Talmudic scholarship organization denied section 501(c)(3) exemption

Plain-English summary

The IRS issued a final adverse determination to a religious and educational organization that provided stipends to Talmudic scholars in a foreign country. The organization’s records showed payments to trustees, a trustee’s family, related individuals, and a foreign organization, including loans, debt payments, cash withdrawals, and transfers that the organization could not adequately document or control. The IRS concluded that the organization’s net earnings inured to private individuals and that it lacked control and discretion over funds sent abroad. The organization also failed to show that its distributions were made on a properly documented charitable basis. The IRS denied exemption under IRC § 501(c)(3), and the organization was advised that contributions would not be deductible under IRC § 170.

Ruling snapshot

• Question: Did the organization satisfy the operational test for § 501(c)(3) when insiders received private benefits and the organization lacked control over foreign distributions?
• Outcome: Denied.
• Key authorities: IRC §§ 170, 501(c)(3), 6104(c), 6110(k)(3), and 7428(b)(2); Treas. Reg. §§ 1.501(a)-1(c), 1.501(c)(3)-1; Rev. Ruls. 56-304, 63-252, and 66-79.

Full text (IRS public release)

+DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Contact Person:

Release Number: 201403018 Identification Number:

Release Date: 1/17/2014

Date: October 21, 2013 Contact Number:

UIL Code: 501.32-00 Employer Identification Number:

501.32-01 Form Required To Be Filed:

Tax Years:
All Years

Dear

This is our final determination that you do not qualify for exemption from Federal income tax as
an organization described in Internal Revenue Code section 501(c)(3). Recently, we sent you a
letter in response to your application that proposed an adverse determination. The letter
explained the facts, law and rationale, and gave you 30 days to file a protest. Since we did not
receive a protest within the requisite 30 days, the proposed adverse determination is now final.

Since you do not qualify for exemption as an organization described in Code section 501(c)(3),
donors may not deduct contributions to you under Code section 170. You must file Federal
income tax returns on the form and for the years listed above within 30 days of this letter, unless
you request an extension of time to file.

We will make this letter and our proposed adverse determination letter available for public
inspection under Code section 6110, after deleting certain identifying information. Please read
the enclosed Notice 437, Notice of Intention to Disclose, and review the two attached letters that
show our proposed deletions. If you disagree with our proposed deletions, you should follow
the instructions in Notice 437. If you agree with our deletions, you do not need to take any
further action.

In accordance with Code section 6104(c), we will notify the appropriate State officials of our
determination by sending them a copy of this final letter and the proposed adverse letter. You
should contact your State officials if you have any questions about how this determination may
affect your State responsibilities and requirements.

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If you have any questions about this letter, please contact the person whose name and
telephone number are shown in the heading of this letter. If you have any questions about your
Federal income tax status and responsibilities, please contact IRS Customer Service at
1-800-829-1040 or the IRS Customer Service number for businesses, 1-800-829-4933. The
IRS Customer Service number for people with hearing impairments is 1-800-829-4059.

Sincerely,

Kenneth Corbin
Director, Exempt Organizations

Enclosure
Notice 437
Redacted Proposed Adverse Determination Letter
Redacted Final Adverse Determination Letter

Letter 4038(CG) (11-2005)
Catalog Number 4763258

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES

DIVISION
Date: August 8, 2013 Contact Person:
Identification Number:
Contact Number:
FAX Number:
Employer Identification Number:
LEGEND: UIL:
B = Trustee 501-03.00
C = Trustee 501.32-00
D = Trustee 501-32-01

E = Brother of C
G = Organization
H = Foreign Organization

J = Language
N = State

Y = Country
X= Date

m = dollar amount
Dear

We have considered your application for recognition of exemption from federal income
tax under Internal Revenue Code section 501(a). Based on the information provided,
we have concluded that you do not qualify for exemption under Code section 501(c)(3).
The basis for our conclusion is set forth below. This letter supersedes our proposed
adverse determination letter dated April 30, 2013 and includes consideration of your
protest.

