides funds to a school in Country, which it has done since its inception... .
‘However, over the past several years the Organization has been operating mainly as a
commercial enterprise running and leasing space for businesses that are unrelated to its stated
charitable purpose. CEO, DIR-2, during bankruptcy proceedings indicated that ORG and .
affiliates are in the business of property acquisition and management, sales of gasoline and

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
. Page: -44-

For A Department of the Treasury - Tntemal Revenue Service Schedule No. or
orm 886 Explanation of Items _ Exhibit
Name of Taxpayer Year/Period
Ended
ORG .
20XX12, 20XX12
& 20XX12

petroleum products and the funding for charitable activities. Clearly, stating that there main
purpose is not charitable.

The Organization has indicated that the reason for the business operations and investments was
for the purpose of building a school in Town of Town near County, State. As evidenced by
newspaper article from the local newspaper, CO-1, stated that ORG discussed the school with
the Town of Town Zoning and Planning Committee in three separate meetings in 19XX. >
regarding zoning and ORG was denied rezoning of property. However, the main reason for _
denial was for lack of detailed plans of the proposed school and would probably only needa
conditional use permit rather than rezoning entire property. In ten plus years, ORG has never
brought forth another plan for the proposed school to the town board or set-aside any dedicated
funds for future construction of proposed school. Instead of working with Town of Town and
City of County, ORG has been an adversary, with frequent lawsuits filed by each.

Additionally, ORG had stated per board minutes in 20XX, they would amend their non-profit
mission statement to include a school in State. No records provided to IRS to expand and change
proposed purpose for being tax-exempt as evidence by checking box no on line 76 and.77 of
Form 990 for 20XX through 20XX for changes in activities or changes to organizing documents.
To date no affiliated school built in the United States since organization foundingin 19XX.
Lastly, Revenue Agent requested documents pertaining to the proposed school in the Town of
Town, through IDR request number twenty in which organization has not provided any
documentation. Another example of the organization not complying with the requirements
needed to retain its tax-exempt status. Section 1.6001-1(e) of the regulations states that the books.
or records required by this section shall be kept at all times available for inspection by authorized
internal revenue officers or employees, and shall be retained as long as the contents thereof may

be material in the administration of any internal revenue law.

Section 1 501(c)(3)-1(e)( 1) of the regulations provides that an organization will be regarded as
“operated exclusively” for one or more exempt purposes only if it engages primarily in activities
that accomplish one or more of such 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. The existence of a substantial nonexempt purpose, regardless
of the number or importance of exempt purposes, will cause failure of the operational test. The
facts demonstrate that the Organization has been conducting substantial commercial activities

that are not in furtherance of an exempt purpose.

SUBSTANTIAL NONEXEMPT PURPOSE

In Better Business Bureau of Washington D.C., Inc. v, United States, 326 US. 279 (1 945), the
Supreme Court held that the presence of a single non-exempt purposes, if substantial in nature,

Form 886-A (Rev.4-68) Department of the Treasuty - Internal Revenue Service
Page: -45-

; Department of the Treasury - Internal Revenue Service Schedule No. or
Form 886A | Explanation of Items Exhibit
Name of Taxpayer Year/Period
. Ended
ORG
. 20XX12, 20XX12
& 20KX12

will destroy the exemption regardless of the number or importance of truly exempt purposes.
The Court found that the trade association had an “underlying commercial motive” that _
distinguished its educational program from that carried out by a university.
Courts have stated that if a nonexempt purpose is not an expressed goal, it will look at the _
manner in which the organization's activities are conducted, inferring an end from the chosen
means. Factors to which the courts will look are the manner in which the organization conducts:
its activities, the commercial nature of such activities, and the existence and amount of annual or
cumulative profits. The existence of any of these factors supports a conclusion that an
organization was not operated exclusively for an exempt purpose. The courts have applied the
“operational test," which "focuses on the actual purposes the organization advances by means of
its activities, rather than on the organization's statement of purpose or the nature of its activities."
_ If the organization is engaged in an activity with a single substantial non-exempt purpose, the -

exemption is destroyed.

