Determination 1329018: IRS revokes arts organization’s exemption over gaming activity and missing returns

View official IRS release (PDF)

Plain-English summary

The IRS revoked an arts organization’s exemption under IRC § 501(c)(3), effective January 1 of the redacted year. The organization’s primary activity was operating gaming programs, including instant games and related event games, while it reported no exempt activity for the audited years and failed to file required Forms 990. The IRS concluded that the gaming activity was a substantial unrelated trade or business and that the organization did not satisfy the operational test. In an alternative analysis, the IRS determined that the gaming income was subject to unrelated business income tax under IRC § 511 and that shared expenses should be allocated by a reasonable method, including gross receipts for certain costs.

Ruling snapshot

• Question: Did the organization operate exclusively for exempt purposes, and, alternatively, how should its gaming income and shared expenses be treated?
• Outcome: Revocation, with Form 1120 filing required; the alternative analysis treated the gaming activity as unrelated business income.
• Key authorities: IRC §§ 501(a), 501(c)(3), 502, 511, 512, 513, 6001, 6033, 6104(c), 6652, 7428; Treas. Reg. §§ 1.501(c)(3)-1, 1.512(a)-1, 1.513-1, 1.513-5, 1.6001-1, 1.6033-2, 44.4421-1; Rev. Rul. 59-95; Rev. Rul. 61-170; Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945).

Full text (IRS public release)

GOVERNMENT ENTITIES

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TEGE EO Examinations Mail Stop 4920 DAL
1100 Commerce St.

Dallas, Texas 75242
TAX EXEMPT AND 501-03.00

DIVISION
Date: March 14, 2013

Release Number: 201329018
Release Date: 7/19/2013
LEGEND

ORG - Organization name

XX -— Date Address - address

Taxpayer Identification Number:
Person to Contact:

Employee Identification Number:
Employee Telephone Number:
(Phone)

(Fax)

ORG
ADDRESS

CERTIFIED MAIL — RETURN RECEIPT
Dear

This is a final adverse determination regarding your exempt status under section 501(c)(3) of the
Internal Revenue Code. Our favorable determination letter to you dated July 28, 20XX is hereby
revoked and you are no longer exempt under section 501(a) of the Code effective January 1, 20XX.

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

Organizations described in IRC 501(c)(3) and exempt under section 501(a) must be both organized
and operated exclusively for exempt purposes. You have failed to establish that you are operated
exclusively for exempt purposes and that no part of your net earnings inures to the benefit of
private shareholders or individuals. Treas. Reg. 1.501(c)(3)-1(a)(1). You failed to respond to
repeated reasonable requests to allow the Internal Revenue Service to examine your records
regarding your receipts, expenditures, or activities and have failed to file information returns for
2010 and 2011, as required by I.R.C. 6001, 6033(a)(1) and Rev. Rul. 59-95, 1959-1 C.B. 627.

Further, your primary activity and purpose during 20XX and subsequent years appears to consist
of the operation of bingo games, which in and of themselves, do not further an exempt purpose
and comprise more than an insubstantial amount of your activities. Your bingo receipts arose
primarily in the operation of instant bingo games, which comprises an unrelated trade or
business. An organization is not operated exclusively for exempt purposes if it is operated
primarily for the purpose of carrying on an unrelated trade of business as defined in I.R.C. 513.
Treas. Reg. 1.501(c)(3)-1(e).

Contributions to your organization are no longer deductible under IRC §170 after January 1, 20XX.

You are required to file income tax returns on Form 1120. These returns should be filed with the
appropriate Service Center for the tax year ending December 31, 20XX, and for all tax years
thereafter in accordance with the instructions of the return.

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

If you decide to contest this determination under the declaratory judgment provisions of section
7428 of the Code, a petition to the United States Tax Court, the United States Claims Court, or the
district court of the United States for the District of Columbia must be filed before the 91° Day
after the date this determination was mailed to you. Please contact the clerk of the appropriate
court for rules regarding filing petitions for declaratory judgments by referring to the enclosed
Publication 892. You may write to the United States Tax Court at the following address:

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

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

Sincerely,

Nanette M. Downing
Director, EO Examinations

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

Exempi Organizations: Examinations

55 N. Robinson MC 4900 OKC

Oklahoma City, OK 73102

Date: September 7, 2012 Taxpayer Identification Number:
Form:
Tax Year(s) Ended:
ORG Person to Contact/ID Number:
ADDRESS Contact Numbers:
Telephone:
Fax:

Certified Mail — Return Receipt Requested
Dear

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

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

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.

If we do not hear from you within 30 days from the date of this letter, we will process your case
based on the recommendations shown in the report of examination. If you do not protest this
proposed determination within 30 days from the date of this letter, the IRS will consider it to be a
failure to exhaust your available administrative remedies. Section 7428(b)(2) of the Code
provides, in part: “A declaratory judgment or decree under this section shall not be issued in any
proceeding unless the Tax Court, the Claims Court, or the District Court of the United States for

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

the District of Columbia determines that the organization involved has exhausted its
administrative remedies within the Internal Revenue Service.” We will then issue a final
revocation letter. We will also notify the appropriate state officials of the revocation in
accordance with section 6104(c) of the Code.

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

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

Thank you for your cooperation.

Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

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

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 990 & EIN 20XX12
990-T 20XX12
20XX12
LEGEND
ORG - Organization name EIN — ein XX - Date State - state Motto - motto
Game - game Co-1 - 15* COMPANY
Issue 1

1. Whether ORG did operate exclusively for exempt purposes described within Internal

Revenue Code section 501(c)(3) for the years under exam.

a. Whether ORG did operate for the primary
purpose of carrying on a trade or business for profit.

b. Whether more than an insubstantial part of ORG activities are in furtherance
of a non-exempt purpose?