Issues

1.) Do your net earnings inure to the benefit of insiders, precluding exemption under
section 501(c)(3) of the Code? Yes, for the reasons described below.

2.) Does your lack of control and discretion over the funds you send to H, located in

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the foreign country Y, preclude you from exemption under section 501(c)(3) of
the Code? Yes, for the reasons described below.
Facts

You were incorporated on X in the state of N by B, C and D, who are also your trustees.
Your Articles of Incorporation state you were formed for religious and educational
purposes as described in section 501(c)(3) of the Code.

Your application for exemption states you were formed to support advanced Talmudic
scholarship in foreign country Y. To that end, you provide a “modest stipend of [m
dollars] distributed twice yearly to 36 exceptional students of Talmud, or Jewish law.”
The scholars are hand-picked by your Board of Trustees and they are all married with
large families living below the poverty line. The scholars spend as much as ten to
twelve hours a day immersed in Talmudic literature and prayer. The stipends you
provide are intended to help alleviate the students’ financial burdens.

You indicated recipients are accepted based upon availability. When a spot opens up,
you place advertisements in local weeklies, neighborhood synagogues, and public
advertisement boards. Applicants must demonstrate exceptional proficiency in
Talmudic studies and a dire economic situation. Trustee D, also a Rabbi (hereafter
Rabbi D), splits his time between the United States and the foreign country Y. Rabbi D
personally meets with and interviews all applicants, and the Board of Trustees selects
the final recipients. Rabbi D is in constant contact with the recipients in order to assess
and encourage their progress. If he deems a recipient no longer eligible, the Board of
Trustees decides on whether to admonish the recipient, impose conditions, or terminate
his stipend. Rabbi D oversees all distributions.

With your initial application you indicated one of the stipend recipients is E, a brother of
C. Eis “...an accomplished, well respected Taimudic scholar, completely dedicated to
advancing his scholarship.”

The recipients of your stipend attend any of three different schools in foreign country Y.
Rabbi D is the Rabbi and Dean for one of the three schools. The students must submit
to you their names, addresses, family size and annual income. There is no written
application. The most important criterion in determining eligibility for a stipend is the
candidate’s level of scholarship. The candidate is subjected to a rigorous oral
examination by his school’s dean, the results of which are reported to Rabbi D. In
addition, the candidate must interview with Rabbi D. The candidate must agree to
dedicate a minimum of 40 hours per week in intensive study, to sit for two monthly oral
examinations on the material covered, and to submit a report on the material every six
weeks. ~~

The students are not pursuing a degree. In Judaism, studying the holy works is

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performed for its own sake. Talmudic scholars continue their studies their entire lives.
For this reason you are prepared to distribute stipends for as long as the student is
immersed in his studies, with no time or monetary limit.

Your application indicated that you distribute stipends to Talmudic scholars studying in
foreign country Y, but that you operate “completely in America.” You later stated,
“Money that is designed for distribution is transferred to [your] bank account in foreign
country Y. All stipends are distributed by check from this account to the student for
deposit only.” Rabbi D personally signs and distributes all checks. Stipends are paid
when funds become available, which is generally in the summer time. Rabbi D has the
final say on the order in which the stipends are distributed. Although you asserted Rabbi
D writes and distributes all of the stipend checks, in fact Trustee C is the signatory on
most, if not all, of the checks written during the 18 month period for which you submitted
bank statements. The bank statements are addressed to Trustee C’s home.

When we requested more information regarding your bank account in foreign country Y
you said, “Please note that we erred in our previous correspondence.” You do not have
a bank account in foreign country Y. You submitted bank statements from your bank
account located in the United States. The statements provided were not consistent with
your described program. The distributions were not twice yearly, m dollar distributions
to 36 individuals. You explained this discrepancy by saying the stipends can be
reduced because of extended absences from study session or from inadequate grades,

• and can be slightly increased for exceptional dedication or outstanding examination
  grades. If a scholar joins in the middle of the first half of the year, he may receive one
  check covering the entire year’s participation.

