IRS revokes an organization's tax-exempt status for private benefit and inurement

View official IRS release (PDF)

Plain-English summary

The IRS revoked an organization's recognition as exempt under IRC § 501(c)(3), effective January 1 of the redacted year. The determination says the organization did not show that a substantial part of its activities avoided serving the private interests of its officers and other individuals, and it found that net earnings benefited private individuals. The letter also says the organization's contributions are no longer deductible under IRC § 170 and that it must file Form 1120 returns. The full release includes the IRS examination materials supporting the revocation, including findings about management contracts, fundraising, private benefit, and inurement.

Ruling snapshot

• Question: Did the organization continue to operate exclusively for exempt purposes without private benefit or inurement?
• Outcome: Revocation
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 509(a)(2), 6104(c), 7428

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examination
1100 Commerce Street 501.03-00
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION Date: February 28, 2013

Release Number: 201351029
Release Date: 12/20/2013

LEGEND Employer Identification Number:
ORG — Organization name Person to Contact/ID Number:
XX — Date Address - address Contact Numbers:

(Phone)
ORG (Fax)
ADDRESS

CERTIFIED MAIL — RETURN RECEIPT REQUESTED

Dear

This is a final adverse determination regarding your exempt status under section
501(c)(3) of the Internal Revenue Code (the Code). Our favorable determination letter
dated January 15, 20XX is hereby revoked and you are no longer exempt under section
501(a) of the Code effective January 1, 20XX.

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

IRC 501(c)(3) of the Internal Revenue Code 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...

Treasury Regulation Section 1.501(c)(3)-1(d)(1)(iii) provides that an
organization is not organized or operated exclusively for one or more
exempt purposes unless it serves a public rather than a private interest.

You have not established that you are operated exclusively for exempt
purposes described in section 501(c)(3) of the Code. Specifically, you
have not shown that a substantial part of your activities does not serve the
private interest of your officers and other individuals. Additionally, you
have not demonstrated that no part of your net earnings inures to the
benefit of private shareholders or individuals.

Contributions to your organization are no longer deductible under section 170 of the
Internal Revenue Code. You are required to file Federal income tax returns on Form
1120. Those returns should be filed with the appropriate Service Center.

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

If you decide to contest this determination, you may file an action for declaratory
judgment under the provisions of section 7428 of the Code in one of the following three
venues: United States Tax Court, the United States Claims Court or the District Court of
the United States for the District of Columbia. A petition or complaint in one of these
three courts must be filed before the 91st day after the date this determination was
mailed to you if you wish to seek review of our determination. Please contact the clerk
of the respective court for rules and the appropriate forms regarding filing petitions for
declaratory judgment by referring to the enclosed Publication 892. Please note the
United States Tax Court is the only one of these courts where a declaratory judgment
action can be pursued without the services of a lawyer. You may write to the court at
the following addresses:

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

We will notify the appropriate State Officials of this action, as required by section
6104(c) of the Internal Revenue Code.

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

Thank you for your cooperation.

Sincerely yours,

Nanette M. Downing
Director, EO Examinations

Enclosure:
Publication 892

Ai Department of the Treasury Date:

Internal Revenue Service January 3, 2013
I Tax Exempt and Government Entities Division Taxpayer Identification Number:
RS 450 Golden Gate Avenue, MS 7401

San Francisco, CA 94102-3412

Form:

Tax year(s) ended:

ORG
ADDRESS Person to contact / ID number:

Contact numbers:

Manager's name / ID number:

Manager's contact number:

Response due date:

Certified Mail - Return Receipt Requested
Dear

Why you are receiving this letter
We propose to revoke your status as an organization described in section 501(c)(3) of the Internal Revenue
Code (Code). Enclosed is our report of examination explaining the proposed action.

What you need to do if you agree

If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed Action — Section
7428, and return it to the contact person at the address listed above (unless you have already provided us a
signed Form 6018). We'll issue a final revocation letter determining that you aren't an organization described in
section 501(c)(3).

After we issue the final revocation letter, we’ll announce that your organization is no longer eligible for
contributions deductible under section 170 of the Code.

If we don't hear from you

If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final
revocation letter. Failing to respond to this proposal will adversely impact your legal standing to seek a
declaratory judgment because you failed to exhaust your administrative remedies.

Effect of revocation status
If you receive a final revocation letter, you'll be required to file federal income tax returns for the tax year(s)
shown above as well as for subsequent tax years.

What you need to do if you disagree with the proposed revocation
If you disagree with our proposed revocation, you may request a meeting or telephone conference with the
supervisor of the IRS contact identified in the heading of this letter. You also may file a protest with the

Letter 3618 (Rev. 6-201 2)
Catalog Number 34809F

IRS Appeals office by submitting a written request to the contact person at the address listed above within 30
calendar days from the date of this letter. The Appeals office is independent of the Exempt Organizations
division and resolves most disputes informally.

For your protest to be valid, it must contain certain specific information including a statement of the facts, the
applicable law, and arguments in support of your position. For specific information needed for a valid protest,
please refer to page one of the enclosed Publication 892, How to Appeal an IRS Decision on Tax-Exempt Status,
and page six of the enclosed Publication 3498, The Examination Process. Publication 3498 also includes
information on your rights as a taxpayer and the IRS collection process. Please note that Fast Track Mediation
referred to in Publication 3498 generally doesn’t apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication 892. Please
contact the individual identified on the first page of this letter if you are considering requesting technical
advice. If we issue a determination letter to you based on a technical advice memorandum issued by the Exempt
Organizations Rulings and Agreements office, no further IRS administrative appeal will be available to you.

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn’t a substitute for
established IRS procedures, such as the formal appeals process. The Taxpayer Advocate can't reverse a legally
correct tax determination or extend the time you have (fixed by law) to file a petition in a United States court.
They can, however, see that a tax matter that hasn't 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:

Internal Revenue Service

Office of the Taxpayer Advocate

For additional information

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:

Report of Examination
Form 6018 .
Publication 892
Publication 3498

Letter 3618 (Rev. 6-2012)
Catalog Number 34809F

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer Tax Identification Number Year/Period ended
December 31, 20XX
ORG EIN December 31, 20XX
December 31, 20XX
December 31, 20XX
LEGEND

ORG ~ Organization name XX—-Date EIN-—ein Address — address
Event -1 through Event-9 — 1" through 9" EVENT CEO -ceo

BM CO-1 through CO-21 — 1" through 21°" COMPANIES

Issues
1) Does the organization operate primarily for exempt purposes?
2) Does the organization’s net income inure to the benefit of the organization founder and board chair?

nn

acts

Outline

1)
2)
3)
4)
))
6)

Background
Purpose
Form 990
Application for Tax Exempt Status
Audit Interviews
Key Players
a) CEO
i) ORG
ii) CO-7
iii) CO-2
iv) CO-3
v) CO-4
vi) CO-1
b) BM-1
c) BM-2
d) BM-3
Board
a) Development during Application Process
b) Audit Year Board
c) Conflict of Interest Policy
d) Board Meetings
Management Contracts with Insiders
a) CO-3 Contract
b) CO-2 Contract
c) Both Contracts Provide
d) Comparability Data
e) Invoicing
Activities
a) Adult ORG Workshops
) ORG Programs & Presentations
) DINNER
) Speaking Engagements
) Website
) The Campaign
) CO-7
h) Activities Summary

c tt

Oo A090 &

Ko}

City—city State-state Program — program
Secretary — secretary BM-1 through BM-7 — 1* through 7"

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 EIN December 31, 20XX
December 31, 20XX
December 31, 20XX
December 31, 20XX

10) Accrued Liability

Background
The organization currently under audit is ORG (subsequently ORG), a State nonprofit corporation, EIN EIN.

ORG is exempt under section 501(a) of the Internal Revenue Code (IRC) as an organization described in
IRC section 501(c)(3). The current TE/GE examination is for the years ending December 31, 20XX, 20XX,
20XX, and 20XX. All details below, unless otherwise noted, are based on facts learned concerning the
year ending December 31, 20XX. The taxpayer has not responded to Information Document Requests
regarding subsequent years.

ORG filed their articles of incorporation with the State Secretary of State in August 20XX. ORG received its
final determination letter in January 20XX, with retroactive exemption as of August 20XX. The final
determination letter found the organization exempt under IRC 501(c)(3) with IRC 509(a)(2) foundation
classification.

ORG had the following filing requirements:
o Form 990
o Form 944

The Form 990 for 20XX and 20XX was received by the extended due date. The 20XX Form 990 was
extended to August 15, 20XX and was received November 22, 20XX. The service center did not assess
penalties or interest. The organization has never had employees, and has never filed the Form 944.
During the audit, examining agent removed the Form 944 filing requirement.

Purpose
The purpose noted in the articles of incorporation was:

Provide ORG training and mentorship to youth to optimize chances of career and educational
SUCCESS.

The 20XX executive summary provided in response to IDR #4 states:
Our mission is to create and develop marketable youth who are academically proficient by providing
CO-2 education, targeted career exposure, and solutions-based collaboration utilizing 21st century
technology. Our vision is to become the largest community of successful youth in the world.