C. Whether ORG failed to file Form 990 Return of Organization Exempt From
Income Tax for tax years ending December 31, 20XX and December 31,
20XX.

Facts

ORG, hereinafter referred to as “ORG” was established as a nonprofit organization on August 15,
20XX. In a determination letter dated July 28, 20XX the Internal Revenue Service determined
“ORG” to be exempt from Federal income tax as an organization described in section 501(c)(3) of
the Internal Revenue Code.

In its Articles of Association, “ORG” states the entity is organized to perform activities within the
meaning of Internal Revenue Code Section 501(C)(3) and specifically this Entity is organized to
support the Fine Arts in the State of State and this United States.

Reported Financial Information on Form 990 20XX12

Part | Summary

Contributions $$
Part Ill Gaming.
(a) Motto (b) Pull (c) Other gaming | (d) Total gaming
tabs/Game/progressi (add col. (a)
ve Motto through col. (c))

Form 886-A (1-1994) Catalog Number 20810W Page 1 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 990 & EIN 20XX12
990-T 20XX12
20XX12
=|
Cc
$
® |1. Gross $ $
a Revenue

2. Cash $ $
   @ Prizes
   5 | 3. Noncash
   2 prizes
   WW | 4. Rent/facility $ $
   © costs
   5 | 5. Other direct $ $
   expenses
   O Yes % |0 Yes _ %
3. Volunteer
   labor X No X No
4. Direct expense summary. Add lines 2 through 5 in column (d)
5. Net gaming income summary. Combine line 1, column (d), and line 7 ($)

Non-Filing of Form 990 Return of Organization Exempt From Income Tax

“ORG” did noi file Form 990 Return of Organization Exempt From Income Tax for tax years ending
December. 31,,20XX or December 31, 20XX.

Non Exempt Activity Description

“ORG” did not perform any exempt activities for the years of audit. “ORG” did make contributions
for scholarships in the amount of $$ for tax year ending December 31, 20XX. The primary activity
“ORG” conducted for tax year ending December 31, 20XX was Game. Game is reported on Form
990-T as unrelated income subject to the Unrelated Business Income Tax. “ORG” did file Form
990-T Exempt Organization Business Income Tax Return for tax year ending December 31, 20XX
showing unrelated business income to be zero. “ORG” did not file Form 990-T Exempt
Organization Business Income Tax Return for tax years ending December 31, 20XX or December
31, 20XX. All MOTTO activity was conducted with paid workers.

Note: State of State requires MOTTO licensed holders to make contributions to charities in order
to maintain their license.

Gaming Activities — General

“ORG’ obtained from the State of State a license to conduct Motto and was a member of CO-1 for
the periods of examination.

Form 886-A (1-1994) Catalog Number 20810W Page 2 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

ot Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 990 & EIN 20XX12
990-T 20XX12
20XX12

The CO-1 is required to file quarterly reports with the State of State in order to maintain it’s license
to conduct Motto.

The CO-1 (hereinafter the CO-1), organized January 1, 20XX in the State of State and is made up
of this organization and four other exempt organizations. The trust agreement was amended
August 18, 20XX in order to admit one more exempt organization as an additional Beneficiary
(member) of the CO-1. The revenue and expenses for these six organizations are consolidated
and reported to the State of State on one quarterly Motto Report (filed by the CO-1). According to
the Units Amendment to Trust Agreement, the proceeds and expenses of the CO-1 are
apportioned to each Beneficiary according to the number of sessions each organization conducts
per quarter. The CO-1 distributes, at least quarterly, net income (or loss) among the Beneficiaries.
Copies of the CO-1 Agreement and Amendments are attached;

( See Exhibit 1 and Exhibit 2.)

CO-1 Trust filed State Motto Quarterly Reports for 20XX through 20XX. ( Attached are 20XX all
quarters; 20XX all quarters and 20XX 1*', 2"? and 3" quarter )

“ORG” did not report the gross receipts from “Game Motto”, which were allocated to the
organization by the CO-1, as unrelated business income on the 20XX; 20XX or 20XX Form 990-T
Exempt Organization Business Income Tax Return. “ORG” filed Form 990-T, Exempt
Organization Business Income Tax Return for tax year ending December 31, 20XX reporting
unrelated business income of zero. “ORG” did not file Form 990-T, Exempt Organization
Business Income Tax Return for tax years ending December 31, 20XX or December 31, 20XX.

A Game is a gambling ticket that is sold as a means to play a Game game. The object of the
ticket is to open the perforated windows on the back of the ticket and match the symbols inside the
ticket to the winning combinations on the front of the ticket. The winning Game ticket is turned in
for a monetary prize. Other names for it include Game, Game, Game, Game, Game, Game,
Game, or Game.

The game manager operates the game by selling tickets and distributing cash prizes. The tickets
may also be provided by mechanical Game dispensers. The Game tickets are multi-layered paper
tickets containing symbols hidden behind perforated tabs. Several different games may be offered
for sale at any one time; each may have different prices and payouts. Games are typically sold for
¢, ¢, $ and $ and have prizes as high as §.

Each ticket has two sides. One side lists the winning combinations of symbols, the cash payout for
each combination, the number of tickets that contain each winning combination, and the total
number of tickets in the game. This information is also posted in a large printed sheet called a
flare.

