IRS revoked a charity's section 501(c)(3) exemption

Plain-English summary

The IRS revoked an organization's tax exemption under section 501(c)(3). The IRS found that the organization did not operate exclusively for exempt purposes, commingled its account with the founder's and the founder's brother's finances, and failed to substantiate its expenditures. The organization also sent money overseas to family members without the expenditure responsibility it had described in its exemption application. The revocation means contributions are no longer deductible under section 170, and the organization must file Form 1120 for the applicable years and later years.

Ruling snapshot

• Question: Did the organization qualify for continued exemption under section 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 501(c)(3), 170, 7428, and 6033; Treas. Reg. §§ 1.501(c)(3)-1(c)(1), 1.501(c)(3)-1(c)(2), 1.501(c)-1(d)(1)(ii), and 1.6033-2(i)(2)

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examinations 501.03-00
1100 Commerce Street, MC 4920 DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION June 20, 2013

Number: 201402016
Release Date: 1/10/2014

LEGEND Taxpayer Identification Number:
ORG - Organization name Person to Contact:
XX - Date Address - address identification Number:

Contact Telephone Number:
ORG

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
to you dated September 23, 20XX is hereby revoked and you are no longer exempt
under section 501(a) of the Code effective September 26, 20XX.

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

You are not operating exclusively for any charitable purpose, educational purpose, or
any other exempt purpose. Our examination reveals that you are not engaged primarily
in activities which accomplish charitable, educational or other exempt purposes as
required by Treas. Reg. 1.501(c)(3)-1(c)(1). Your activities, including your financial
transactions, more than insubstantially furthered non-exempt purposes. Moreover, you
failed to establish that you were not operated for the benefit of private interest of your
founder and sole officer as required for continued recognition of exemption pursuant to
Treas. Reg. 1.501(c)(3)-1(d)(1)(ii). Your income inured to the benefit of private
shareholders and individuals.

Contributions to your organization are no longer deductible under IRC §170 after
September 26, 20XX.

You are required to file Form 1120 U. S. Corporation Income Tax Return. These
returns should be filed with the appropriate Service Center for tax years ended
December 31, 20XX, December 31, 20XX, December 31, 20XX and for all years
thereafter in accordance with the instructions of the return.

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

If you decide to contest this determination under the declaratory judgment provisions of
section 7428 of the Code, a petition to the United States Tax Court, the United States
Claims Court, or the district court of the United States for the District of Columbia must
be filed before the 91st Day after the date this determination was mailed to you. Please
contact the clerk of the appropriate court for rules regarding filing petitions for
declaratory judgments by referring to the enclosed Publication 892. You may write to
these courts 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
that you have to file a petition in a United States court. The Taxpayer Advocate
can, however, see that a tax matter that may not have been resolved through
normal channels gets prompt and proper handling. You may call toll-free, 1-877-
777-4778, and ask for Taxpayer Advocate Assistance. If you prefer, you may
contact your local Taxpayer Advocate at:

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

Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosure:

Publication 892

Department of the Treasury Date:

Internal Revenue Service October 31, 2012

IRS Tax Exempt and Government Entities Division Taxpayer Identification Number:
450 Golden Gate Ave, MS 7401
San Francisco, CA 94102 Form:

Tax year(s) ended:

ORG RESS 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. 6-2012)
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

Schedule number or exhibit
Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)
Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN 12/31/20XX
12/21/20XX
12/31/20KX
LEGEND
ORG - Organization name EIN - ein XX - Date City - city State -
state Country - country website - website Founder - founder RA-1 -
1st RA Co-1 THROUGH CO-11 - 1st through 11th COMPANIES

Issue:
Is ORG an organization exempt from tax under section 501(c)(3) of the Internal Revenue Code?
Facts:

ORG (ORG) was incorporated in the State of State on September 26, 20XX. ORG received recognition
as an organization exempt under Internal Revenue Code section 501(c)(3), and section 170(b)(1)(a)(vi),
on September 23, 20XX effective September 26, 20XX.