ORG’s purpose was to apply the organization founder CEO’s business philosophies to youth to help them
be successful. The organization defined youth as between ages 16 and 24. ORG did not define “youth” on
the Form 1023. In CEO’s promotion of himself and his self-improvement philosophies, he often describes
the difficult circumstances in which he grew up. The implication is that his ORG program is for
disadvantaged youth, but this is not a component of the organization’s purpose.

Form 990

The mission described on the 20XX Form 990 is:
Equipping youth to be successful by delivering real life information and tools to youth, parents, and
concerned citizens through school assemblies, events, academy programs, and a highly informative
website while maintaining a strong bond that appeals to youth of all ages

Form 886-A (1-1994) Catalog Number 20810W Page 2 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 EIN December 31, 20XX
December 31, 20XX
December 31, 20XX
December 31, 20XX

Subsequent year Forms 990 indicate the following mission:
Our mission is to grow the ORG community through interactive summits, virtual learning, and a
strong social network dedicated to life skills and success intelligence while maintaining partnerships
that create awareness and provide opportunities for the youth we serve.

The stated program service accomplishments on the 20XX, 20XX, and 20XX Forms 990 were:
PROGRAM - ORG conducted ten sessions consisting of orientation, eight workshops, and a final
workshop that served young men and women from the eleventh grade through the age of 25.

The Leadership Development Series focused on training a core group of leaders who would serve
as future “PROGRAM” trainers with in the communities served.

The organization’s Power of Attorney (POA) later stated that the Leadership Development Series did not
occur in 20XX. The program service revenue reported on the Form 990 was actually for adult ORG
workshops. ORG indicated in Schedule O several programming changes in 20XX. They changed the
program focus from large community events to the PROGRAM; they eliminated fees for the program; and
they changed its focus “to build a virtual environment that could touch the masses in which it is still
building.”.

The 20XX Form 990 indicated a new program service accomplishment:
The ORG social network was designed to create an environment for youth to pursue information,
skills, and opportunities that will help them become successful. Instead of creating another online
way to chat with the masses and/or look for companionship, we will create an environment with a
precise focus on delivering knowledge and opportunities conducive for success. This will create a.
success engine that will ignite a fire in many youth to see and believe that success is possible for
everyone if the right effort is made (expense $$).

The Forms 990 showed the following income and expenses:
20XX 20XX 20XX 20XX

fundraising events

donation income

adult ORG workshop revenue
total revenue

professional fees — CO-2
meals
other expenses
~ total expenses

net income (loss)

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 EIN December 31, 20XX
December 31, 20XX
December 31, 20XX
December 31, 20XX

The Forms 990 for 20XX showed the following assets and liabilities:
20XX 20XX 20XX 20XX

assets
liabilities
net assets

The liabilities were substantially all payable to CO-3, Inc. and CO-2 (subsequently CO-2). In 20XX, over
90% of the total liability was payable to these entities.

Application for Tax Exempt Status
ORG submitted its Form 1023 Application for Recognition of Exemption in August 20XX. Its planned
purpose was “to foster knowledge that will assist youth and young adults in developing positive skills that
will strengthen educational performance and improve lives.” Its planned activities were:
1) Virtual academies — linking schools with ORG instructors using simulcast video and interactive
software
2) Community events — to teach youth and young adults about the importance of ORG through
presentations by business and educational professionals
3) Learning academy — seminars, mentoring, and youth development activities
4) School partnerships — offering ORG curriculum at schools and colleges

On the application, ORG reported a liability of $$ at the end of 20XX payable to two companies owned by
the organization founder, CEO. Reports provided during the examination showed a liability of $$ payable
to CO-2 and $$ to CO-2 at the end of 20XX. A total liability of $$ was payable to these entities by the time
the application was filed.

During the application process, CEO submitted a request for expedited processing of the Form 1023
because ORG was in danger of losing pledges from sponsors. He included copies of four letters from
potential sponsors. Two of these letters were regarding pledges from other companies owned by CEO: $$
from CO-5 and $$ from his restaurant, CO-6’s. The IRS granted the request for expedited processing
October 20XX.

In addition to this correspondence, the exempt organizations determinations specialist requested additional
information from ORG in October, November, and December 20XX. This correspondence was primarily
about potential conflicts of interest regarding management contracts with insiders. ORG was selected for
audit due to the following these concerns raised during the application process:

o Management contracts with insiders

o Related for-profit entity

o Agreements negotiated during development

o Validity of information contained in the application

Audit Interviews

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 EIN December 31, 20XX
December 31, 20XX

December 31, 20XX
December 31, 20XX
The TE/GE audit interviews were at Address, City, State. This office was home to ORG and the for-profit
companies owned by CEO. In the year under audit, CO-2 let ORG use this office space free of charge.
The audit dates and participants were:

o November 15, 20XX with the organization's Power of Attorney

o December 12, 20XX with the POA and Executive Director BM-4

o August 15, 20XX with the POA, CEO, BM-1, and Secretary, CEO’s executive assistant.

The area manager and examining agent met with the taxpayer and representative at the TE/GE offices at
address on two occasions:

e November 27, 20XX with the POA

e December 13, 20XX with the POA, CEO, BM-1, Secretary, and BM-2 (via Skype)

Interactions with the taxpayers and their representative were pleasant. Responses to IDRs were
sometimes delinquent, inaccurate, and lacked detail to paint a clear picture of ORG activities. At the two
final meetings at the TE/GE offices, the parties discussed the case issues and the necessary steps to close
the case on a mutually acceptable basis. At the time of the issuance of the final Form 886-A Revenue
Agent Report, the organization had not responded to IDR #8 (submitted November 6, 20XX) and IDR #9
(December 11, 20XX) requesting documentation of activities in 20XX, 20XX, and 20XX.

Key Players

CEO
CEO was the founder of ORG and the organization’s board chair in all years under audit. He owned and
operated a collection of companies under the appellation CO-12. CO-12 was incorporated in the state of
City in April 20XX. It is an LLC with a Form 1120 filing requirement. CEO was the president and CEO of at
least two of his companies, CO-1 and CO-2. CO-12 promoted CEO as a visionary, a motivator, and a
personality. The themes of business management, self-improvement, and financial management
connected several of his companies. On his website and in speaking engagements, CEO used his
personal story of emerging from troubled childhood to become a successful businessperson to promote
CO-12. CEO's collection of businesses included the following:

o ORG is anon-profit started by CEO for the purposes of helping youth aged 16 to 24 become
successful individuals. The footer on the 20XX ORG website listed the following supporters with
links: CO-1, CO-7, CO-8.CO-8, CO-9, CO-6's, CO-2 |, CO-10, and CO-5.

o CO-7- In an audit interview, CEO described “CO-7" as a mental philosophy or leadership concept
which he used in a variety of ways. In speaking events, he used it to inspire and motivate listeners:
“You are the CEO of the business of running your life.” The current CO-12 website, describes CO-7
as an “ n

o CQO-2 (now CO-2 Solutions, Inc.) is a leadership philosophy developed by CEO. On the current CO-
12 website, this business sells workshops, books, DVDs, consulting, coaching, and certification
training in CO-2 business management philosophy. CEO’s book is for sale on the CO-2 website
and the website promotes CEO as a speaker. In the years under audit, CO-2 also contracted with
ORG to provide services. See Management Contracts with Insiders, below.

o CO-3, Inc. focuses on building businesses using CO-2. Ina 20XX web capture, CO-2 said that
successful companies must appoint their customers as their CEOs, utilizing the CO-7 and the CO-2

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 EIN December 31, 20XX
December 31, 20XX

December 31, 20XX
December 31, 20XX

business philosophies. The 20XX website also promoted CEO’s book, the CO-12 website, the CO-
2 philosophy, and several of the CO-12 companies. In the years under audit, CO-2 also contracted
with ORG to provide services. See Management Contracts with Insiders, below.

o CO-3 is an online financial management service. A 20XX web capture says: “With CO-4 System,
there’s not only the opportunity to manage your finances in a more organized and systematic way,
but there’s also the opportunity to start your own business and get paid for referring CO-3 to the
people you know. We offer this opportunity through our CO-7 CO-11.”

o CO-1is asalon. The website featured links to all of the CO-12 companies. The current ORG
website features testimonials of ORG participants, several of whom are CO-9 stylists.

o Other companies included in the CO-12 collection were CO-13, CO-8.CO-8, CO-17, CO-6, CO-5,
CO-14, CO-15, and CO-16.

BM-1
BM-1 was ORG's executive director and as such filled the role of president. The meeting minutes provided
show that CEO and the three board members elected BM-1 to serve as executive director. The board
repeated this nomination and election annually in the meeting minutes provided. Correspondence during
the application process clarified that BM-1 is not a director; the POA stated during audit correspondence
that as executive director he was an elected officer of the organization. In an audit interview, CEO reported
that in 20XX BM-1 worked 40 hours per week for ORG for no compensation. The POA also stated that
there was no contract with BM-1 and no compensation paid. The Form 1023 explained that BM-1 was a
consultant to CO-2 and a project proposal provided during the audit showed that BM-1 is a senior instructor
for CO-2.