Form 886-A (1-1994) Catalog Number 20810W Page 3 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 990 & EIN 20XX12
990-T 20XX12
20XX12

The other side of the ticket contains the perforated tabs. After purchasing the ticket, the player
pulls the perforated tabs to reveal their winnings, if any. Cash prizes may be claimed immediately.

Motto Event Games (also called ball games, last number, dab games, or tag-along games)
bridge the gap between Motto and Games. Each individual Motto event ticket game has a number
of instant winning tickets and a series of "hold" tickets. The "hold" tickets in a Motto event

game are traditionally Motto numbers from B-1 to 0-75. These “hold” tickets are held for a larger
prize that is paid out after all the tickets are sold. Many styles are available.

Law
Issue 1

Section 501(a) of the Internal Revenue Code provides that an organization described in section
501(c)(3) is exempt from income tax.

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

Section 1.501(c)(3)-1(a)(1) of the regulations provides that, in order to be exempt as an
organization described in section 501(c)(3), 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.

Section 1.501(c)(3)-1(c)(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. Better
Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279 (1945).

Section 6001 of the Internal Revenue Code of 1986, as amended (the "Code"), provides that
every person liable for any tax imposed by title 26, or for the collection thereof, shall keep such
records, render such statements, make such returns and -comply with such rules and Regulations
as the Secretary or his delegate may from time to time prescribe. Whenever in the judgment of the
Secretary or his delegate it is necessary, he may require any person, by notice served upon such
person or by Regulations, to make such returns, render such statements, or keep such records, as
the Secretary or his delegate deems sufficient to show whether or not such person is liable for tax
under title 26.

Form 886-A (1-1994) Catalog Number 20810W Page _4 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 990 & EIN 20XX12
990-T 20XX12
20XX12

Section 1.6001-1(c) of the Regulations provides, in part, that organizations exempt from tax under
section 501(a) shall "keep such books and records as are required to substantiate the information
required by" section 6033.

Section 6033 provides, in general, that every organization exempt under section 501(a) shall file
an annual return, stating specifically the items or’ gross income, receipts, and disbursements, and
such other information for the purpose of carrying out the internal revenue laws as the Secretary
may by forms or Regulations prescribe, and shall 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 1.6033-2(a)(1) of the Regulations provides, in part, that, except for certain exceptions not
here applicable, every organization exempt from taxation under section 501(a) shall file an annual
information return specifically setting forth its items of gross income, gross receipts and
disbursemeriis, and such other information as may be prescribed in the instructions issued with
res'oect to the return.

Section 1.6033-2(1) (2) of the Regulations provides, in part, that every organization which is
exempt from tax, whether or not it is required to file an annual information return, shall submit such
additional information as may be required by the Internal Revenue Service for the purpose of
inquiring into its exempt status and administering the provisions of subchapter F, chapter 1 of
subtitle A of the Code, section 6033, and chapter 42 of subtitle Do f the Code.

Section 6652(c)(1) provides that in the case of a failure to file a return required under section 6033
on the date and in the manner prescribed therefore (determined with regard to any extension of
time for filing), unless it is shown that such failure is due to reasonable cause there shall he paid
(on notice and demand by the Secretary and in the same manner as tax) by the exempt
organization or trust failing so to file, $20 for each day during which such failure continues, but the
maximum aiiiount imposed hereunder on any organization for failure to file any one return shall
not exceed the lessor of $10,000 or five (5) percent of-the gross receipts of the organization for
the year. In the case of an organization having gross receipts exceeding $1,000,000 for any year,
there is a $100 per day penalty for failure to file with a maximum penalty of $50,000.

Section 6652(c)(2) provides that in the case of a failure to file returns required under section 6034
(relating to returns by certain trusts), or section 6043(b) (relating to terminations, etc. of exempt
organizations), on the date and in the manner prescribed therefor (determined with regard to any
extension of time for filing), unless it is shown that such failure is due to reasonable cause, there
shall be paid (on notice and demand by the Secretary and in the same manner as tax) by the
exempt organization or trust failing so to file, $10 for each day during which such failure continues,
but the total amount imposed hereunder on any organization for failure to file any return shall not
exceed $5,000. Written demand may be made on organizations failing to file and if returns are not

1.

Form 886-A (1-1994) Catalog Number 20810W Page 5 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 990 & EIN 20XX12
990-T 20XX12
20XX12

filed by the date specified, similar penalties may be imposed upon managers or such
organizations. 1.R.C. § 6652(c)(2)(B).

Section 6033, Treas. Reg. § 1.6001-1(c) and Treas. Reg. §1.6033-2(a) (1) and (i) (2) require any
organization exempt from tax under section 501(a), to supply the Service with such information as
is required by the revenue procedures and the instructions for Schedule A (Form 990) and to keep
such books and records as are necessary to substantiate such information.

IRC § 502. Feeder organizations

(a) General rule.—An organization operated for the primary purpose of carrying on a trade or
business for
profit shall not be exempt from taxation under section 501 on the ground that all of its profits
are
payable to one or more organizations exempt from taxation under section 501.

(b) Special rule-—For purposes of this section, the term “trade or business” shall not include—

(2) any trade or business in which substantially all the work in carrying on such trade or
business is performed for the organization without compensation, or

Revenue Ruling 61-170, 1961-2 CB 112 ruled that 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.

Revenue Ruling 70-4, 1970-1 CB 126 ruled that Section 501(c)(3) of the Code provides for the
exemption from Federal income tax of organizations organized and operated exclusively for
educational purposes. Section 1.501(c)(3)-1(c)(1) of the Income Tax Regulations provides that an
organization will be regarded as “operated exclusively” for one or more exempt purposes only if it
engages primarily in activities which accomplish one or more of such exempt purposes specified
in section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of
its activities is not in furtherance of an exempt purpose.