On February 24, 20XX, the Service issued Letter 3613 and Form 4564 to the organization along with
Publication 1, Your Rights as a Taxpayer. The form asked the organization for information about its
activities including “All books and records of its assets, liabilities, receipts and disbursements.” Some
information was provided on April 30, 20XX, the date of the examination. The organization provided
CO-1 statements, CO-2 wire transfers, and photographs of individuals distributing bread in Country.
With the exception of one invoice for insurance for a fundraising event purportedly held on 7/11/20XX,
ORG did not provide contemporaneous receipts or similar substantiation for its expenditures. Founder,
founder and sole officer of ORG, stated that he does not keep ORG receipts, and that he ‘threw them
away’.

Activities

Founder stated that he created ORG to help the less fortunate and hungry, and that its goal is to open up
a food bank one day. ORG is advertised on the website website and accepts CO-1 donations. ORG also
advertises on CO-3, CO-4, and CO-5.

Founder stated that ORG’s conducted the following activities in 20XX - 20XX:

• A Ramadan fundraiser in 20XX

• Donated books and Christmas toys at CO-6 (20XX)

• Wire transferred money to family in Country to distribute bread on the streets to the hungry.
  Founder stated that this activity has been discontinued because people are being poisoned by the
  Taliban.

• Distributed sandwiches in the streets of City

• Conducted a hunger walk/fundraiser in July or August 20XX at CO-7

Founder stated that no one showed up for this event, and that he used close to $ of personal funds
to pay for the event. Expenses included event flyers, food, paintball arena, martial arts school,
24 x 7 gym, musicians, etc.

• Donated books and pens to the CO-8 (20XX)

• Organized clothing drives for donation to the CO-9

Founder stated that ORG had a CO-10 account but closed this account in 20XX due to errant hotel
charges (~$) at an event in City, State. ORG did not provide the bank statements for 20XX. ORG has a
CO-1 account, which it shares with Founder’s and his younger brother’s personal finances. Founder’s
younger brother owns an entertainment business that conducts festivals called CO-11.

Revenue and Expenditures

ORG receives CO-1 donations, and money from donation cans in 11 stores around City, State. Founder
stated the CO-1 account is shared between himself and ORG.

CO-1 statements from 20XX through 20XX report the following revenues, consisting of purported
donations and personal income from Founder and his younger brother’s business:

20XX 20XX 20XX
Total $
(Less Personal)
ORG ‘donations’ $

CO-11’s receipts totaled $ and $ in 20XX and 20XX, respectively. On July 30, 20XX, Founder stated
that these funds were from the festival conducted by Founder’s brother. ORG let CO-11 use its pay pal
account and the funds were paid back to Founder’s brother.

Schedule number or exhibit
Form 886-A _ EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN 12/31/20XX
12/21/20XX
12/31/20XX
Expenditures
20XX 20XX 20XX
CO-1 (sent) $ .
(less personal) $
ORG payments $
CO-2 $
Total ORG $

On July 6, 20XX, The Revenue Agent asked ORG if it had located any records that it “tossed out” for
the 20XX year and to provide receipts, invoices and similar documentation supporting all organizational
expenditures and how they served an exempt purpose for years 20XX & 20XX. On July 30, 20XX
Founder stated that he has nothing.

ORG provided names and phone numbers of individuals for the Service to contact as references. ORG
provided email correspondence from donees¹ for the current year ( 20XX).

Founder has family in Country and wire transfers (CO-2) the money to family members which is used to
purchase bread and distribute to poor children in the streets of Country. On April 30, 20XX, ORG
provided pictures of individuals distributing bread to children in Country. The photographs’ source was
from Founder’s relative, RA-1. RA-1 provided the photos in various emails in 20XX & 20XX along
with brief statements about the distribution. On July 30, 20XX, Founder stated that the bread
distribution and photography is no longer a permitted due to security concerns in Country.

During the form 1023 application process, ORG did not inform the Service that it would be sending
money overseas to family members. ORG stated that it would conduct an extensive grant selection
process and exercise expenditure responsibility with respect to foreign grants. The Service asked
questions with respect to its operations in Country. On August 2, 20XX, the Service asked:

To local school for pen pencils notebooks bags, for 1/20XX year & clothing collection drive for 7/20XX¹

Form 886-A

(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer

ORG

Tax Identification Number

EIN

Year/Period ended

12/31/20XX
12/21/20XX
12/31/20XX

1 a) “Are contributions paid only to organizations exempt under
501(c)(3). If not, please explain the criteria that will be used to
maintain expenditure responsibility. How will you ensure that the
grants paid will be used for exempt purposes under IRC 501(c)(3)?”