BM-2
BM-2 was ORG’s secretary and treasurer. As with BM-1, the three board members and CEO elected him.
BM-2 was also the CFO of CO-2. BM-2 was not compensated by ORG.

BM-3
BM-3 is a CPA and serves as ORG’s appointed representative for this audit. The POA prepared the Forms
990 for all years under audit. BM-3 did not fully understand the organization’s activities and did not take
care to ensure the accuracy of responses to the Information Document Requests. Wherever possible and
necessary, examining agent used the best information available.

Board

Development during the Application Process
The exempt organizations specialist corresponded with ORG during the exemption application process to
ensure that the organization was not controlled by CO-2, that the board was comprised of individuals
without a financial interest in CO-2, and that CO-2 were compensated not excessively and in accordance

with IRC 501(c)(3).

Meeting minutes included with the original application, indicated that the board was comprised of three CO-
2 employees: CEO, his executive assistant Secretary, and _ The original bylaws, included
with the application, designate CO-2 as the organization's sole “member” possessing the power to appoint

Form 886-A (1-1994) Catalog Number 20810W = Page__ 6 publish.no.irs.gov DePartment of the Treasury-Internal Revenue Service

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Tax Identification Number

EIN

Name of taxpayer

ORG

Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX
December 31, 20XX

and remove at will all directors. This equated to control of ORG by CEO, the sole shareh

The initial application also showed CEO's planned compensation to be $$.

pondence from the exempt organizations specialist,

In response to October 20XX corres
private interest was served. To ensure the

CEO’s compensation to demonstrate that no
the broad interests of the community, CO-2 e

and how CEO and BM-1 did not participate in the votes for the contracts.

ndence from the exempt organizations speciali

In response to November 20XX correspo
zation’s sole member. At the direction of the e

the bylaws to remove CO-2 as the organi
organizations specialist, Secretary and B
the board was comprised of no more than 49%
BM-6, and BM-7 all signed a statement committing to take an active part in the operatior
also described in more detail how compensation for CO-2 were determined. ORG also
board members approved the consulting contracts with CO-2.

In response to December 20XX correspondence, ORG further clarified about approval o
compensation rates paid to CO-2.

Audit Year Board

During the all years under audit, the Forms 990 and meeting minutes show the following
None received compensation.

o CEO Chairman of the Board

o BM-5 Director

o BM-6 Director

o =BM-7 Director

o BM-3 Secretary and Treasurer
In response to the November 20XX request for clarification, the taxpayer stated that BM
organization's ctuet executive officer (later executive director) and not a board director.

“a broad range of professionals from the Eas

The POA described the three directors as
ave worked w

who are committed to educating and developing youth. These directors h
various professional and social capacitie
the resumes of the board members, which generally confirms their interest in relevant is
Conflict of Interest Policy
The intent of ORG’s conflict of interest policy was to protect the organization’s interests
provisions were incorporated into the organization's bylaws prior to the organization's 4
exemption.
a. Aninterested person must
opportunity to disclose all mat

disclose the existence of a financial interest a
erial facts to the directors and members of
governing board delegated powers considering the proposed transaction
b. After disclosure of the financial interest and all material facts, and after d
interested person, the interested person will leave the meeting while the

lected three new directors to the board: BM

7. Finally, ORG explained how compensation rates for CO-2 were determined using cor

M-3 submitted statements resigning from the b«
interested persons. CEO remained on the board. BM-5,

pplication for

volder of CO-2.

ORG removed
board represented
-5, BM-6, and BM-
nparability data

st, ORG amended
xempt
yard to ensure that

1of ORG. ORG
clarified which

f and

board members.

-1 was the

t Bay community

ith the founder in

s.” As apart of the application process, the taxpayer submitted
ssues.

The following

nd be given an
committees with

or arrangement

scussion with the
determination of a

Form 886-A (1-1994) Catalog Number 20810W Page_/ publish.no.irs.gov

Department of the Treasury-Internal Revenue Service

Form 886-A

(Rev. January 1994) EXPLANATIONS OF ITEMS

Schedule number or exhibit

Tax Identification Number

EIN

Name of taxpayer

ORG

Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX
December 31, 20XX

conflict of interest will be discussed and voted on. The remaining board v
exists.

The interested person may make a presentation regarding the proposed t
will leave during discussion and vote on the possible conflict of interest. |
chairperson will appoint a disinterested party to investigate alternatives. |
decide if they can find, with reasonable effort, a more advantageous trans
interested person. If none is reasonably available, the board will vote if th
the organization’s best interest.

If the board has reasonable cause to believe a member has failed to discl
possible conflict of interest, the interested person will be given an opportu
their failure to disclose. After hearing the response and investigating furtt
the board will determine if the interested person failed to disclose a conflic
will take appropriate disciplinary action.
Ultimately, “A financial interest is not necessarily a conflict of interest. ...a person who
interest may have a conflict of interest only if the appropriate governing board or comm
conflict of interest exists.”

Board Meetings
In all years under audit, ORG held an annual and a special meeting in August each yea
members, officers, and BM-1 were present at both meetings and signed each set of me
the 20XX annual meeting, the following items were resolved:

1) The CEO would continue to serve as chairman of the board and BM-5, BM-6, ar

continue to serve as board members.

2) BM-1 was elected to serve as CEO by the board members.

3) The bylaws were amended so that the required number of directors was reduce
of the chief executive officer was changed to executive director; and the paymer
ORG must be signed by at least one person authorized by the corporation.

“The Board of Directors stated that the question before the meeting was whethe
Professional Services Agreement with CO-2, Inc. and to determine if any conflic
due to interested person, CEO, association with CO-2, Inc. and if this agreemen
interest of the corporation.

Upon Motion duly made, seconded, and carried unanimously by the vote of men
(excluding Chairman and Officers), it was:

RESOLVED, that the professional Services Agreements with CO-2, Inc. does nc
conflict of interest and is in the best interest of the corporation and is therefore a

4)

The annual meetings in 20XX, 20XX, and 20XX were identical in regards to numbers of
above.

In conjunction with the annual meeting, each year all of the board members, officers, ar
“Annual Statement” confirming their belief in the work of the organization and committin
part in carrying out the mission of ORG. This is likely in continued response to a reque
determinations process by the exempt organizations specialist that the organization suk
dated statements by the board saying that they will take an active part in the operation

vill decide if one

ransaction. They
f appropriate, the
The board will
action with a non-
e transaction is in

ose an actual or
nity to explain

ler as warranted,
ct of interest, and

has a financial
ttee decides that a

r. All board
eting minutes. At

1d BM-7 would

1 to three; the title
its of money by

r to renew
t of interest exist[s]
t is in the best

nbers of the Board

bt represent a
pproved.”

ne, two, and four,

nd BM-1 signed an
g to take an active
st during the

bmit signed and

of ORG.

Department of the Treasury

Form 886-A (1-1994) | Catatog Number 20810W publish.no.irs.gov

Page 8

-Internal Revenue Service

Form 886-A

(Rev. January 1994) EXPLANATIONS OF ITEMS

Schedule number or exhibit

Tax Identification Number

EIN

Name of taxpayer

ORG

Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX
December 31, 20XX

The purpose of the special meetings held each August was to review and approve the F
board did not produce an annual report as mandated by the bylaws; in lieu of this, they
990.

In response to IDR #7, the POA stated that the ORG board and BM-1 held an annual m
beginning of each calendar year “to discuss the direction(s) the non-profit will take durin
twelve month period.” The POA continued, “And while BM-1 has significant influence or
is conducted, the Board of Directors has the ultimate decision making power in how to p
the message of helping underprivileged individuals, especially younger people.” As sho
no evidence of this type of meeting recorded in meeting minutes provided.

The board did not review ORG’s activities or the conduct of the management companie
“ORG management these organizations services by the provision of the services agree
documentation was required [sic].” CO-2 do not provide reports to the board to inform if
programming or status. In 20XX, CO-2 each provided a single invoice to ORG as docu

Management Contracts with Insiders

ORG had management contracts with CO-2 for the provision of all services necessary t
organization. Without CO-2, ORG does not exist. CEO started all three entities. All thr
the same office with the same officers, CEO and BM-2.

CEO signed both contracts on behalf of CO-2 and BM-1 signed both for ORG. The effe
CO-2 contract is November 27, 20XX and the effective date of the CO-2 contract is Aug

CO-3
Meeting minutes do not show that the board discussed approval of this contract in acco
conflict of interest policy.

The management contract states that CO-2 would furnish ORG with qualified personne
deliver professional consulting services. The work would be done in a workmanlike fast

form 990. The
utilized the Form

eeting at the

g the respective
nhow ‘mission
romote and spread
wn above, there is

5s. The POA stated,
ment. No additional
of ORG’s
mentation.