Although ORG’s, wholly owned disregarded LLCs might be disregarded as legal separate
entities, they are not disregarded as an activity of its sole owner. Rather, the disregarded LLCs’
activities are treated as the activities of the owner. Therefore, if the disregarded entity’s activities
are contrary to the tax-exempt purposes of its sole owner, they may adversely affect the owner’s
tax-exempt status or create tax liability for the owner. ORG has multiple active and inactive
LLCs and Controlled Corporations, which are set forth below. The list is-not all-inclusive but
only. known entities identified through various public records: . .
a _ Controlled Limited Liability Companies - Disregarded Entities

(1). . CO-8
(2) CO-9 — |
(3) CO-10
(4). CO-11
(5),. CO-12
(6). CO-13
(7) CO-14
(8) . CO-15
(9) CO-16
(10) CO-17
(11). CO-18
(12) .CO-19
(13) COQ-20

De Controlled Corporations
(1) _-CO-7
(2) CO-21

Department of the Treasury - Internal Revenue Service

Form 886-A (Rev.+68)
Page: -46-

QI - Department of the Treasury - Internal Revenue Service Schedule No. or
Form 886A Explanation of Items Exhibit _
Name of Taxpayer Year/Period
. Ended
ORG | |
20XX12, 20XX12
& 20XX12
(3) CO-22
(4) CO-23

(5). CO-24 .
These wholly owned LLCs carry out passive activities such as holding real property, act as

landlords, and actively conduct businesses earning substantial profits. Passive rental activities,
income, and expenses with debt on the buildings have been reported on the Form 990T for 20XX
and.20XX. The commercial operations of these LLCs are substantial in nature, such as gas
stations, hotels, commercial leases of property and other businesses. None of which are related to
_ the Organization’s exempt purpose. There is no record that these LLCs are being treated as
separate entities for tax purposes, nor any evidence that they are tax-exempt stand-alone entities.
DIR-2, during cross examination, testified in bankruptcy court that the other related entities are
wholly owned, sitigle member entities so they file a consolidated return with ORG withthe
exception of a couple of entities. DIR-1, also testified that ORG is the ¢ only entity tax-exempt

under 501(c)(3).

_ The LLC businesses operate under ORG’s employer identification number. Other aspects of
ORG operations are very similar to that of the organization discussed in the Easter House v. _
United States case, supra. In Easter House, the organization made substantial profits and
accumulated a substantial amount of capital surplus in comparison to direct expenditures for
charitable and educational purposes. Similarly, ORG reported gross income of $ and a net profit
-of'$ during the taxable year 20XX. It provided merely $ in financial support to the school in
_ Country. In 20XX, ORG reported gross income of $ and net income of $. It provided merely $ ~
in financial support to the school in Country. ORG reported combined gross income of $ on its —
Forms 990 filed for the tax years 19XX through 20XX and profit and loss statement for 20XX,
yet.reported expenditures of $ during this period toward its exempt purpose. The organization. -
acoumulated assets with a fair market value of $, per ORG consolidated balance sheet as of
December 31, 20XX. ‘The balance sheet showed total equity of $ and ‘mortgages of $. Most of
the assets expended on the purchase of new properties, businesses and improvements to existing.
properties unrelated to the organization’ s-exempt purpose of operating.a private foreign school. -

Although. the revenue generated by the Organization has substantially increased during this
seven-year period, funding for the school in Country has remained between $ and $ per year,
which is stated purpose of the Organization. The profit ORG has derived from these businesses
has not been used for charitable purposes but for the growth of its unrelated trade or business
operations. Very little of the charities operations are dependent on public contributions or
revenue generated from related activities. Based on inspection of the Organization’s financial
records, ORG is using its business earnings and assets to leverage the purchase of additional
pieces of property, expansion of businesses and rental properties. As an example, ORG expended

an additional $ in 20XX and $ in 20XX on upgrades to amusement park and the racetrack. These
figures clearly show the activities are not commensurate with the funds needed to sustain its tax-

Form 886-A (Rev.468) Department of the Treasury - Internal Revenue Service
on, . . Page:~é ~47-

Department of the Treasury - Intemal Revenue Service Schedule No. or
Form 886A Explanation of Items Exhibit
Name of Taxpayer . Year/Period -
Ended
ORG
| 20XX12, 20XX12
| | 8 20XX12 -

exempt mission. Many of these properties have been used as collateral in order to purchase

additional businesses arid properties, further risking the loss of ORG assets. .

In Airlie Foundation v. Commissioner, 283 F. Supp. 2d 58 (D.D.C.. 2603), . the court relied on

the “commerciality” doctrine in applying the operational test. Because of the-commercial —

manner in which an organization conducted its activities, courts have found that an organization
was operated fora non-exempt commercial purpose, rather than for a fax-exempt purpose.