A check for several thousand dollars was written from your account to an individual.
You said this was to pay another Rabbi to lecture and test the scholars in a difficult and
complex area of the Talmud. No other documentation was provided to substantiate this
claim.

Your bank statements included a payment made to a credit card company. You
explained that this was a reimbursement to someone who used his personal credit card
to purchase something for you, not a charge made by you on your credit card. You
stated you do not remember what was originally received or who made the charge.

Your bank statements included numerous, frequent checks written to an organization
named G. ,Regarding these payments, you explained that E borrowed money from G.

E has accepted upon himself additional responsibilities, including teaching and
fundraising. For this reason, his stipend is slightly higher than that of the other scholars.
In addition, you have decided to help him repay some of his outstanding debts,
including the debt he owes to G. You are repaying those loans obtained by individual E.

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There were numerous checks written to Trustee C. Regarding these payments, you
stated Trustee C “...borrowed money from [you], not realizing that doing so could be
problematic. This rationale was based in part on his not receiving any financial
remuneration from [you]. All money borrowed was returned.” You stated that you
understand a nonprofit organization cannot be used this way and guaranteed that this
practice would stop.

A payment was also made to an individual with the same surname as C and E. You
indicated that the individual is the sister-in-law of C and that the “loan was repaid.” You
provided no written record to substantiate the obtainment or repayment of this “loan.”

Two checks were written to E totaling approximately $4000 within a few weeks of each
other. You indicated these payments were reimbursements for fundraising expenses.
Although it was requested, you did not provide any documentation substantiate this
claim.

Several payments were made from your bank account to a tour company. You said the
payments were for airline tickets for D for fundraising purposes. Again, you provided no
documentation to substantiate these expenditures.

You made several distributions in one month to an organization named H. The
distributions totaled approximately $15,000. When we asked for details regarding these
distributions, your authorized representative responded with the following, under the
signature of C:

Unfortunately, there has been some miscommunication as regards [sic] the
organization’s bank accounts. As written earlier, we originally understood that
donations are distributed through the organization’s bank account in foreign
country Y; afterwards, we were told that all distributions are made from the
American bank account and that the organization does not own a bank account
in foreign country Y. Rabbi D has now clarified the situation as follows.

[We are] in fact affiliated with a larger Y non-profit organization, H. H is
recognized by the Y government as tax exempt. H formed smaller non-profit
entities in different countries to facilitate the fund-raising process in those
countries. Each entity operates independently from the other smaller entities and
from H.

[We were] formed to operate in America. As stated above, [we] operate as [our]
own independent non-profit, raising money in America for [our] expressed
purpose, depositing these donations in [our] American bank account, and
distributing these donations as stipends directly from that bank account. [We do]
not own a Y bank account.

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Since each organization is independent, it was always intended that there be no
intermingling of funds between the different organizations. However, because of
a difficult financial situation, H and [our] accounts were mixed. It seems that
checks written in American dollars take two weeks to clear in Y, whereas checks
written in [Y currency] clear immediately. Because some of the recipients of the
stipends were continuously in dire need of money, Rabbi D made the decision to
write the checks in [Y currency] from H’s bank account and to then write checks
to H from [you].

All checks written from H were supervised by Rabbi D. He has indicated that he
can provide all of H’s bank statements if necessary (please keep in mind they are
all written in foreign language J). Nonetheless, we have explained to Rabbi D
and the other board members that this practice, although understandable, is not
acceptable, since H is not recognized by the IRS as a 501(c)(3) organization.

There were several large ATM withdrawals and other cash withdrawals from your bank
account. When asked about these withdrawals, you said that Trustee C holds the ATM
card. You said cash withdrawn is money that C borrowed from you. You asserted that
Trustee C repaid all loans and has guaranteed that he will no longer borrow money from
the organization. However, you did not submit any documentation to substantiate that
the loans had been repaid.