0 operate the
ee operate out of

ctive date of the
ust 1, 20XX.

rdance with the

to perform and
nion and in

accordance with specifications provided to CO-2, would be of professional quality, and would not be

disrupted due to unavailability of employees. The attached fee schedule provided a littl
contracted professional services.
e Accounting Services
o Develop framework for accounting controls
o Train QuickBooks systems
o Develop vendor agreements
o Prepare financial reports and tax information

e Marketing Services

o Research and identify business and government agencies with str¢

alliances
o Advise and deliver event & tour plans
co Coordinate event collateral and mailers
o Consult on program introductions and presentations

e Fundraising/Grant Consulting

e detail on the

ong educational

Department of the Treasury;

Form 886-A (1-1994) Catalog Number 20810W =Page_ 9 publish.no.irs.gov

-Internal Revenue Service

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

Schedule number or exhibit

Name of taxpayer Tax Identification Number

ORG EIN

Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX
December 31, 20XX

o Consult on corporate sponsorship

o Create and deliver foundation and grant tactical plans and agreements for target

agencies
o Consult on managing foundation and grants agreements
o Create and deliver internal policies/controls to meet regulatory com
federal)
e Information technology
o Identify IT and audio visual needs
o Establish and maintain servers for internet based programs
o Deliver IT support for events and tours
o Produce public service video and audio productions
e Administrative Support
o Provide and maintain office supplies
o Proved copier-document production services for educational and e
o Provide postage and mail support

Fees due would be based on fair market value, which the contract showed to be $ perh

CO-2
The board approved this contract in the 20XX annual meeting minutes.

The management contract states that CO-2 would furnish ORG with qualified personnel
deliver the following professional marketing services: “design, procure, market, and sale
Future professional services and deliverables could be determined. The work would be

pliance (state &

vent material

our.

to perform and
[sic] products”.
done ina

workmanlike fashion and in accordance with specifications provided to CO-2, would be of professional
quality, and would not be disrupted due to unavailability of employees. The attached fee schedule provided

detail on CO-2’s duties.

e Product Development
o Research and identify products to retail
o Create client brand and image design
o Create product designs using client's logo
o Deliver products designs and samples
e Product Procurement
o Research vendors to procure product
o Research pricing/cost strategies
o Consult with clients on procurement cost
o Deliver products meeting cost strategies

o Coordinate on inventory controls systems (lien [sic] management systems)

e Product Marketing
o Design and maintain website for client
Create E-commerce platforms on-line for client
Establish retail agreements to accept credit card payments

Oo 0 0

Create and deliver mailer/email blast campaigns to promote products

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 EIN December 31, 20XX
December 31, 20XX
December 31, 20XX
December 31, 20XX

e Product Sales
o Consult with client on product pricing
o Coordinate on product fulfillment (ordering & delivering)
o Coordinate on sales promotions for events
o Coordinate on sales promotions strategies and goals

A review of the organization website and other promotional material indicated the intent to sell ORG
branded clothing as a component of the organization's efforts to build “a movement.” The other details on
the fee schedule showed that CO-2 was responsible for ORG’s website design and maintenance.

The original exemption application contained a contract that stated that CO-2 would provide services in
exchange for 50% of net profit. The exempt organizations specialist informed ORG that this constituted
inurement. The final contract stated that invoices would be based on the cost of goods sold and variable
cost.

Both Contracts Provide:

o ORG would maintain the ownership of all work performed and product generated by the consultant
under the contract.

o ORG agreed to a provision barring the solicitation of the contractor's employees.

o The contractors were reimbursable for travel expenses if invoiced with supporting documentation.

o Invoices with supporting documentation would be submitted on the 10" of each month and paid by
ORG within 30 days.

o ORG could terminate the contract with out cause and either party may terminate if the other
materially defaults in its performance of duties. Otherwise, the contract remains in effect. Upon
termination, ORG would receive a final invoice.

Comparability Data
Examining agent requested copies of the comparability data used by ORG when they decided to sign the
contracts with CO-2:
o Compensation paid for similar work by similar organizations
o Compensation surveys of at least three similar organizations for the same geographic area
o Copies of bids to work for ORG provided by other entities
o Aschedule of fees charged by CO-2 to other clients

The POA did not provide sufficient documentation to show that comparability data was use to determine
CO-2 compensation rates. The POA provided a national survey of salaries for consultants and managers.
The contracts were not competitively bid. The POA did not provide a fee schedule of rates typically
charged by CO-2. The POA provided project proposals by CO-2 and CO-2. CO-2’s Forms 1120 indicate
that the entities have sources of other revenue, but the sources and rates cannot be determined based on
the information provided.

Invoicing
In 20XX, CO-2 each invoiced ORG only once. CO-2 invoiced ORG on February 16, 20XX for $ for
expenses associated with the fundraising dinner event. CO-2 invoiced ORG on March 31,

20XxX for $ for “credit card pymt for social network (ORG).” The POA provided a timesheet as supporting
documentation for the CO-2 invoice; there was no supporting documentation for the CO-2 invoice.

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 Year/Period ended
ORG EIN December 31, 20XX

December 31, 20XX
December 31, 20XX
December 31, 20XX

Activities

The proposed activities cited in the Form 1023 were:

Virtual academies to link schools with the ORG program via video stream and interactive software
Community events to inform youth and adults about the importance of acquiring ORG ,

A learning academy consisting of seminars, mentoring, and youth development activities

School partnerships to offer ORG curriculum on campuses

0000

Examining agent had difficulty compiling a list of ORG activities supported by documentation. In response
to IDR #7, the POA submitted a list of seven activities tied to substantiation provided on a disk in response
to IDR #6. The following are activities as listed by them with elaboration drawn from interviews and other
documentation provided during the audit.

1) Adult Workshops
IDR #7

ORG stated that they developed these workshops for “young adults that were entering the workforce and
professionals that are looking for personal and professional development opportunities.” The courses were
provided on a bi-monthly basis, lasted 2.5 hours, averaged 15 participants, and cost $ per participant.
ORG did not define bi-monthly or state the number of workshops. ORG initiated this project, created the
curriculum, and conducted the workshops. CO-2 created all of the PowerPoint presentations and the
student workbook.

Additional Research
During interview #3, CEO explained that for ORG to be effective, they needed to instill the value of ORG in
the student, the parent, and the teacher. CEO said they invited the parents of participating kids to come to
adult ORG workshops, but the workshops were open to anyone who was interested. He estimated that
50% of the attendees were parents/guardians. He also stated that they did several workshops in 20XX.
No invitations or enrollment forms were provided.

A website capture dated May 20XxX indicates that the purpose of this programming is not to buttress ORG's
primary purpose.
We would like to encourage all Adults to have an open mind and take the time to look through the
information provided within this website. ORG™ is NOT just for youth; rather, we also Offer a
variety of courses to adults that will assist them in gaining the necessary skills they need to be
successful in every area of their lives. Whether you are trying to improve as a parent, professional,
or in any personal area of your life, ORG™ can assist you.

ORG provided copies of 14 sessions/presentations. The POA stated that no video footage was available to
substantiate the workshops. He also said that CO-7 and courses were the only programs
offered in 20XX.

CO-2 did not invoice ORG for this work in 20XX. The GL showed no corresponding adult ORG income.
The most likely GL item is “Program service fees’ totaling $. Per the GL, these courses cost$ each; the
POA had previously reported that the cost was $ and $, Under this account were 62 entries dated
12/XX/20XX with a memo of “Cash management” and 14 entries dated 12/XX/20XX with a memo of
“Financial management.” These titles do not match the presentations provided in response to IDR #6. On

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 December 31, 20XX
EIN December 31, 20XX
December 31, 20XX
December 31, 20XX

first look at this account, BM-1 wasn’t sure what these entries were. He then called them “single class
webinars.” This was the only program revenue on the GL and was reported on the F990.

The GL provides the best estimate of participation: 78 individuals participated in two workshops resulting in
income of $.

2) ORG Programs & Presentations
IDR #7

The taxpayer included ORG programs and presentations as an exempt purpose activity. The taxpayer
stated the organization “provided many of the programs and services, as well as personal development &
life skills training to this community organization.” ORG indicated that each activity/event lasted between
two and a half and five hours. The PowerPoint slides and documents included on the CD and the
description provided indicate the following:

o 4 motivational presentations/events/trainings on personal awareness and positive thinking

o 1 “appreciation event” which appears to be selling points and requests to support of CEO’s nine
companies
CO-18 agenda and presentation, promoting ORG to the audience
Presentation at the CO-20 National meeting saying that the church has partnered with ORG
Brainstorming notes on a play proposal for kids
Handouts for a day-long program for high school seniors
A flyer advertising two “youth forum” 1.5 hour workshops

00000

One document is CO-1 branded. Four items are co-branded with branding, an entity
never before mentioned during the audit. Several items are in line with ORG'’s exempt activity; motivational
trainings, agendas for relevant programming, flyers, and brainstorming. The rest are requests for support
for CEO’s businesses and pitching the ORG program.

ORG estimated the following participation:
o Workshops — average 150

Training — 100

Youth Address — 1,000+

Youth Forums — average 150

Event — 1,000+

0000

ORG created the curriculum/content and hosted the activities and events, while CO-2 created all of the
PowerPoint presentation templates. ORG provided copies of several presentations on a disk. The
organization stated that pictures of the “ORG Appreciation Event” were available on FaceBook.

Additional Research
The POA and taxpayer did not describe this activity at any other time during the audit. CO-19 and CO-20
are not identified in these supporting documents.