On August 24, 20XX, ORG stated:

Contributions, gifts, and grants are not paid only to organizations exempt
under 501(c)(3). Organizations requesting assistance must submit a
proposal detailing what items are needed, how the items are to be used,
financial information on the organization, and a description of the
organizations and its activities. Prior to choosing which organizations will
receive assistance the buildings we will meet with the organization leaders
[sic]. At this meeting we will request a tour of their facilities and a list of
organization leaders, personnel, and volunteers to check against the OFAC
list. Our criteria for choosing organizations is demonstration of need
through the description and financials submitted in the proposal, best
proposed use of the items/funds, and ability to help the most individuals
possible.

Each organization will be required to send annual, periodic, and or final
distribution reports. The type of report will depend upon the type of
distribution (i.e cash or items such as food, clothing, or school supplies).
We will also conduct periodical site inspections when deemed necessary
by the board. All grantees, be they new or renewal, must go through the
same process. This is to ensure preferential treatment is not given to
renewal grantees and to ensure all organizations continue to meet our
criteria and IRS standards and regulations.

1 b) What Specific practices and safeguards has, or will the
organization put in place to ensure that grants to foreign recipients
are not diverted for non exempt purposes and overseas activities are
in furtherance of its exempt purposes?

i. What kind of due diligence investigation is done in advance of grant
making?

ORG response:

Organizations requesting assistance must submit a proposal detailing what
items are needed, how the items are to be used, financial information on
the organization, and a description of the organizations and its activities.

Schedule number or exhibit
Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)
Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN 12/31/20XX
12/21/20XX
12/31/20XX

Prior to choosing which organizations will receive assistance the buildings
we will meet with the organization leaders. At this meeting we will
request a tour of their facilities and a list of organization leaders,
personnel, and volunteers to check against the OFAC list. Our criteria for
choosing organizations is demonstration of need through the description
and financials submitted in the proposal, best proposed use of the
items/funds, and ability to help the most individuals possible.

ii. What provisions are used by grant agreements to ensure grants are
used for their intended purpose?

The grant proposal will specify our responsibilities and those of the
grantee, obligate the grantee to use the grant funds only for the purposes
for which the grant was made, provide periodic written reports concerning
the use of the grant funds, require a final written report and an accounting
of how grant funds were used, and acknowledge our authority to withhold
and/or recover grant funds in case such funds are, or appear to be,
misused.

Law:

Section 501(c)(3) of the Internal Revenue Code provides for exemption from taxation for organizations
"organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary,
or educational purposes, or to foster national or international amateur athletic competition,..., 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..."

Section 1.501(c)(3)-1(c)(1) of the Income tax regulations states that "An organization will be regarded
as ‘operated exclusively' for one or more exempt purposes only if it engages primarily in activities which
accomplish one or more of such exempt purposes specified in section 501(c)(3). An organization will
not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt
purpose."

Section 1.501(c)(3)-1(c)(2) of the Income tax regulations states that an organization is not operated
exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of
private shareholders or individuals. For the definition of the words “private shareholder or individual”,
see paragraph (c) of §1.501(a)-1.

Section 1.501(c)-1(d)(1)(ii) of the Income tax regulations states that "An organization is not organized
or operated exclusively for one or more of the purposes specified ... unless it serves a public rather than

Schedule number or exhibit
Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)
Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN 12/31/20XX
12/21/20XX
12/31/20XX

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."

Section 1.6033-2(i)(2) of the Income tax regulations provides that "Every organization which is exempt
from tax, whether or not it is required to file an annual information return shall submit such additional
information as may be required by the Internal Revenue Service for the purpose in inquiring into its
exempt status and administering the provisions of subchapter F (section 501 and following), chapter 1 of
subtitle A of the Code...."

Rev. Rul 59-95, An organization previously held exempt from Federal income tax was requested to
produce a financial statement as of the end of the year and a statement of its operations during such year.
However, its records were so incomplete that it was unable to furnish such statements. Section 6033 of
the Internal Revenue Code of 1954 provides that every organization, except as provided therein, exempt
from taxation under section 501(a) of the Code shall file an annual return, stating specifically the items
of gross income, receipts, and disbursements, and shall keep such records, render under oath such
statements, make such other returns and comply with such rules and regulations as the Secretary of the
Treasury or his delegate may from time to time prescribe. Held, failure or inability to file the required
information return or otherwise to comply with the provision of section 6033 of the Code and the
regulations which implement it, may result in the termination of the exempt status of an organization
previously held exempt, on the grounds that the organization has not established that it is observing the
conditions required for the continuation of an exempt status.