Law

Section 501(c)(3) of the Code describes corporations organized and operated
exclusively for charitable purposes no part of the net earnings of which inures to the
benefit of any private shareholder or individual.

Section 1.501(c)(3)-1(a)(1) of the regulations states that, in order to be exempt as an
organization described in section 501(c)(3) of the Code, an organization must be both
organized and operated exclusively for one or more of the purposes specified in such
section. If an organization fails to meet either the organizational test or the operational
test, it is not exempt.

Section 1.501(a)-1(c) of the regulations provides that the terms “private shareholder or
individual” in Section 501 refer to persons having a personal and private interest in the
activities of the organization.

Section 1.501(c)(3)-1(c)(2) of the regulations provides 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 as defined in Section
1.501(a)-1(c).

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Section 1.501(c)(3)-1(d)(1)(ii) of the regulations provides that an exempt organization
must serve a public rather than a private interest. The organization must demonstrate
that it is not organized or operated to benefit 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." Thus, if an organization is
operated to benefit private interests rather than for public purposes, or is operated so
that there is prohibited inurement of earnings to the benefit of private shareholders or
individuals, it may not retain its exempt status.

Rev. Rul. 56-304, 1956-2 C.B. 306 states that an organization which otherwise meets
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.

Rev. Rul. 63-252, 1963-2 C.B. 101, states that contributions to certain domestic
charitable organizations are deductible if it can be shown that the gift is, in fact, to or for
the use of the domestic organization, and that the domestic organization is not serving
as an agent for, or channel for, a foreign charitable organization. In reaching this
conclusion, the revenue ruling states that it seems clear that the requirements of section
170(c)(2)(A) of the Code would be nullified if contributions inevitably committed to go to
a foreign organization were held to be deductible solely because, in the course of
transmittal to the foreign organization, they came to rest momentarily in a qualifying
domestic organization. In such cases, the domestic organization is only nominally the
donee; the real donee is the ultimate foreign recipient. In each case, the question to be
decided is whether the amounts paid to the domestic organization are deductible under
section 170(a) of the Code. Below are five examples considered:

(1) In pursuance of a plan to solicit funds in this country, a foreign organization caused a
domestic organization to be formed. At the time of formation, it was proposed that the
domestic organization would conduct a fund-raising campaign, pay the administrative
expenses from the collected fund and remit any balance to the foreign organization.

(2) Certain persons in this country, desirous of furthering a foreign organization's work,
formed a charitable organization within the United States. The charter of the domestic

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organization provides that it will receive contributions and send them, at convenient
intervals, to the foreign organization.

(3) A foreign organization entered into an agreement with a domestic organization which
provides that the domestic organization will conduct a fund-raising campaign on behalf
of the foreign organization. The domestic organization has previously received a ruling
that contributions to it are deductible under section 170 of the Code. In conducting the
campaign, the domestic organization represents to prospective contributors that the
raised funds will go to the foreign organization.

(4) A domestic organization conducts a variety of charitable activities in a foreign
country. Where its purposes can be furthered by granting funds to charitable groups
organized in the foreign country, the domestic organization makes such grants for
purposes which it has reviewed and approved. The grants are paid from its general
funds and although the organization solicits from the public, no special fund is raised by
a solicitation on behalf of particular foreign organizations.

(5) A domestic organization, which does charitable work in a foreign country, formed a
subsidiary in that country to facilitate its operations there. The foreign organization was
formed for purposes of administrative convenience and the domestic organization
controls every facet of its operations. In the past the domestic organization solicited
contributions for the specific purpose of carrying out its charitable activities in the foreign
country and it will continue to do so in the future. However, following the formation of the
foreign subsidiary, the domestic organization will transmit funds it receives for its foreign
charitable activities directly to that organization.