Earlier in the audit, ORG provided a “20XX Timeline of Programs and Services” which included “Youth &
Young Adult Summit” as one of the items. Several potentially related ‘youth items’ — a forum, an address, a
workshop — were included with the substantiation later provided. This may correlate with the CO-20/CO-19
presentations.

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 EIN December 31, 20XX
December 31, 20XX
December 31, 20XX
December 31, 20XX

A review of CO-2 invoices dating back to late 20XX showed no charges for CO-20, CO-19, or Youth &
Young Adult Summit. The GL shows that no community organization compensated ORG for ‘providing
programs and services.’

Based on the information provided, it is impossible to discern what the extent of ORG’s activities were and
how it furthered its exempt purpose. It appears that CO-20/CO-19 invited ORG to participate in events by
speaking and presenting motivational topics. An estimate of attendance based on the numbers provided
by ORG would be:

o 6-7 workshops/trainings of 100-150 each

o “appreciation” event and a youth address with attendance of 1,000 each

3) DINNER
IDR #7

The benefit dinner, a fundraising and appreciation event, was an oft-cited activity during
20XX. ORG stated that they “hosted a fundraising dinner which they recognized some of [their] community
supporters, highlighted [their] student’s successes, and informed the community of upcoming efforts.” The
taxpayer stated that over 400 individuals attended the event and that tickets cost $ or $ for students and
seniors. The target audience was “beneficiaries of our program, our current following, and our sponsors
and supporters.”

CO-2 created all collateral and organized, promoted, recorded media, and managed the event under the
professional services agreement. ORG provided copies of advertising posters and brochures, donation
slips, ticket order forms, solicitation letters to potential sponsors, event agenda, and a copy of the event
presentation describing the program and its accomplishments to date.

Additional Research
The POA stated that ORG made no invitations or solicitations to the public for the event. Family and
friends of 20XX CO-7 participants were “welcomed.” CEO stated that attendees came from all the
organizations and churches they had worked with, not just the prior participants. Tne POA previously
stated that tickets cost $ each. The GL shows approximately 300 individuals paying $ each.

The taxpayer indicated that video of the event was available on FaceBook. A video of CEO speaking
during the event was available on YouTube. In his speech, CEO promoted the program. There was no
view of the audience.

ORG correctly reported the dinner income of $ on the F990. The $ invoice from CO-2 for this work was the
only CO-2 invoice to the organization in the year under audit. The invoice included the line “event
promotional services” for $. The POA explained that this was to promote the event on Comcast Cable and
for the creation of 30- and 60- second commercials placed on CO-8, posters, brochures, event program,
event planning, and AV support (highlight video, recording of event, hosting of promotional materials
online). The dinner is responsible for approximately half of both the 20XX income ($) and expenses ($).

4) Speaking Engagements
IDR #7
The taxpayer cited speaking engagements as one of its exempt purpose activities. The taxpayer stated
that ORG was invited to participate as keynote speaker at six community events in 20XX and that they

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 Tax identification Number Year/Period ended

ORG EIN December 31, 20XX
December 31, 20XX
December 31, 20XX
December 31, 20XX

hosted two community appreciation events of their own. The six events they spoke at targeted youth in
primary school, secondary school, and college. The six events they spoke at as a guest were:

o Event-1
o Event-2
o Event-3
o EVENT-4
o Event-5
o Event-6

ORG claimed that 500-1,000 attendees were at each event. ORG provided a copy of a promotion for the
program as evidence of its speaking engagements.

CO-2 created the speaking engagement package for each event and CO-2 was responsible for the media
production.

Additional Research
The POA had previously confirmed that there had been four speaking engagements in 20XX:
o Event-5
o Event-7
o Event-8
o Event-9

A review of the relevant videos available on YouTube showed the speeches were all by CEO. In total,
there were five videos of CEO speaking engagements to varying size audiences in varying locations. No
dates or descriptions are included on the YouTube listings. It was impossible to tie the video of the
speeches to the events cited above.

ORG reported no income from the speaking engagements on the F990 or GL. There are no letters of
appreciation to CEO or ORG for doing these speaking events.

CO-2 had no speaking engagement invoices dating back to early 20XX. CO-2 had some media production
charges for unspecified projects on invoices dating to early 20XX. Media production charges for CO-2
should likely be contemporaneous with the date of the event.

The four to six speaking engagements likely did occur, although the size and nature of the events cannot
be substantiated. CEO has an active career that includes public speaking engagements. It is impossible
to separate CEO’s personal career from the speaking engagement activities of ORG.

5) Website
IDR #7

As substantiation of its exempt activities, ORG provided copies of “website files.” Most could not be
opened, but they appeared to be images of logos and other content to be included on the ORG website.
Also included were four PowerPoint presentations containing drafts of the website pages promoting the
ORG's positive thinking and personal awareness philosophy. ORG claimed the purpose of the website
was to serve their current community and to attract additional community members to their work. The
taxpayer stated that they created all of the content and that CO-2 designed and developed the website.
They stated project took 100 days.

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 EIN December 31, 20XX
December 31, 20XX
December 31, 20XX
December 31, 20XX

Additional Research
The taxpayer stated that they revamped the entire website from the original one developed in 20XX.
Earlier in the audit, the POA provided printouts from the ORG website to explain its activities. Video
streaming and reality-based content provided academic development, career exposure, and life changing
information. Most of the material seemed to be motivational-speaking type.

The only invoice from CO-2 in the year under audit is for $ for the social network. Web captures from 20XX
do not show evidence of the social network on the ORG website. ;

6) The Campaign
IDR #7
ORG partnered with (celebrity) on a bay area tour to promote his Campaign. The Campaign
organized the activity and ORG (CEO) participated as a speaker. The tour included visits to three middle
and high schools in the cities of City and City. The taxpayer stated that the tour targeted youth who
showed leadership potential in their local communities. The taxpayer claimed they spoke to over 2,000
students in total over the course of one day.

ORG provided as substantiation a copy of the project budget (charging the Campaign $ for its work), an
agreement on how the facilitators from the two groups will work together, and a presentation on the “S
Phases” for implementation of the program.

The POA included as substantiation a copy of the regular ORG program outline and application, and a CO-
2-branded presentation on the 5 Phases, including slides on seven of CEO’s other companies. The line
between the tax-exempt organization and the for-profit companies started by CEO is not always clear.

CO-2 was responsible for media production and created the * ” proposal.

Additional Research
In response to an IDR, the POA agreed with the following statement describing the program: “Work was
done to create a partnership with other program developers, but this program did not come to fruition.”
The POA stated that they created enrollment forms and a fee schedule for the program as well. Because
the program did not come to fruition, none of this was implemented. There are no corresponding invoices
from CO-2 dating back to January 1, 20XX.

A review of video footage showed a “pitch” speech at the with a tiny
crowd and motivational speeches by CEO and others at CO-19, CO-20, and at CO-21. The video
combined highlights of all the speeches, so it was difficult to discern exactly what happened at each.
Crowds of kids range from 20-500 and appear more like high school assemblies than targeted
programming.

7) CO-7
IDR #7
The taxpayer stated that ORG conducted the program for 2.5 hours per week for 10 weeks with youth aged
16-24. ORG sought out 30 students, and actually served 27. ORG provided copies of nine workshop
presentations, activities, and games used during the presentations. ORG created the curriculum and
conducted the workshops while CO-2 created the PowerPoint presentations, student workbook tempiates,

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 El December 31, 20XX
N December 31, 20XX
December 31, 20XX
December 31, 20XX

and all activities for the program. CO-2 was responsible for media production. The taxpayer stated that a
highlight video was available on FaceBook and “a full playlist of the program” was available on YouTube.

Additional Research
The POA and the taxpayer stated several times that 20XX was the only year that they conducted the
program. BM-1 said that the organization had spent some time developing the program to be used with
The Campaign. When that fell through, they decided to continue with it on their own. CEO also stated that
“CO-7” is more of a philosophy than a program. It influences much of ORG’s activity.

The POA provided a copy of the roster of 27 students. There were no enrollment forms. BM-1 said that
tuition was originally $, but that they would only charge this as necessary in the future. In 20XX, there was
no charge to participate.

The POA initially stated that in the year under audit, the CO-7 program was a free series of 8-13 workshops
and provided 12-workshop syllabus. ORG did not have any “homework” or other items completed by
participants as evidence of youth involvement. ORG did not have any flyers or posters advertising the
program to share. Most participants were attracted through public speaking engagements.

ORG syllabus:

1) orientation

2) personal s.iccess

3) success tninking

4) committed‘to success

5) success planning
) decision for success
7) relationship for success
8) success communication
9) living success

ORG stated that Leadership Program clips on YouTube are from the CO-7 program. Previously they had
stated that they did not have the Leadership Program in the year under audit. The Leadership Program
was intended for graduates of the CO-7 program; the material is likely very similar. The clips show
persona! development workshops with 20-30 participants at two venues. This material is undated and
unlabeled on YouTube.