In Better Business Bureau of Washington D.C.., Inc. v. United States, 326 U.S. 279 (1945), the
Supreme Court held that the presence of a single non-exempt purpose, if substantial in nature, 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.

Taxpayer's Position

Form 886-A (41-1994) Catalog Number 20810W Page 6 publish.no.irs.gov Department of the Treasury-internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

ORG 990 & EIN 20XX12
990-T 20XX12
20XX12

Taxpayer has not stated a position at this time.
Government's Position:

It is the Government's position that “ORG” is not operated as an organization described in section
501(c)(3) of the Internal Revenue Code. “ORG’s” sole activity is MOTTO. MOTTO is not an
exempt activity. In Better Business Bureau of Washington D.C.., Inc. v. United States, 326 U.S.
279 (1945), the Supreme Court held that the presence of a single non-exempt purpose, if
substantial in nature, will destroy the exemption regardless of the number or importance of truly

exempt purposes. percent (939,063.67/1,405,134.49= % for tax year ending
December 31, 20XX) and percent (741,203.22/1,098,625.00= % for tax year ending
December 31, 20XX) and percent (657,047.41/927,92204= %) for tax year ending

December 31,-20XX) of “ORG’s” Gross Revenue is from Pull tabs/Game. Game is a trade or
business for profit and is an unrelated exempt activity. “ORG” did not receive any contribution or
grants for the years of exam. All MOTTO activity was conducted with paid workers. IRC 502
specifically provides that an organization operated for the primary purpose of carrying on a trade
or business for profit shall not be exempt under 501 on the ground that all of its profits are payable
to organizations which do qualify under IRC 501.

Note: Examination revealed no exempt activity what so ever in year of exam.

In addition, “ORG” did not file Form 990 Return of Organization Exempt From Income Tax for tax
years ending December 31, 20XX or December 31, 20XX as required under Internal Revenue
Code 6033.

Conclusion:

“ORG’ is not operating exclusively for purposes specified in IRC 501(C)(3) nor did “ORG" file
Form 990 Return of Organization Exempt From Income Tax for tax years ending December 31,
20XX or December 31, 20XX as required under Internal Revenue Code 6033. “ORG” is not
exempt from income tax under section 501, effective January 1, 20XX. In order to be treated as a
501(c)(3) the exempt organization must in operation perform an exempt activity related to it’s
exempt purpose. This organization during the years of exam performed no exempt activity and
fails the operation test. Therefore; we propose revocation.

If you agree to the proposed revocation, please sign form 6018, and mail back to the person listed
in the attached letter, within 30 days of receipt of this letter. If you do not agree to the proposed
revocation please refer to the letter and attached publications for the appeals process, or contact
the person listed in the letter.

If this proposed revocation is upheld, Form 1120 U.S. Corporation Income Tax Return should be
filed for tax years ending beyond the date of revocation.

Form 886-A (1-1994) Catalog Number 20810W — Page_7 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATIONS OF ITEMS

(Rev. January 1994;

Name of taxpayer Tax Identification Number Year/Period ended
ORG 990 & EIN 20XX12
990-T 20XX12
20XX12

ALTERNATIVE ISSUES:
In the alternative, if “ORG” continues to qualify for exemption under section 501(c)(3),

1. Is “ORG” subject to Section 511 Tax on Unrelated
   Business Income for income it received from conduct of “Game Motto”?

2. Whether a partner's distributive share of partnership income retains the same character as
   when the income was earned by the partnership.

3. Whether the expenses related to Motto and “Game Motto” should be allocated using a
   gross receipts method.

FACTS:

Gaming Activities — General

“ORG’, hereinafter referred to as (“ORG’” ) obtained from the State of State a license to conduct
Motto and was a member of CO-1 for the periods of examination.

The CO-1 is required to file quarterly reports with the State of State in order to maintain it’s license
to conduct Motto.

The CO-1 (hereinafter the CO-1), organized January 1, 20XX in the State of State and is made up
of this organization and four other exempt organizations. The trust agreement was amended
August 18, 20XX in order to admit one more exempt organization as an additional Beneficiary
(member) of the CO-1. The revenue and expenses for these six organizations are consolidated
and reported to the State of State on one quarterly Motto Report (filed by the CO-1). According to
the Units Amendment to Trust Agreement, the proceeds and expenses of the CO-1 are
apportioned to each Beneficiary according to the number of sessions each organization conducts
per quarter. The CO-1 distributes, at least quarterly, net income (or loss) among the Beneficiaries.
Copies of the CO-1 Agreement and Amendments are attached;

( See Exhibits 1 and 2.)

The CO-1 filed State Motto Quarterly Reports for 20XX through 20XX. Attachments A-4 20XX; A-
4 20XX and A-4 20XX show the amounts reported on the Quarterly Reports for the organizations
tax years ending December 31, 20XX; December 31, 20XX and December 31, 20XX.

“ORG” did not report the gross receipts from “Game Motto”, which were allocated to the
organization by the CO-1, as unrelated business income on the 20XX; 20XX or 20XX Form 990-T
Exempt Organization Business Income Tax Return. “ORG” filed Form 990-T, Exempt

Form 886-A (1-1994) Catalog Number 20810W Page_ 8 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer — Tax Identification Number Year/Period ended
ORG 990 & EIN 20XX12
990-T 20XX12
20XX12

Organization Business Income Tax Return for tax year ending December 31, 20XX reporting
unrelated business income of zero. “ORG” did not file Form 990-T, Exempt Organization
Business Income Tax Return for tax years ending December 31, 20XX or December 31, 20XX.