Contributions to the domestic organizations described in the first and second examples set
forth above are not deductible. Similarly, those contributions to the domestic organization
described ini the third example which are given for the specific purpose of being turned
over to the foreign organization are held to be nondeductible.

Rev. Rul. 66-79, 1966-1 C.B. 48, amplifies Rev. Rul. 63-252 to provide that
contributions to a domestic charity that are solicited for a specific project of a foreign
charitable organization are deductible under section 170 of the Code if the domestic
charity has reviewed and approved the project as being in furtherance of its own exempt
purposes and has control and discretion as to the use of the contributions. This
conclusion is reached because the contributions received by the domestic charity are
regarded as for the use of the domestic organization and not the foreign organization
receiving the grant from the domestic organization.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 179
(1945), the Supreme Court held that the presence of a single non-exempt purpose, if

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substantial in nature, will destroy a claim for exemption regardless of the number or
importance of truly exempt purposes.

In Church in Boston v. Commissioner, 71 T.C. 102 (1978), the court upheld the denial of
exemption on an organization that made grants to individuals. The organization
asserted that its grants were made in furtherance of a charitable purpose: to assist the
poor. The organization was unable to furnish any documented criteria which would
demonstrate the selection process of a deserving recipient, the reason for specific
amounts given, or the purpose of the grant. The only documentation contained in the
administrative record was a list of grants made during one of the three years in question
which included the name of the recipient, the amount of the grant, and the “reason” for
the grant. The court held that this information was insufficient in determining whether
the grants were made in furtherance of an exempt purpose.

In Western Catholic Church v. Commissioner, 73 T.C. 196 (1979), the Tax Court held
that although separate requirements, the "private inurement" test and the "operated
exclusively for exempt purposes" test often overlap substantially. The petitioner's only
activities were some individual counseling and distribution of a few grants to needy
individuals. The petitioner's failure to keep adequate records and its manner of
operation made it impossible to trace the money completely, but the court found it clear
that money passed back and forth between petitioner and its director and his for-profit
businesses. The Court Held that petitioner had not shown it was operated exclusively
for exempt purposes or the no part of its earnings inured to the benefit of its officer.

In Basic Bible Church v. Commissioner, 74 T.C. 846 (1980), the Sixth Circuit court
found that although the organization did serve religious and charitable purposes, it
existed to serve the private benefit of its founders, and thus failed the operational test of
section 501(c)(3). Control over financial affairs by the founder created an opportunity
for abuse and thus the need to be open and candid, which the applicant failed to do.

In KJ's Fund Raisers v. Commissioner, T.C. Memo 1997-424 (1997), affd, 166 F.3d
1200 (2d Cir. 1998), the Tax Court held, and the Second Circuit affirmed, that an
organization formed to raise funds for distribution to charitable causes did not qualify for
exemption under section 501(c)(3) because its activities resulted in a substantial private
benefit to its founders.

In Peoples Prize v. Commissioner, T.C. Memo 2004-12 (2004), the court upheld the
Service's determination that an organization failed to establish exemption when the
organization failed to provide requested information. The court stated "[Applicant] has,
for the most part, provided only generalizations in response to repeated requests by [the
Service] for more detail on prospective activities.... Such generalizations do not satisfy
us that [applicant] qualifies for the exemption."

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In New Dynamics Foundation v. United States, 70 Fed.Cl. 782 (2006), the petitioner
brought to challenge the denial of its application for exempt status. The court found that
the administrative record supported the Service's denial on the basis that the
organization operated for the private benefit of its founder, who had a history of
promoting dubious schemes. The organization's petition claimed that the founder had
resigned and it had changed. However, there was little evidence of change other than
replacement of the founder with an acquaintance who had no apparent qualifications.
The court resolved these questions against the petitioner, who had the burden of
establishing it was qualified for exemption. If the petitioner had evidence that
contradicted these findings, it should have submitted it as part of the administrative
process. “It is well-accepted that, in initial qualification cases such as this, gaps in the
administrative record are resolved against the applicant”.