ORG stated that no charges on the single invoice from CO-2 in 20XX were for expenses related to the CO-
7 program. Theie are no CO-2 invoices for CO-7 dating back to January 1, 20XX. CO-2 submitted an
invoice dated December 15, 20XX for $ with the project name “foundation curriculum.” This may be for
CO-7 development, although ORG stated that they created the curriculum and CO-2 created the collateral.

Activities Summary
The overall theme of the workshops, speaking engagements, and presentations is motivational and self-
improvement. In CEO’s speeches, he often utilizes his CO-7 philosophy, encouraging people to take
control of their lives, because “you are the CEO of the business of running your life.” ORG'’s workshops
take participants through a self-assessment of their strengths and their needs, and lay out the steps to self-
improvement, outlining the basis of setting goals, forming good relationships, and so on.

Department of the Treasury-Internal Revenue Service

Form 886-A (1-1994) Catalog Number 20810W Page 17 publish.no.irs.gov

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended

ORG EIN December 31, 20XX
December 31, 20XX

December 31, 20XX
December 31, 20XX

Several other activities came up over the course of the audit but were not presented on ORG's final list of
activities. One of the best developed, but apparently not enacted activities, was selling ORG-branded
clothing to promote the “movement”. It was suggested that “youth would wear ORG paraphernalia”
regularly in a proposed program. The POA suggested that retails sales was an expected income streams
contributing to future profitability. No income from sales of such items was reported on the Form 990 or
recorded on the GL for 20XX.

The social network’ was another potentially exempt purpose activity not listed as an activity. The purpose
of the social network was to engage kids, parents, and teachers using popular, modern technology. During
the audit, CEO made a brief demonstration of the current version of the social network. Web captures from
20XX do not show that it was operational in 20XX. The CO-2 invoice for 20XX says “social network’ on it.
It is unclear what the status of this activity was in 20XX.

The actual activities can be grouped this way:
o Fundraising - the fundraising dinner
o Marketing - CEO’s speaking engagements and speaking at other organizations’ events in order to
promote the ORG program and CEO and his business philosophies
o Exempt purpose activities — the CO-7 program run once with 27 participants and the ORG website
giving information about the organization to the community; the adult self-improvement workshops

The actual activities had little consistency with what ORG proposed during the determination process. Only
the exempt purposes activities were consistent, and they comprised a small portion of overall activities.
Marketing events may have coincided with community events. The community speaking events ultimately
served to draw participants into the CO-7 and ORG philosophies. The details and the inconsistency of the
activities indicated there is not a comprehensive plan to become “the largest community of successful
youth in the world”

The activities of CEO’s companies and ORG had significant overlap. The absence of income and
expenses for many cited activities failed to support that the activity occurred or indicated that another
company may have recorded the activity on its books. CEO's speaking resume on the CO-12 website
includes seven speaking engagements from 20XX about ORG, including the

Accrued Liability

The GL showed a liability at the end of 20XX of $ to CO-2 and $ to CO-2. The POA provided invoices
substantiating these liabilities. The following charts are compiled primarily from the GL accounts, and
contain relevant information from project time sheets and the interviews to paint a more complete picture of
ORG’s activities.

CO-3 Accounts Payable

date notes payment invoice balance due
08/31/XX__ rent, parking, other occupancy
10/01/XX rent, parking, other occupancy
10/01/XX
40/01/XX
11/29/XX advance
12/31/XX__ professional fees - other
12/3 1/KX

Form 886-A (1-1994) Catalog Number 20810W = Page__18 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A
(Rev. January 1

EXPLANATIONS OF ITEMS

994)

Schedule number or exhibit

Name of taxpayer

ORG

Tax Identification Number

EIN

Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX
December 31, 20XX

01/01/XX

event,
08/1E/AX

01/01/XX

information session event,
09/16/XX

01/01/XX

personal awareness event,
09/30/XX

01/01/XX

discipline event, 11/01/XX;
tour

01/01/XX

positive thinking event, 10/14/XX;
tour

01/01/XX

O1/01/KX

rent, parking, other occupancy

01/01/XX

rent, parking, other occupancy

01/01/XX

01/01/XX

01/01/XX

01/01/XX

legal fees, contracted AV
broaacasting services

01/0 1/XX

01/13/XX

ORG, Positive Relationships
event: executive, accounting,
marketing, event promotional,
research & development, audio
visual & IT, administrative,
mileage, document reproduction,
cost of refreshments and creating
overall facility look & feel, cost of
facility

05/16/XX

Gala eventfor Academy:
executive & leadership,
accounting, marketing, event
promotional, audio visual & IT,
administrative, mileage,
document reproduction, cost of
facility ($$)

August 2QXX - Form 1023 Application for Recognition of Exemption signed by CEO and received by IRS.

12/XX/XX

luncheon event:
executive & leadership,
accounting, marketing, event
promotional, audio visual & IT,
administrative, mileage,
document reproduction, cost of
facility ($)

12/3 1/XX

12/3 11XX

photography and billboard rental

12/3 1/XX

01/23/XX

teleservices transfer

Form 886-A a

-1994) Catalog Number 20810W Page 19 publish.no.irs.gov

Department of the Treasury-Internal Revenue Service

Form 886-A
(Rev. January 1

994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer

ORG

Tax Identification Number

EIN

Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX
December 31, 20XX

02/16/XX

fundraising event:
executive & leadership,
accounting, marketing, event
promotional, audio & IT,
administrative, mileage,
document reproduction, cost of
facility ($)

O3/XX/XX

12/01/

teleservices transfer

The primary expenses incurred to CO-2 were for events, including at least one fundraiser, and ranged in
cost from $to $ each. None of the expenses were for curriculum development or programming with youth.

CO-2 Accounts Payable

date notes payment invoice balance due

09/21/XX _ suppiies
supplies (summed eight line

09/22/XX __ items)

10/XX/XX__ supplies (summed 16 line items)

10/14/XX__ supplies

10/16/XX__ supplies

10/18/XX __ supplies

11/XX/XX__ supplies

11/XX/XX __ supplies

11/XX/XX __ supplies

11/22/XX__ supplies
Only Believe: brainstormed
product concept, created content
outline, coordinated media
recording, media recording and
editing ($), product package
design, product pricing, marketing
strategy, added to ecommerce
site, added to fulfillment
operations, mileage, supplies and
equipment ($), product

01/01/XX reproduction

01/29/XX
Organize Your Life: brainstormed
product concept, created content
outline, coordinated media
recording, media recording and
editing, product package design,
product pricing, added to
fulfillment operations, added to
ecommerce site, document
reproduction, suplies &

03/01/XX equipment, marketing strategy

Form 886-A (1-1994) Catalog Number 20810W Page 20 _publish.no.irs.gov ePartment 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
December 31, 20XX
ORG EIN December 31, 20XX
December 31, 20XX
December 31, 20XX

Audio Book: brainstormed
product concept, created content
outline, coordinated media
recording, media recording and
editing, product package design,
product pricing, marketing
strategy, product fulfillment, added
to ecommerce site, mileage,
03/01/XX document reproduction
August 20XX - Form 1023 Application for Recognition of Exemption signed by CEO and received by IRS.
Foundation Curriculum:
brainstormed product concept ($),
created content outline ($),
coordinated media recording,
media recording and editing,
product package design, product
pricing, marketing strategy,
12/15/XX_ document reproduction ($)

42/2 11XX

marketing, credit card payment for
03/31/XX__ ORG social network

06/05/XX
08/25/XX
O9/XX/XX
09/15/XX
11/25/XX

Most of the expenses incurred to CO-2 were for product/media development and production. The Only
Believe and Organize Your Life events didn’t relate to any CO-2 invoices. An audio book was never
mentioned during the audit, although CEO’s book, _ is for sale on several of his companies’
websites. The December 15, 20XX foundation curriculum invoice could be for program curriculum
development. The 20XX social network invoice could be related to the organizations exempt purpose.

Law

IRC 501(c)(3) says:
Corporations, and any community chest, fund, or foundation, organized and operated exclusively for
religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster
national or international amateur sports competition (but only if no part of its activities involve the
provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, 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 (except as otherwise provided in subsection (h)), and which does not
participate in, or intervene in (including the publishing or distributing of statements), any political
campaign on behalf of (or in opposition to) any candidate for public office.

Treasury Regulation 1.501(c)(3)-(1)(a) says:
Organizational and operational tests. (1) 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

Form 886-A (1-1994) Catalog Number 20810W Page 21 _ 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 EIN December 31, 20XX
December 31, 20XX
December 31, 20XX
December 31, 20XX

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.

Treasury Regulation 1.501(c)(3)-(1)(c) says:
Operational test - (1) Primary activities. 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.

Treasury Regulation section 53.4942(b)-1(a)(2)(ii) defines “primarily” as at least 50%. Treasury Regulation
section 53.4942(b)-1(c) defines “substantially all” as 85% or more. Therefore “insubstantial” means less
than15%.