Rev. Rul. 56-304, Organizations privately established and funded as charitable foundations which are
organized and actively operated to carry on one or more of the purposes specified in section 501(c)(3) of
the Internal Revenue Code of 1954, and which otherwise meet the requirements for exemption from
Federal income tax are not precluded from making distributions of their funds to individuals, provided
such distributions are made on a true charitable basis in furtherance of the purposes for which they are
organized. However, organizations of this character which make such distributions should maintain
adequate records and case histories to show the name and address of each recipient of aid; the amount
distributed to each; the purpose for which the aid was given; the manner in which the recipient was
selected and the relationship, if any, between the recipient and (1) members, officers, or trustees of the
organization, (2) a grantor or substantial contributor to the organization or a member of the family of
either, and (3) a corporation controlled by a grantor or substantial contributor, in order that any or all
distributions made to individuals can be substantiated upon request by the Internal Revenue Service.

Government's Position:

Schedule number or exhibit
Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)
Name of taxpayer Tax Identification Number Year/Period ended
ORG EIN 12/31/20KX
12/21/20XX
12/31/20XX

ORG is not operating exclusively for charitable purposes under 501(c)(3). You do not meet the
operational test described in section 1.501(c)(3)-1(c)(1) because you have your assets are not used
exclusively for exempt purposes. ORG’s CO-1 account, its primary asset, is commingled with Mr.
Founder’s personal finances. Founder uses the CO-1 account for both personal and organizational
matters. In 20XX² % and in 20XX, % of ORG’s CO-1 account revenues were generated by and
destined to a different entity owned by Founder’s brother. In 20XX and 20XX, % and % of ORG’s Co-
1 expenditures were Founder’s personal. ORG allows its asset to be used by its founder for non exempt
personal purposes. Such use constitutes inurement and ORG fails the operational test under Treasury
Regulations 1.501(c)(3)-1(c)(1), which states, “an organization will not be so regarded if more than an
insubstantial part of its activities is not in furtherance of an exempt purpose."

The Internal Revenue Service asked the Foundation to provide specific information about its actual
activities during the years ending December 31, 20XX, 20XX and 20XX. Other than emails and photos
of bread distributions, the organization did not show how its expenditures furthered an exempt activity.

The Service asked the organization to provide all books and records of its assets, liabilities, receipts and
disbursements. ORG did not provide any receipts, invoices or any other contemporaneous
substantiation for its expenditures. ORG “tossed out” its receipts.

ORG failed to disclose its activities during the application process. It did not reveal to the Service that it
would be making overseas payments to relatives of its founder, Mr. Founder. ORG stated that it would
maintain expenditure responsibility by requiring organizations to submit detailed proposals on how the
funds are to be used, financial information on the organization, and a description of the organizations
and its activities. ORG stated that it will meet with officers of these potential grantee organizations.

The criteria for selecting grant recipients will then be based on need. ORG stated that each recipient
organization will be required to send annual, periodic, and final written distribution reports and
accounting of how grant funds were used; that it will conduct periodical site inspections when deemed
necessary by the board. All grantees, be they new or renewal, must go through the same process.

ORG failed to exercise expenditure responsibility over the funds wired to Country. Instead of providing
annual, periodic, or final distribution reports from the grantee organizations to the Service, ORG
provided photographs taken by relatives of Founder. Such photographs do not satisfy the expenditure
responsibility requirements ORG promised it would exercise, nor do they to prove these wire transfers
served a charitable class. ORG does not maintain minutes and has no record of any grant selection
process in place (as promised in its application process).

An exempt organization must respond to Internal Revenue Service inquiries to establish that it is entitled
to tax exempt status. In this case the taxpayer had failed to establish that it was engaged in exempt

² Commingling occurred before the application process

activities, that its expenditures were for the purpose of exempt activities, or that its assets did not inure
to private shareholders or individuals.
Taxpayer's Position:
The organization has not submitted its position.

Conclusion:

Exemption under Code section 501(c)(3) for ORG should be revoked effective January 1, 20XX. The
organization is required to file Form 1120 for all opened years.