Application of Law

You are not operated exclusively for charitable purposes under section 501(c)(3) of the
Code as your net earnings inure to the benefit of Trustee C. Trustee C is a private
individual within the meaning of section 1.501(a)-1(c) of the regulations. Your net
earnings inure to his benefit, as well as to the benefit of his family, through direct
payments you made to him and his family as well as cash withdrawn from your bank
account. An organization will be denied exemption if any of its net earnings inure to the
benefit of private individuals per section 1.501(c)(3)-1(c)(2) of the regulations. Even a
small amount of inurement will prevent exemption to be granted.

Section 1.501(c)(3)-1(a)(1) of the regulations states that if an organization fails to meet
either the organizational test or the operational test, it is not exempt. Although your
Articles of Incorporation contain adequate provisions to meet the organizational test,
you do not meet the operational test. You have not substantiated the activities you
conduct further exclusively 501(c)(3) purposes, as numerous payments have been
made to individuals for non-exempt purposes. Some of these payments constitute
inurement, as they were paid to and for the benefit of C, your trustee. Your bank
statements show inconsistencies and discrepancies and do not support your stated
activity of providing scholarships to 36 individuals in the amount of m dollars twice
annually.

Section 1.501(c)(3)-1(d)(1)(ii) of the regulations states that an organization is not
organized exclusively for any of the purposes specified in section 501(c)(3) of the Code
unless it serves public, rather than private interests. Your bank statements and related
information shows you have made substantial payments to Trustee C and other
individuals.to be used for non-exempt purposes. These payments benefit the private
interests of Trustee C and others, and not the public as a whole.

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Aside from your earnings inuring to the benefit of Trustee C, you do not have adequate
control and discretion over how your funds are used. As required by Revenue Ruling
56-304, you do not keep adequate records to substantiate that the grants and
contributions you make further a 501(c)(3) purpose. The evidence shows you have sent
substantial funds in the form of checks made out to organization H in foreign country Y.
as a reimbursement for funds that were already distributed by H. You do not track the
distributed cash to individuals. You have no records to show who actually received the
final distributions or what the funds were used for. Therefore, it is clear that you do not
keep adequate records as required by Rev. Rul. 56-304.

You are similar to the organization described in Example 1 of Rev. Rul. 63-252. You
have little or no control over who receives the cash in the foreign country Y, or how
much they receive. You are, according to your own statement, a fundraising arm in the
United States. Like Example 1 in Rev. Rul. 63-252, you simply send the funds to
organization H, who distributes it as they wish.

In contradiction to Revenue Ruling 66-79, the funds you raise are not used for the
purposes of the domestic organization (you), but rather for the purposes of the foreign
organization receiving the grant from the domestic organization (you). By your own
admission, you were created by H to “facilitate the fundraising process” in America.
You conduct the fundraising and then distribute funds to H who has ultimate control
over how the funds are used. Therefore, you do not maintain adequate control to
ensure your distributions are used exclusively for purposes described under section
501(c)(3) of the Code.

You are similar to Better Business Bureau of Washington, D.C.., Inc. v. United States,
because you have a substantial non-exempt purpose. The presence of a single non-
exempt purpose, if substantial in nature, will destroy a claim for exemption regardless of
the number or importance of truly exempt purposes. The inurement described above,
as well as your lack of control and discretion over contributed funds are both substantial
non-exempt purposes.

Much like the above-cited case of Church in Boston v. Commissioner, you were unable
to furnish any documentation which would demonstrate your selection process of a
deserving recipient, the reason for specific amounts given, or the purpose of the grant.
You have no written application. Although you stated you provide bi-annual stipends to
36 students, your bank statements did not confirm either of these assertions.