In Revue Ruling 76-152, 1976-1 C.B. 151, a group of art patrons formed an organization to promote
community understanding of modern art trends. The organization selected modern art works of local artists
for exhibit at its gallery, which was open to the public, and for possible sale. If an artwork was sold, the
gallery retained a commission of ten percent and paid the remainder to the artist. The ruling states:
If the purposes or operations of an organization are such that private individuals who are not
members of a charitable class receive other than an insubstantial or indirect economic benefit there
from, such activities are deemed repugnant to the idea of an exclusively public charitable
purpose... This result is the same, moreover, even if the purposes and activities of the organization
would be charitable were it not for the element of private benefit.

On the facts of the instant proposal we believe a prohibited direct economic benefit is conferred on
the individual artists by the gallery's sale and rental of the art works. .... [T]he sale activity provides
the artist with a direct monetary benefit and serves to enhance his artistic career. This benefit
cannot be dismissed as being merely incidental to the organization's other exempt purposes and
activities as it is substantial by any measure.

In Church by Mail, Inc. v. Commissioner, T.C. Memo, 1984-349, affd, 765 F.2d 1387 (9th Cir. 1985), two
evangelists formed a “church” whose principle activity was mailing out holy water, prayer cloths, and
solicitations for donations. They also started a direct mail company. The church contracted with the direct
mail company and the direct mail company purchased computer services from a data processing company
whose stock was owned by the two evangelists. All three entities also employed the evangelists and their
families. The church operated at a loss because of the expense of the direct mail campaigns and was only
able to keep operating because of loans and advances from the direct mail company. The court stated:
The critical inquiry is not whether particular contractual payments to a related for-profit organization
are reasonable or excessive, but instead whether the entire enterprise is carried on in such a
manner that the for-profit organization benefits substantially from the operation of the Church.

The Court determined that the church was not entitled to exemption because it was operated for the
substantial nonexempt purpose of enriching the evangelists and their families. The church cancelled its
contract with the direct mail company, but the Court held that this did not stop the flow of funds to the
evangelists. Formal legal control is not necessary if the facts demonstrate dual control of the two entities.

Inurement

Form 886-A (1-1994) Catalog Number 20810W Page 22 _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 EIN December 31, 20XX
December 31, 20XX

December 31, 20XX
December 31, 20XX

Treasury Regulation 1.501(c)(3)-(1)(c)(2)provides: “Distribution of earnings. An organization is not
operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the
benefit of private shareholders or individuals.”

Treasury Regulation 1.501(c)(3)-1(d)(1)(ii), provides that:
An organization is not organized or operated exclusively for [exempt purposes] unless it serves a
public rather than a private interest. Thus, to meet the requirement of this subdivision, it is
necessary for an organization to establish that it is not organized or operated for the benefit of
private interests such as designated individuals, the creator or his family, shareholders of the
organization, or persons controlled, directly or indirectly, by such private interests.

Treasury Regulation 1.501(a)-1(c) defines a private shareholder as “... persons having a personal and
private interest in the activities of the organization.” Inurement refers to the non-incidenta! diversion of
assets, which are supposed to be dedicated to charitable purposes, to an insider of the organization. See
American Campaign Academy v. Commissioner, 92 T.C. 1053, 1068 (1989).

Treasury Regulation 1.501 (c)(3)-1(f)(2)(ii) states:
Determination of whether revocation of tax-exempt status is appropriate when section 4958 excise
taxes also apply. In determining whether to continue to recognize the tax-exempt status of an
applicable tax-exempt organization (as defined in section 4958(e) and § 53.4958—2) described in
section 501(c)(3) that engages in one or more excess benefit transactions (as defined in section
4958(c) and § 53.4958—~4) that violate the prohibition on inurement under section 501(c)(3), the
Commissioner will consider all relevant facts and circumstances, including, but not limited to, the
following--
(A) The size and scope of the organization's regular and ongoing activities that further exempt
purposes before and after the excess benefit transaction or transactions occurred;
(B) The size and scope of the excess benefit transaction or transactions (collectively, if more than
one) in relation to the size and scope of the organization's regular and ongoing activities that further
exempt purposes;
(C) Whether the organization has been involved in multiple excess benefit transactions with one or
more persons;
(D) Whether the organization has implemented safeguards that are reasonably calculated to
prevent excess benefit transactions; and
(E) Whether the excess benefit transaction has been corrected (within the meaning of section
4958(f)(6) and § 53.4958-7), or the organization has made good faith efforts to seek correction from
the disqualified person(s) who benefited from the excess benefit transaction.

In Housing Pioneers, Inc. v. Commissioner, 58 F.3d 401 (9th Cir. 1995) the organization's purpose was to
provide affordable housing for low income and handicapped persons. The organization entered into an
agreement with a for-profit partnership to participate in a project whereby the for-profit's property would be
exempt from property tax. As part of the agreement, the for-profit loaned money to the exempt to buy an
interest in and become a general partner. Part of the property tax savings was to go to the general
partnership to keep rents low and part to the exempt organization for its charitable purposes. The court
ruled that even though the tax reductions were to be used exclusively to make rents affordable, private
inurement was present. Federal income tax advantages and property tax reductions resulted in inurement
at least indirectly to the benefit of the non-exempt partners (two of whom were insiders with respect to the

Form 886-A (1-1994) Catalog Number 20810W Page 23 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 EIN December 31, 20XX
December 31, 20XX
December 31, 20XX
December 31, 20XX

exempt entity) because their partnerships were relieved of maintaining rents at a level sufficient to cover
operating expenses that would otherwise have to be paid out of partnership capital.

Record keeping and reporting requirements

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 1.6001-1(c) of the Treasury Regulations 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, receipts and disbursements. 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 Treasury Regulations provides that the books or records required by this section
shall be kept at all times available for inspection by authorized internal revenue officer or employees, and
shall be retained as long as the contents thereof may be material in the administration of any internal
revenue law.

IRC section 6033(a)(1) states that, except as provided, every organization exempt from tax under IRC
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.

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 Service for the purpose of
inquiring into its exempt status and administering the provisions of subchapter F (i.e., IRC section 501 and
following), chapter 1 of subtitle A of the Code, IRC section 6033, and chapter 42 of subtitle D of the Code.

An organization's failure or inability to file required information returns or otherwise to comply with the
provisions of IRC section 6033 and the regulations which implement it, may result in the termination of the
organization's exempt status based on the grounds that the organization has not established that it is
observing the conditions that are required for the continuation of its exempt status. These conditions
require the filing ci a complete and accurate annual information return (and other required federal tax
forms) and the retention of records sufficient to determine whether the organization is operated for the
purposes for which it was granted tax-exempt status and to determine its liability for any unrelated business
income tax.

Taxpayer Position
The taxpayer's position is unknown at this time.

Government Position

1) Does the organization operate primarily for exempt purposes?

IRC 501(c)(3) exempts corporations...organized and operated exclusively for charitable...or educational
purposes. An organization is not organized or operated exclusively for one or more exempt purposes

Form 886-A (1-1994) Catalog Number 20810W Page 24 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 EIN _ December 31, 20XX
December 31, 20XX
December 31, 20XX
December 31, 20XX

unless it serves a public rather than a private interest. The burden is on the organization to establish that it
is not organized and operated for the benefit of private interests such as the founder or their family,
shareholders of the organization, or persons controlled, directly or indirectly, by private interests. The
organization's activities must be broad enough in scope to confer a public benefit versus serving to benefit
only a few. Serving the public is a basic tenet of the law of charity whose purpose is to ensure that those
who constitute the "public" benefit equally.

A review of details of the relationship between ORG and CO-2 showed that ORG served a private interest
and was not operated exclusively for charitable purposes. An analysis of each of ORG’s activities and the
actual results of each activity shows both a qualitative and a quantitative private benefit to CEO, CEO’s
companies, and BM-2.

Characteristics of Private Benefit Relationships
Control

CEO owned and operated several closely tied businesses, including ORG, under the umbrella entity CO-

12. BM-2 was an officer of ORG and at least two of CEO’s businesses, including CO-2. The original
    exemption application for ORG showed CEO and BM-2’s intent to maintain control of ORG via a board
    comprised solely of CO-2. The application also showed original intended compensation to CEO of $
    The control that CEO and BM-2 had over the entities and the entities’ closeness allowed them to use ORG
    to benefit themselves and the for-profit businesses.

The minutes of the 20XX annual board meeting were brief and written in legal language. They attempted
to convey a sense of a well-run organization that adhered to the letter of the law. The minutes failed to
show any involvement of the board in the mission of the organization.

While no more than 49% of the board was comprised of interested persons, the independence of the board
was not certain. The board exercised little control over ORG activities. The POA provided conflicting
information about board involvement. Initially, the POA stated that meeting minutes did not record any
discussion of program function, duties, or responsibilities because there were no designated committees.
Rather, BM-1 handled the majority of duties. Later, the POA stated that the board held an annual meeting
with BM-1 to discuss the direction(s) ORG would take during the next year. The POA indicated that the
board made final decisions regarding ORG programming with significant input by BM-1. The meeting
minutes do not reflect this.

Conflict of Interest Policy
The board composition included CEO and BM-2, which ensured that members of CO-2 and CO-2 were
present at all board meetings and involved in planning ORG’s operations. As noted above, the conflict of
interest policy required that interested persons not be present for discussions of and vote on transactions
that might result in a conflict of interest. Meeting minutes do not indicate adherence to the policy or include
the content of the discussion and reasons for determining a conflict of interest did not exist.