“Among the major factors courts have considered in assessing commerciality are competition _

_ with for profit commercial entities; extent and degree of below cost services provided; pricing
policies; and reasonableness of financial reserves. Additional factors include, inter alia, whether
the organization uses commercial promotional methods (e.g. advertising).and the extent to which

the organization receives charitable donations.” ORG, through the operation of LLCs has been in
direct competition with for-profit entities of which have filled suit against them. ce

• In.20XX, ORG, through its wholly owned LLC CO-10 of State, operated gas stations in the
  cities of City, City, City and CO-58 in direct competition with other for-profit gas stations.
  _ These and the gas stations operating similarly in County generated in excess of $ dollars in .
  revenue in 20XX. The gas stations operated by ORG, advertised in similar matter as other gas _
  stations, through local.publications, internet and signage. ;

CO-11, was fined $$ in 20XX by the State Commerce Department for repeated violations of state —
law, which requires that.gasoline prices be set each day based on a formula that includes.
wholesale prices, fees and taxes to determine a daily floor for gas prices. Because ORG had the
competitive advantages of below-market labor and paid no income taxes, it was-able to price its
gas lower than for-profit competitors could legally charge. This caused for-profit competitors in
State. to lose as much as one third of their monthly sales. Congress did not intend for tax-exempt
entities to éstablish disregarded LLCs-to directly compete with for-profit business:ata So
competitive advantage. a . . |
Additionally, in 20XX, 20XX & 20XX, ORG operated a Fudge and Gift store through an LLC in
which it.was open hours similar to other gift stores, advertising in newspapers, brochures, radio .
_ and TV and a website to sell fudge all over the world. ORG expended $«~ ‘\in 20XX, $ in’
_ 20XX and $ in 20XX on various forms of advertising such as radio, TV, internet and billboards,
‘which: was the highest expenditure except for purchase of merchandise. CO-22 also enlisted ©
followers of Founder to sell fudge and gifts at festivals throughout State and State. No record of
sales provided, only cancelled checks paying for booth space. Again, because of incomplete
_ records.provided the validity of the sales figure is questionable since ORG has a history of not -
depositing all cash sales in its bank accounts as evidenced by the bankruptcy hearings. ~ .

• Currently, ORG, through wholly owned CO-9 operates two commercial hotels in County, one
  purchased in 20XX. The CO-61 isa franchised hotel, advertising and charging similar rates as

Form 886-A (Rev.4-68) oo Department of the Treasury - Internal Revenue Service
Page: -48-

EB wr Department of the Treasury - Internal Revenue Service Schedule No. or
orm 886A Explanation of Items Exhibit
Name of Taxpayer Year/ Period
. . Ended
ORG
20XX12, 20XX12
& 20XX12

other hotels in County area. Again, ORG is claiming volunteer labor exception to avoid being’
subject'to unrelated trade or business tax. However, in 20XX, based on profit and loss statement,
ORG paid-CO-62 $ clearly, they had paid management to operate hotel. oo

In 20XX, ORG purchased another hotel the CO-43, which is currently named the CO-43. Again
in 20XX, ORG paid:CO-62 $. In the memo section of the profit and loss statement detail, the
payments were characterized as commissions, payroll advance, and advance for.insurance. The
hiring of a management company will constitute paid labor for purposes of unrelated trade or .
business sirice the operation of a hotel is not in furtherance of its tax-exempt purpose of operating.

and funding a foreign school.

Clearly, all of these business endeavors are unrelated to ORG exempt purpose. ORGhas _
continually blamed bad publicity and ongoing lawsuits and disputes with the local government __
for their financial problems. Yet, as a 501(c)(3) public charity, ORG has not beén forthcoming
with information and has operated under a cloud of suspicion for a number years, which is
atypical of a public charity. .

At various times, ORG has purchased for investment vacant buildings it intends to renovate and
rent or operate.-Many of these buildings sit idle after four or more years from the purchase date.
These‘buildings continue to be assessed real estate taxes, accrue interest and mortgage payments
continue to be due, which is a substantial drain on assets that could be used for charitable:
purposes; During the bankruptcy proceedings it was disclosed that ORG had an opportunity to
sell the CO-58 property, anon-operational gas station, but refused to sell, even though ORG had
a willing buyer. Additionally, while these buildings remain unfinished, ORG continued.to. _-
purchase additional property for commercial purposes incurring additional debt. From 20XX.
through 20XX: based on various sources of information ORG purchased land, buildings and -
businesses in excess of $. \ million which does not include several million in renovations and
exparisions of said properties in which ORG incurred substantial debt and used existing -
properties as collateral.