A Game is a gambling ticket that is sold as a means to play a Game game. The object of the ticket
is to open the perforated windows on the back of the ticket and match the symbols inside the ticket
to the winning combinations on the front of the ticket. The winning Game ticket is turned in for a
monetary prize. Other names for it include Game, Game, Game, Game, Game, Game, Game, or
Game.

The game manager operates the game by selling tickets and distributing cash prizes. The tickets
may also be provided by mechanical Game dispensers. The Game tickets are multi-layered paper
tickets containing symbols hidden behind perforated tabs. Several different games may be offered
for sale at any one time; each may have different prices and payouts. Games are typically sold for
¢, ¢, $ and $ and have prizes as high as §.

Each ticket has two sides. One side lists the winning combinations of symbols, the cash payout for
each combination, the number of tickets that contain each winning combination, and the total
number of tickets in the game. This information is also posted in a large printed sheet called a
flare.

The other side of the ticket contains the perforated tabs. After purchasing the ticket, the player
pulls the perforated tabs to reveal their winnings, if any. Cash prizes may be claimed immediately.

Motto Event Games (also called ball games, last number, dab games, or tag-along games) bridge
the gap between Motto and Games. Each individual Motto event ticket game has a number of
instant winning tickets and a series of "hold" tickets. The "hold" tickets in a Motto event

game are traditionally Motto numbers from B-1 to 0-75. These "hold" tickets are held for a larger
prize that is paid out after all the tickets are sold. Many styles are available.

LAW:

Section 511(a)(1) of the Code imposes, for each taxable year on the unrelated business taxable
income of every organization described in paragraph (2) a tax computed as provided in the Code.
Computation shall be termed “unrelated business taxable income’.

Section 512(a)(1) defines the term “unrelated business taxable income” as the gross income
derived by an organization from any unrelated trade or business regularly carried on by it, less
allowable deductions directly connected with the carrying on of such trade or business.

Section 1.512(a)-1(a) of the Regulations defines "unrelated business taxable income" as the gross
income derived from any unrelated trade or business regularly carried on, less those deductions

Form 886-A (1-1994) Catalog Number 20810W Page 9 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 990 & EIN . | 20XX12
990-T 20XX12
20XX12

allowed by chapter 1 of the Code which are directly connected with the carrying on of such trade
or business, subject to certain modifications referred to in [Reg.] 1.512(b)-1. To be deductible in
computing unrelated business taxable income, therefore, expenses, depreciation, and similar
items not only must qualify as deductions allowed by chapter 1 of the Code, but also must be
directly connected with the carrying on of unrelated trade or business. Except as provided in
paragraph (d)(2) of this section, to be "directly connected with" the conduct of unrelated business
for purposes of section 512, an item of deduction must have proximate and primary relationship to
the carrying on of that business.

Section 1.512(a)-1(b) of the Regulations defines expenses attributable solely to unrelated
business activities. Expenses, depreciation and similar items attributable solely to the conduct of
unrelated business activities are proximately and primarily related to that business activity, and
therefore, qualify for deduction to the extent that they meet the requirements of section 162,
section 167 or other relevant provisions of the Code. Thus, for example, salaries of personnel
employed full-time in carrying on unrelated business activities are directly connected with the
conduct of that activity and are deductible in computing unrelated business taxable income if they
otherwise qualify for deduction under the requirements of section 162.

Section 1.512(a)-1(c) of the Regulations explains deductions for dual use of facilities or personnel.
Where facilities are used both to carry on exempt activities and to conduct unrelated trade or
business activities, expenses, depreciation and similar items attributable to such facilities (as, for
example, items of overhead) shall be allocated between the two uses on a reasonable basis.
Similarly, where personnel are used both to carry on exempt activities and to conduct unrelated
trade or business activities, expenses and similar items attributable to such personnel (as, for
example, items of salary) shall be allocated between the two uses on a reasonable basis. The
portion of any such item so allocated to the unrelated trade or business activities is proximately
and primarily related to that business activity, and shall be allowable as a deduction in computing
unrelated business taxable income in the manner and to the extent permitted by section 162,
section 167 or other relevant provisions of the Code.

' Treasury Regulation section 1.512(a)-1(f)(6)(i) provides guidelines for allocating certain types of
expenses "For example, salaries may generally be allocated among various activities on the basis
of the time devoted to each activity; occupancy costs such as rent, heat and electricity may be
allocated on the basis of the portion of space devoted to each activity".

Section 513(a) defines the term “unrelated trade or business” as any trade or business the
conduct of which is not substantially related (aside from the need of an organization for income or
funds or the use it makes of the profits derived) to the exercise or performance by an organization
of its exempt purposes.

Form 886-A (1-1994) Catalog Number 20810W Page 10 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 990 & EIN 20XX12
990-T 20XX12
20XX12

Section 513(a)(1) provides that the term “unrelated trade or business” does not include any trade
or business in which substantially all the work in carrying on such trade or business is performed
for the organization without compensation.

Section 513(f)(1) of the Code states in general.--The term “unrelated trade or business” does not
include any trade or business which consists of conducting Motto games.

Section 513(f)(2) defines “Motto games” as any game of Motto of a type in which usually the
wagers are placed, the winners are determined, and the distribution of prizes or other property is
made, in the presence of all persons placing wagers in such game, the conducting of which is not
an activity ordinarily carried out on a commercial basis, and the conducting of which does not
violate any State or local law.