As in the case of Western Catholic Church v. Commissioner, your lack of sufficient
records makes it impossible to trace the use of your money completely. Trustee C
receives a private benefit by using your bank account to take out “loans” in the form of
ATM withdrawals or withdrawals from your bank account when a personal need arises.
You also are paying the debt of individual E, who is related to individual C. You have no

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recorded board meeting minutes, nor did you provide any documentation to substantiate
the loan payments you made on his behalf. Much like Basic Bible Church v.
Commissioner, even if you do serve some level of charitable or educational purpose,
you have existed to serve the private benefit of one of your founders, and thus failed the
operational test of section 501(c)(3).

~ Control over financial affairs by Trustee C created an opportunity for abuse. You are not
entitled to exemption because your net earnings inure to the benefit of C and his family,
also similar to KJ's Fund Raisers v. Commissioner.

As in the case of Peoples Prize v. Commissioner, you have provided only
generalizations in response to the detail that is required. When detailed substantiation
of expenditures was requested, it was not provided. For example, you made a payment
to a credit card company, but did not have records to support the payment, nor did you
recall whose credit card was paid. Such generalizations do not establish that you are
operated exclusively for exempt purposes.

An organization that is unable to demonstrate they have now or will have in the future
sufficient records to show operations that exclusively further exempt purposes will not
be found to have met the operational test under Section 501(c)(3) of the Code. In
contrast to your Conflict of Interest Policy, you were unable to provide any evidence that
you have any established policies and procedures to prevent inurement or that you
keep adequate records. As in the above-cited case of New Dynamics Foundation v.
United States, you have not demonstrated that your operations exclusively further
exempt purposes. Therefore, you do not qualify for exemption under Section 501(c)(3)
of the Code.

Applicant’s Position

In correspondence you submitted, you explained that Rabbi D and the other trustees
understand that their practices are not acceptable. You further stated that Trustee C
has repaid all loans and has guaranteed that he will no longer borrow money from you.

Service Response to Applicant’s Position

Although you have asserted Trustee C will never use your bank account for personal
loans again, he is still in full control over the bank account. In fact, after you made the
statement that Trustee C will never use your bank account in this manner again, these
same transactions continued. The bank statements are mailed to Trustee C’s home, he
has the checkbook, most checks are written by him, and he holds the ATM card. You
have not substantiated any of your purported changes with documentation. The
documentation you did provide supports our assertion that your funds are inuring to the
benefit of Trustee C. Likewise, the additional bank statements submitted show that

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financial activity continues to be inconsistent with your stated activities of providing
scholarships in the amount of m dollars, and funds are still being distributed to
organizations G and H.

Applicant’s Protest

You and your representative have discussed the issues outlined in this letter and
indicated that you now understand the severity of inurement and lack of control over
your funds. You stated that you recognize that you have been managed in an
unacceptable manner and have resolved to take concrete actions to rectify this. To this
end, your board of directors have taken the following steps:

a. You resolved unanimously to remove C from the position of Trustee. He was
replaced by an individual noted in the community for his honesty and integrity.
You submitted copies of the board resolution and the new trustee’s resume.

b. You also unanimously resolved to cease writing checks to any member of C’s
family and to cease paying any debt owed by any member of C's family.

c. You further unanimously resolved to cease writing checks to H.

You submitted a copy of your bank statement for a recent month as evidence of your
new method of operating. The only checks written were to a tour company, which you
stated was for fundraising travel for D and for four Talmudic scholars. You provided a
receipt from the tour company. All four checks had a specific number written in the
memo line of the check.

You requested that in light of your material efforts to rectify your previous errors and to
meet the operational test, we reconsider our previous decision and grant you exemption
under section 501(c)(3) of the Code.

Service’s Response to Applicant’s Protest

You assert that you have now resolved, for the second time, to substantially change the
way you operate so that you qualify for exemption. Even after you previously said you
would no longer conduct certain activities that precluded you from exemption, you
continued to conduct them. You provided a receipt from the tour company, but it was
not written in English and a translation was not provided. The four checks written to
Talmudic scholars were substantially more than the “modest stipend” you describe in
your application. You did not explain the numbers written in the memo line of the
checks you submitted, but previously when we asked about specific numbers written in
the memo lines, you indicated they were indicators of payments for a specific debt.
Although you have again theoretically corrected deficiencies in the way you function, we

Letter 4036(CG) (11-2011)
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are unable to conclude that you pass the operational test, similarly to the organization
described in the above-cited case of New Dynamics Foundation.