Failure to Comply with IRC 6001 & 6033

Based on IRS records, ORG has not filed a Form 990 or 990T for tax period ending December
31, 20XXi . 20XX, 20XX, 20XX and 20XX. All five periods are past due. Internal Revenue
Code section 6033(a)(1) provides, except as provided in section 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 purposesof .
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. oe

Form 886-A (Rev.t-68) Department of the Treasury - Internal Revenue Service

Department of the Treasury - Internal Revenue Service Schedule No. or
Form 886A Explanation of Items Exhibit
Name of Taxpayer Year/ Period
Ended.
ORG .
. . 20XX12, 20XX12
&.20XX12

• IRS sent ORG a notice and demand letter on July 28, 20XX, requesting the filing of Form 990 &
  990-T for periods ending December 31, 20XX through 20XX, all of which were past due beyond
  any extensions. ORG stated it was in bankruptcy and needed additional 60 days to secure an
  accountant, however, most of the returns were past due prior to ORG filing Chapter 1 1 .
  Bankruptcy on March 16, 20XX. This is another example’of ORG delay and not cooperating
  with governmental agencies, which has been going on for several years. One of the reasons ORG .
  was denied Chapter 11 Bankruptcy reorganization was the failure to file tax returns prior and
  after filing bankruptcy as required by the Bankruptcy Court. ORG also failed to pay CPA firm ~
  CO-12 for return preparation work for 20XX & 20XX and were subsequently dropped from :
  representing ORG. SO
  ORG failed to ptovide information and documents for such items as whether construction ~
  services, was in fact conducted by volunteers, or if any part of proceeds inured to insiders.
  Additionally, ORG failed to provide documentation regarding a vehicle previously owned by
  ORG, which is now registered in the name of an officer of ORG. Further, Revenue Agent
  requested documentation on loans from officers to ORG. Organization failed to provide
  information on its complex organizational structure in order for the IRS to determine who
  conducted the activities and whether activities are subject to unrelated trade or business tax.
  Section 1.6001-1(e) states that the books or records required by this section shall be kept at all.
  times available for inspection by authorized internal revenue officers or employees, and shall be

retained as long as the-contents thereof may be material in the administration of any. internal
the determination of tax-

revenue law. All records requested by Revenue Agent were relevant to
exempt status, inurement and unrelated business income tax.
Further, Rev. Rul. 59-95, 1959-1 C.B.627 concems 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 statemenits. The
Service held that the failure or inability to file the required information return or otherwise to
comply with the provisions of section 6033 of the Code and the regulations which implement it,
may result in the termination of the exempt status of an organization previously held exempt, on
the grounds that the organization has not established that it is observing the conditions required
for the continuation of exempt status. ORG has filed materially incomplete Form 990 returns for
tax period-ending December 31, 20XX and 20XX, by failing to complete Part IX, disclosing the
operating of multiple LLCs as disregarded entities for tax purposes and failure to disclose a

change in operations as required by line 76 of Form 990.

In 20XX, it was discovered, based on property tax statements and cancelled checks, ORG paid
property taxes on property listed asownedby & Founder-1, which constitutes
inurement to an insider and prohibited by a tax-exempt organization recognized under 501(c)(3).

Department of the Treasury - Internal Revenue Service

Forin 886-A (Rev.4-68)
Page: -50- -

Department of the Treasury- Internal Revenue Service Schedule No. or
Form $864 | Explanation of Items - | Exhibit _
Name of Taxpayer . Year/Period
; Ended
ORG
os 20XX12, 20XX12
~& 20XXK12
ORG paid over$__\in real estate taxes on behalf of the President. No documentation

provided to show t that the parcels are owned by ORG.

CON CLUSION: :

Accordingly, the Organization’ s status as an organization described under section 501(c)(3)
should be revoked , effective January 1, 20XX, because it did not operate exclusively for exempt
purposes; it operated for the purpose of serving a private benefit rather than public interests, and .
& part of the net earnings inured to the benefit of a private shareholder or individual. Form 1120
U.S. Corporate Income Tax Return should be filed for tax years ending December 31, 20XX, © -
December 31, 20XX, December 31, 20XX, December 31, 20XX, December 31, 20XX,

December 31, 20XX and December 31, 20XX.
Returns should be sent to the following mailing address:

Employee
Internal Revenue Service

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service -
Page: -51-