Section 1.513-1(e)(1) of the Income Tax Regulations provides for exceptions to Section 513(a) of
the Code, including any trade or business in which substantially all of the work in carrying on such
trade or business is performed for the organization without compensation.

Section 1.513-5(a) of the Regulations provides that, under Section 513(f) of the Code, and subject
to the limitations in paragraph (c) of this Section, in the case of an organization subject to the tax
imposed by Section 511, the term “unrelated trade or business” does not include any trade or
business that consists of conducting Motto games as defined in paragraph (d) of this Section.

Section 1.513-5(c)(1) of the Regulations provides that paragraph (a) of this Section shail not apply
with respect to any Motto game conducted in violation of State or local law.

Section 1.513-5(d) of the Regulations further defines Motto as a game of chance played with
cards that are generally printed with five rows of five squares each. Participants place markers
over randomly called numbers on the cards in an attempt to form a preselected pattern such as a
horizontal, vertical, or diagonal line, or all four corners. The first participant to form the preselected
pattern wins the game. As used in this section, the term “Motto game” means any game of Motto
of the type described above in which wagers are placed, winners are determined, and prizes or
other property is distributed in the presence of all persons placing wagers in that game. The term
“Motto game” does not refer to any game of chance (including, but not limited to, keno games,
dice games, card games, and lotteries) other than the type of game described in this paragraph.

Section 44.4421-1(b)(1) of the Regulations defines the term lottery, which includes the numbers
game, policy, and similar types of wagering. In general, a lottery conducted for profit includes any
scheme or method for the distribution of prizes among persons who have paid or promised a
consideration for a chance to win such prizes, usually as determined by the numbers or symbols
on tickets as drawn from a lottery wheel or other receptacle, or by the outcome of an event:
Provided, Such lottery is conducted for profit.

Form 886-A (1-1994) Catalog Number 20810W Page_11 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer / Tax identification Number j Year/Period ended
ORG 990 & EIN 20XX12
990-T 20XX12
20XX12

Section 44.4421-1(c)(4) of the Regulations defines “Conducted for Profit” as, a wagering pool or
lottery may be conducted for profit even though a direct profit will not inure from the operation
thereof. A wagering pool or lottery operated with the expectancy of a profit in the form of
increased sales, increased attendance, or other indirect benefits is conducted for profit purposes
of the wagering tax.

Rev. Rul. 72-481 concerns what constitutes a wager using ‘free plays’ won in a ‘Motto spindle
game’ only to the extent that the player assumes an additional risk. In the game being played,
which is equivalent to a punchboard, a player pulls five spindles at X dollars per pull. These five
pulls are taxable wagers. His first four pulls are losers, but on the fifth pull he wins ten free pulls.
Under the rules of the game, he may not exchange free pulls for cash or merchandise, but he may
use available free plays to pay for previous unpaid plays. There are two situations to consider; the
first situation is that the player elects to use five of his free plays to pay for his five original taxable
plays. Since no additional risk is involved in this use of free plays, it is held that such use of free
plays does not constitute taxable wagers within the meaning of section 4401 of the Code.
However, the second situation is that the player elects to play the first five of ten plays, so he is
assuming an additional risk, so these would be taxable wagers within the meaning of section 4401
of the Code. With respect to the last five free plays, the player would not under any circumstances
have had the choice but to play them or forfeit them, and since there’s no additional risk, it is held
that such use of free plays does not constitute additional taxable wagers within section 4401 of the
Code. In order to exclude free plays from the tax on wagers, a taxpayer must maintain records
that will establish that no risk was involved in connection with the use of the free play. If such
records are not kept, then the Service will presume that all plays taken are taxable wagers.

Section 3.554(a)(3) of the State Motto Act Tax Rules defines an “Game” game as a game of
chance played by the random selection of one or more individually prepackaged Game cards from
a series of Game cards. Prize winners are determined by the preprinted appearance of numbers
in a prescribed order, according to winning arrangements indicated on the reverse side of the
card.

According to the State Administrative Code, Title 16, Part 9, Chapter 402, Subchapter C, Rule
Section 402.300 the definition of a Motto Ball Draw is a pulling of a Motto ball(s) to determine the
winner of an event ticket by either the number or color on the ball(s).

16 TAC §402.300(h)(6)

The State Administrative Code also defines an Event Ticket as...a Game Motto ticket used as
event tickets that must contain more than two instant winners. Event ticket winner(s) are
determined by some subsequent action such as a drawing of ball(s), spinning wheel, opening of a
seal on a flare(s) or any other method approved by the Commission so long as that method has
designated numbers, letters, or symbols that conform to the randomly selected numbers or
symbols.

Form 886-A (1-1994) Catalog Number 20810W Page_12 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 990 & EIN 20XX12
990-T 20XX12
20XX12

In the case of Julius M. Israel Lodge of B’nai B’rith No. 2113 v. Commissioner, Game activity
constituted unrelated business taxable income under section 511(a) of the Code. The Game
game did not meet the definition of the Motto game defined by section 513(f) of the Code and
section 1.513-5d of the Regulations. The net income derived from sales of Game games did not
qualify for the exception from unrelated business income tax referred to in section 513(f) of the
Code, and was considered unrelated business taxable income.

Explanations of Gaming conducted by Partnerships

IRC Section 701 states that a partnership as such shall not be subject to the income tax imposed
by this chapter. Persons carrying on business as partners shall be liable for income tax only in
their separate or individual capacities.

IRC Section 6031(a) states that every partnership (as defined in Section 761(a)) shall make a
return for each taxable year, stating specifically the items of its gross income and the deductions
allowable by subtitle A, and such other information for the purpose of carrying out the provisions of
subtitle A as the Secretary may by forms and regulations prescribe.”