Also, your method of distributing stipends to individuals in foreign country Y continues to
lack transparency and consistency. You previously said you would issue small stipends
in the amount of m, but each of the four stipends paid for the most recent month are all
double that amount or more. Your bank statements continue to show inconsistencies in
what you describe as your activities and do not support your stated activity of providing
stipends to 36 individuals in the amount of m dollars twice annually.

Conclusion

Based on the above facts and law, you do not qualify for exemption under section
501(c)(3) of the Code. Your net earnings inure to the benefit of insiders, precluding
exemption under section 501(c)(3) of the Code. Also, you lack control and discretion
over the funds you send to H, located in foreign country Y. For both of these reasons,
you failed to demonstrate that you meet the operational test as you do not operate
exclusively for exempt purposes under section 501(c)(3) of the Code.

You have the right to file a protest if you believe this determination is incorrect. To
protest, you must submit a statement of your views and fully explain your reasoning.
You must submit the statement, signed by one of your officers, within 30 days from the
date of this letter. We will consider your statement and decide if the information affects
our determination. If your statement does not provide a basis to reconsider our
determination, we will forward your case to our Appeals Office. You can find more
information about the role of the Appeals Office in Publication 892, How to Appeal an
IRS Decision on Tax-Exempt Status.

Types of information that should be included in your protest can be found on page 1 of
Publication 892, under the heading “Filing a Protest’. The protest must be
accompanied by the following declaration:

“Under penalties of perjury, I declare that I have examined the statement of facts
presented in this appeal and in any accompanying schedules and statements and, to
the best of my knowledge and belief, they are true, correct, and complete.”

The declaration must be signed by an officer or trustee of the organization who has
personal knowledge of the facts.

Your protest will be considered incomplete without this statement.

If an organization’s representative submits the protest, a substitute declaration must be
included stating that the representative prepared the protest and accompanying

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documents; and whether the representative knows personally that the statements of
facts contained in the protest and accompanying documents are true and correct.

An attorney, certified public accountant, or an individual enrolled to practice before the
Internal Revenue Service may represent you during the protest process. If you want
representation during the protest process, you must file a proper power of attorney,
Form 2848, Power of Attorney and Declaration of Representative, if you have not
already done so. You can find more information about representation in Publication
947, Practice Before the IRS and Power of Attorney. All forms and publications
mentioned in this letter can be found at www.irs.gov, Forms and Publications.

If you do not file a protest within 30 days, you will not be able to file a suit for declaratory
judgment in court because the Internal Revenue Service (IRS) will consider the failure
to appeal as a failure to exhaust available administrative remedies. Code section
7428(b)(2) provides, in part, that a declaratory judgment or decree shall not be issued in
any proceeding unless the Tax Court, the United States Court of Federal Claims, or the
District Court of the United States for the District of Columbia determines that the
organization involved has exhausted all of the administrative remedies available to it
within the IRS.

If you do not intend to protest this determination, you do not need to take any further
action. If we do not hear from you within 30 days, we will issue a final adverse
determination letter. That letter will provide information about filing tax returns and other
matters.

Please send your protest statement, Form 2848, and any supporting documents to the
applicable address:

Mail to: Deliver to:

You may fax your statement using the fax number shown in the heading of this letter. If
you fax your statement, please call the person identified in the heading of this letter to
confirm that he or she received your fax.

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

Letter 4036(CG) (11-2011)
Catalog Number 47630W

15

Sincerely,

Kenneth Corbin
Director, Exempt Organizations

Enclosure: Publication 892

Letter 4036(CG) (11-2011)
Catalog Number 47630W