Fundamentally, the conflict of interest policy stated that a conflict of interest existed only if the board
determined that there was one. Regardless of the independence of the board, this effectively negated any
protections this policy provided to ORG.

Management Contract with Insiders

Form 886-A (1-1994) Catalog Number 20810W Page_25 _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 EIN December 31, 20XX
December 31, 20XX

December 31, 20XX
December 31, 20XX
Several elements of the management contractors lent themselves to serving private interests. The
management contract did not provide for any specific deliverables for the board to monitor. The
management companies essentially were ORG. Without the CO-2, ORG would not have existed.

ORG did not seek competitive bids for services. It is unclear if CO-2 had ever before run a nonprofit similar
to ORG. The net loss of $ resulting from the fundraiser did not indicate that CO-2 was good at fundraising
and called into question the true intent of the fundraiser.

Additional elements of the management contracts were common to private benefit relationships. The
contract was open-ended, indefinitely benefitting BM-2, CEO, and his companies. ORG agreed to a
contractual provision barring the solicitation of the contractor's employees.

ORG Activities and Beneficiaries
-Fundraising

The fundraising dinner event reached 350 individuals who ORG solicited via public speaking
events and through former participants. Benefit to attendees of this event was purely incidental. Video
footage shows the continued promotion of ORG’s self-improvement programming. The purpose of this
fundraising event was to increase the liability to CO-2, to raise funds to pay down this liability, and to
promote CEO's speaking career and business philosophies. The event raised $ but cost $ payable to CO-

2. In 20XX, the net accounts payable to CO-2 increased to $ due. The true beneficiaries were CO-2, its
   owner CEO, and its CFO BM-2.

Marketing
Benefit to attendees at speeches and presentations was incidental. CEO used the opportunities to
promote ORG and his CO-7 philosophy, and to demonstrate and promote his own speaking ability. The
Campaign in particular was an opportunity to work with a celebrity to gain access to schools and a broader
basis of support. These outreach events resulted in a larger pool of potential donors to invite to fundraising
events. Income from these speaking engagements, if any, was not recorded on the ORG GL; it may have
been recorded on CO-12’ GL. The true beneficiaries were the debt holders, CO-2, BM-2, and CEO and his
personal enterprise.

Exempt Purpose Programming
Nearly all organizations must have a website to reach their constituencies and to inform the public of their
activities. ORG hired CO-2 to create and manage the website. In the primary year under audit, ORG
incurred a $ liability to CO-2 for work on the social network/website.

ORG’s CO-7 program was a version of CEO’s CO-7 company targeted at youth aged 16 to 24. While the
there was an educational component to the self-improvement workshops, the true intent was to gain
marketing access to schools, churches, and community spaces. This access allowed CEO to grow the
base of financial support and to expose people to his CO-7 “mental philosophy” and his personal brand.
Likewise, Adult ORG exposed participants to CEO’s business and life philosophies and potentially to his
other for-profit businesses, such as CO-18. Some benefited from participating in ORG’s CO-7 and Adult
ORG programs, but CEO’s companies also benefitted from the exposure.

Qualitative Benefit
The private benefit to CEO, CO-2, and CO-2 was not incidental or merely a necessary byproduct of ORG’s
programming. Certainly, ORG had the right to contract for management expertise; however, it had the

Form 886-A (1-1994) Catalog Number 20810W Page 26 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 EIN December 31, 20XX
December 31, 20XX
December 31, 20XX
December 31, 20XX

option to hire experienced employees or use volunteer staff. ORG could have conducted its activities
without conferring benefit on CEO, his companies, or BM-2.

ORG's activities generally promoted CEO and his collection of for-profit businesses. The CO-7 philosophy
served as the basis of ORG and of CEO’s CO-7 business. It is difficult to draw a line between the two
activities. Part of the intent of the ORG program was to get individuals enrolled mentally in the philosophy.
The speaking engagements, events, and ORG participants provided opportunities to expose new
customers to CEO’s other businesses. The ORG speaking engagements were inseparable from CEO’s
career as a speaker. CO-2’s relationship with ORG gave the companies access to ORG's charitable
receipts. ,

Quantitative Benefit
The nature of the activities and ORG’s method of documenting its activities make it very difficult to quantify
the public versus private benefit. Based on estimates provided by ORG and a review of substantiation
provided, the following quantifiables are present:

ORG shared
participants participants duration income expense
Adult ORG
workshops 78 2 days
CO-19 programs
and presentations 2813 ?
fundraiser dinner 350 1 evening
CEO speaking
engagements 2500 4-6 hrs total
Website/social
network 100 days
Campaign 20XX 1 day
2.5 hrs/wk, 9
CO-7 program. 27 wks
. total 455 7313

While ORG claims to have affected over 7,000 individuals, most of this is by participating as a speaker at
events hosted by other organizations. ORG has only directly affected 27 youth and 78 adults through its
exempt purpose programming. This is only 1% of all individuals the organization claims to have touched.

No income or expenses from activities with questionable exempt purposes, such as CEO's speaking
engagements, were recorded on ORG’s GL. Because of the interrelatedness of all of CEO’s businesses,
the exempt nature of any activity might be claimed by ORG, while the income or expense could be
recorded on another company’s books. The absence of income for CEO’s speaking engagements
indicates that CO-12 might have collected payment. CEO’s speaking resume on CO-12 website includes
several speaking engagements about ORG.

The income and expense analysis of the fundraising event is revealing. ORG paid CO-2 $ to manage the
fundraiser. ORG received $ in donations from the event, resulting in a net loss of $. CEO stated that the
fundraiser was their first large event and that they learned from the experience. A review of past invoices

Form 886-A (1-1994) Catalog Number 20810W Page 27 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 EIN December 31, 20XX
December 31, 20XX
December 31, 20XX
December 31, 20XX

indicates that the fundraiser was not the first large event that ORG hired CO-2 to manage
(e.g. ). The true purpose of the event was not to fundraise for ORG, but to increase liabilities
to CO-2 and to raise funds to make payments to CO-2.

The relationship with ORG gives CEO and his companies access to ORG’s tax-exempt status and its
contributors. This provides an alternate revenue stream to keep his companies in business.

While some members of the public may have benefitted from ORG’s activities, the benefit to CEO, CO-2,
CO-2, and BM-2 negates that benefit. The accounts payable to CO-2 and CO-2 are substantial. At the
close of 20XX, ORG owed $ to CO-2. ORG does have some charitable potential, but its activities taken as
a whole are not exclusively in furtherance of exempt purposes. There is a substantial nonexempt purpose
of providing benefit to CEO, CO-2, and CO-2. Any benefit to youth is secondary and incidental to ORG's
activities.

Does the ORG’s net income inure to the benefit of the founder and board chair?

IRC § 501(c)(3) exempts corporations organized and operated exclusively for charitable or educational
purposes when no part of the net earnings inures to the benefit of any private shareholder or individual. An
organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole
or in part to the benefit of private shareholders or individuals. Inurement is concerned with the direct
transfer of income or provision of services unrelated to exempt purposes. A private shareholder or
individual is considered an "insider" with respect to the exempt organization

ORG's net income inures to the benefit of CEO through payments to CO-2 in excess of the value received.
CEO is the sole shareholder of CO-2. In 20XX, the only payment to CO-2 was greater than the value
services provided by CO-2. The fundraising event ORG contracted with CO-2 to manage cost $ yet raised
only $ resulting in a net loss for the organization.

The value received by ORG in terms of the number of youth served is far smaller than the value of $ owed
to CO-2 at the end of 20XX.

CO-12, CO-2, and CO-2 are structured so closely that ORG’s income inures to the benefit of CEO.
Donations made to ORG are transferred to CO-2 to pay down accrued liabilities. Although the payments
are for operational costs of the organization, donations to ORG relieve CO-2 from covering their own
Operating expenses. Especially in the current weak economy, this income keeps CEO’s businesses
operational. It is in CEO’s interests to keep ORG operational, and to expand and extend CO-2’s
commercial activities through the organization.

Conclusion

As a result of the examination of the Forms 990 filed by ORG for periods ending December 31, 20XX:
December 31, 20XX; December 31, 20XX; and December 31, 20XX, the examining agent has determined
that ORG no longer qualifies as an exempt organization described in the IRC section 501(c)(3) for the
following reasons:

Issue #1

The organization is not operated primarily for exempt purposes. It is operated primarily for the purposes of
funneling money to the founder's for profit companies, the for profit companies’ officers BM-2 and CEO,
and to promote the founder’s speaking career.

Form 886-A (1-1994) Catalog Number 20810W Page_28 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer

Tax Identification Number

Year/Period ended

ORG December 31, 20XX
EIN December 31, 20XX
December 31, 20XX
December 31, 20XX
Issue #2

Income to the organization inures to the benefit of the organization founder through payments to his for
profit companies. The organization’s exempt status should be revoked as of January 1, 20XX.

Form 886-A (1-1994)

Catalog Number 20810W ==Page_ 29 publish.no.irs.gov

Department of the Treasury-Internal Revenue Service