IRC Section 6031(b) states that each partnership required to file a return under subsection (a) for
any partnership taxable year shall (on or before the day on which the return for such taxable year
was required to be filed) furnish to each person who is a partner or who holds an interest in such
partnership as a nominee for another person at any time during such taxable year a copy of such
information required to be shown on such return as may be required by regulations.

IRC Section 6031(d) states that in the case of any partnership regularly carrying on a trade or
business (within the meaning of Section 512(c)(1), the information required under subsection (b)
to be furnished to its partners shall include such information as is necessary to enable each
partner to compute its distributive share of partnership income or loss from trade or business in
accordance with Section 512(a)(1), but without regard to the modifications described in
paragraphs (8) through (15) of Section 512(b).

IRC Section 702 states that the character of any item of income, gain, loss, deduction, or credit
included in a partner's distributive share under paragraphs (1) through (7) of subsection (a) shall
be determined as if such item were realized directly from the source from which realized by the
partnership, or incurred in the same manner as incurred by the partnership.

Section 1.702-1(a)(8)(ii) of the Regulations states that each partner must also take into account
separately the partner's distributive share of any partnership item which, if separately taken into
account by any partner, would result in an income tax liability for that partner, or for any other
person, different from that which would result if that partner did not take the item into account
separately. Thus, if any partner is a controlled foreign corporation, as defined in section 957, items

Form 886-A (1-1994) Catalog Number 20810W Page 13 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 990 & EIN 20XX12
990-T 20XX12
20XX12

of income that would be gross subpart F income if separately taken into account by the controlled
foreign corporation must be separately stated for all partners. Under section 911(a), if any partner
is a bona fide resident of a foreign country who may exclude from gross income the part of the
partner's distributive share which qualifies as earned income, as defined in section 911(b), the
earned income of the partnership for all partners must be separately stated. Similarly, all relevant
items of income or deduction of the partnership must be separately stated for all partners in
determining the applicability of section 183 (relating to activities not engaged in for profit) and the
recomputation of tax thereunder for any partner. This paragraph (a)(8)(ii) applies to taxable years
beginning on or after July 23, 20XX.

Section 1.702-1(c)(1) of the Regulations states that where it is necessary to determine the amount
or character of the gross income of a partner, his gross income shall include the partner's
distributive share of the gross income of the partnership, that is, the amount of gross income of the
partnership from which was derived the partner's distributive share of partnership taxable income
or loss (including items described in section 702(a)(1) through (8)). For example, a partner is
required to include his distributive share of partnership gross income: (i) In computing his gross
income for the purpose of determining the necessity of filing a return (section 6012(a)).

Explanations of Expenses attributable to Unrelated Business Activities

Section 1.512(a)-1(a) of the Regulations defines "unrelated business taxable income" as the gross
income derived from any unrelated trade or business regularly carried on, less those deductions
allowed by chapter 1 of the Code which are directly connected with the carrying on of such trade
or business, subject to certain modifications referred to in [Reg.] 1.512(b)-1. To be deductible in
computing unrelated business taxable income, therefore, expenses, depreciation, and similar
items not only must qualify as deductions allowed by chapter 1 of the Code, but also must be
directly connected with the carrying on of unrelated trade or business. Except as provided in
paragraph (d)(2) of this section, to be "directly connected with" the conduct of unrelated business
for purposes of section 512, an item of deduction must have proximate and primary relationship to
the carrying on of that business.

Section 1.512(a)-1(b) of the Regulations defines expenses attributable solely to unrelated
business activities. Expenses, depreciation and similar items attributable solely to the conduct of
unrelated business activities are proximately and primarily related to that business activity, and
therefore, qualify for deduction to the extent that they meet the requirements of section 162,
section 167 or other relevant provisions of the Code. Thus, for example, salaries of personnel
employed full-time in carrying on unrelated business activities are directly connected with the
conduct of that activity and are deductible in computing unrelated business taxable income if they
otherwise qualify for deduction under the requirements of section 162.

Section 1.512(a)-1(c) of the Regulations explains deductions for dual use of facilities or personnel.
Where facilities are used both to carry on exempt activities and to conduct unrelated trade or

Form 886-A (1-1994) Catalog Number 20810W Page 14 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer j Tax Identification Number Year/Period ended
ORG 990 & EIN 20XX12
990-T 20XX12
20XX12

business activities, expenses, depreciation and similar items attributable to such facilities (as, for
example, items of overhead) shall be allocated between the two uses on a reasonable basis.
Similarly, where personne! are used both to carry on exempt activities and to conduct unrelated
trade or business activities, expenses and similar items attributable to such personnel (as, for
example, items of salary) shall be allocated between the two uses on a reasonable basis. The
portion of any such item so allocated to the unrelated trade or business activities is proximately
and primarily related to that business activity, and shall be allowable as a deduction in computing
unrelated business taxable income in the manner and to the extent permitted by section 162,
section 167 or other relevant provisions of the Code.

Treasury Regulation section 1.512(a)-1(f)(6)(i) provides guidelines for allocating certain types of
expenses "For example, salaries may generally be allocated among various activities on the basis
of the time devoted to each activity; occupancy costs such as rent, heat and electricity may be
allocated on the basis of the portion of space devoted to each activity".

Taxpayer's Position:

Taxpayer has not stated a position at this time.
Government's Position:

Alternative Issues

Issue 1

At issue is whether “Game” is considered an exempt Motto game as described in Section 513(f) of
the Internal Revenue Code (Code) and further defined in Section 1.513-5(d) of the Income Tax
Regulations. ( Regulations ) The (Code) defines In general the conduct of Certain Motto games
not included in the term “unrelated trade or business” and thereby exempted from the unrelated
business income tax provide for under Section 511.

( Regulations ) further defines Motto as a game of chance played with cards that are generally
printed with five rows of five squares each. Participants place markers over randomly called
numbers on the cards in an attempt to form a preselected pattern such as a horizontal, vertical, or
diagonal line, or all four corners. The first participant to form the preselected pattern wins the
game. As used in this section, the term “Motto game” means any game of Motto of the type
described above in which wagers are placed, winners are determined, and prizes or other property
is distributed in the presence of all persons placing wagers in that game. The term “Motto game”
does not refer to any game of chance (including, but not limited to, keno games, dice games, card
games, and lotteries) other than:the type of game described in this paragraph.

“Game” does not meet the term “Motto game” as described in the ( Regulations )

Form 886-A (1-1994) Catalog Number 20810W Page 15 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG » 990& EIN 20XX12
990-T 20XX12
20XX12

Taken right from the court case analysis of Julius M. Israel Lodge of B’nai B’rith No. 2113 v. |
Commissioner. Game involves no random selection of numbers by a caller, nor does it require the
player to participate in the game by covering the squares on his card that correspond to randomly
drawn numbers, Rather, an Game player's participation in the game is wholly independent of any
other’s and requires only that he remove a Game to determine whether he has a winning card.

A Motto game by any other name is not a Motto game. Game is, for all practical purposes, a
lottery. Gaitie does not comport with even the preliminary requirement under Section 513(f) that it
be “any game of Motto.”

In the case of Julius M. Israel Lodge of B’nai B'rith No. 2113 v. Commissioner, Game activity
constituted unrelated business taxable income under section 511(a) of the Code. The Game
game did not meet the definition of the Motto game defined by section 513(f) of the Code and
section 1.513-5d of the Regulations. The net income derived from sales of Game games did not
qualify for the exception from unrelated business income tax referred to in section 513(f) of the
Code, and was considered unrelated business taxable income.

issue 2

It is the Government's position that the CO-1 Trust failed to provide the organization, and the other
exempt organizations in the CO-1, information under IRC Section 6013(d) needed to determine
the amount ui unrelated business income that the organizations should have reported on their
Form 990-T. a reasury Regulation 1.702-1(a)(8)(ii) states that each partner must take into account
the character of their share of any partnership income. Income from Games is unrelated business
income whether or not the exempt organizations operate the gaming sessions alone or as part of
a partnership. The character of the income does not change because of the organizational
structure of the owners of the business. Unrelated business income prior to forming a partnership
is still unrelated business income afterwards.

Issue 3

Only expenses directly connected with the carrying on of the unrelated trade or business and
which is attributable solely to the conduct of unrelated business activities that are proximately and
primarily related to that business activity, qualify as a deduction. Motto and Games are two
separate activities. Motto is an exempt activity and Games are an unrelated business subject to
unrelated business income tax. The expenses that are related to both activities (i.e. rent of the
hall, utilities, etc.) must be allocated between the two using a reasonable allocation method.

According to Treasury Regulation section 1.512(a)-1(f)(6)(i) , the time allocation method
accurately reflects the salaries, wages and contract labor expenses, however, the time allocation
method is not a reasonable method for allocating the rent, utilities, maintenance and repair, and

Form 886-A (1-1994) Catalog Number 20810W Page 16 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 990 & EIN 20XKX12
990-T 20XX12
20XX12

other expenses. The gross receipts method reasonably reflects each activities use of the space.
Therefore the gross receipts allocation method is a reasonable method to allocate the rent,
utilities, maintenance and repair, and other expenses.

We have used the gross receipts method to allocate the expenses that are related to both Motto
and Games. Please note that if you choose to use the time allocation method in the future for
expenses related to salaries and wages, you will need to maintain detailed records of the time that
each Motto/Game worker spent on the specific activity of either Motto or Games (or other if they
receive wages for participating in any other activities), in order to allocate the wage expenses
accurately between Motto and Games.

Conclusion to Alternative Issues:

Note: Conclusion to the Alternative Issue only applies in the event proposed revocation is not
upheld.

“Game” is not considered an exempt Motto game as described in Section 513(f) of the Internal
Revenue Code and further defined in Section 1.513-5(d) of the Income Tax Regulations. “ORG” is
subject to Section 511 Tax on Unrelated Business Income for income it received from conduct of
“Game Games”.

Because “ORG” did not report the gross receipts from “Game Motto” on Form 990-T Exempt
Organization Business Income Tax Return for tax year ending December 31, 20XX we have
prepared an adjustment. In addition, because “ORG” has not filed the required Forms 990-T
Exempt Organization Business Income Tax Return for tax years ending December 31, 20XX and
December 31, 20XX, we have prepared substitute for returns. Explanation of the adjustments are
included in the attached documents. ( A-1 20XX through A-4 20XX for the year ending December
31, 20XX; A-1 20XX through A-4 20XX for the year ending December 31, 20XX and A-1 20XX
through A-4 20XX for the year ending December 31, 20XX. )

If you agree to these adjustments, please have one of the officers of the organization sign on the
separate report (Form 4549) and return the form to the contact person listed on the attached letter
within 30 days of receipt. If you have any questions or additional information that could affect the
tax adjustment, please contact the individual in the attached letter within 30 days of receipt.

Form 886-A (1-1994) Catalog Number 20810W Page 17 publish.no.irs.gov Department of the Treasury-Internal Revenue Service