IRS revokes a foundation's exemption after private benefits and excess benefit transactions

View official IRS release (PDF)

Plain-English summary

The IRS revoked a foundation's federal income tax exemption after an examination of its activities and expenditures. The foundation was formed to support people affected by autism and Alzheimer's disease, but the IRS found few documented activities serving the public. It concluded that foundation funds substantially benefited family members through personal or household purchases and other expenditures, and that two officers were disqualified persons in excess benefit transactions. Because the foundation did not operate exclusively for exempt purposes, had no effective safeguards, and had not corrected the transactions, the IRS concluded that revocation was appropriate. Contributions to the foundation were no longer deductible, and the foundation was required to file Form 1120.

Ruling snapshot

• Question: Did the foundation operate exclusively for exempt purposes and avoid private inurement and excess benefit transactions?
• Outcome: Revocation of tax-exempt status.
• Key authorities: IRC §§ 170, 501(c)(3), 4958, 6104(c), and 7428; Treas. Reg. §§ 1.501(c)(3)-1 and 53.4958-3

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examination
1100 Commerce Street

TAX EXEMPT AND Dallas, Texas 75242 501-03.00
GOVERNMENT ENTITIES
DIVISION Date: February 6, 2013
Release Number: 201407019
Release Date: 2/14/2014
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

In a determination letter dated October 12, 20XX, you were held to be exempt from
Federal income tax under section 501(c)(3) of the Internal Revenue Code (the Code).

Based on recent information received, we have determined you have not operated in
accordance with the provisions of section 501(c)(3) of the Code. Accordingly, your
exemption from Federal income tax is revoked effective February 1, 20XX. This is a

_ final adverse determination letter with regard to your status under section 501(c)(3) of
the Code.

We previously provided you a report of examination explaining why we believe
revocation of your exempt status is necessary. At that time, we informed you of your
right to contact the Taxpayer Advocate, as well as your appeal rights.

Our adverse determination 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 your 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. Specifically, you have not
shown that various payments you made have not resulted in net earnings
flowing to your officers and their family members.

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 in court, you must initiate a suit of declaratory
judgment in the United States Tax Court, the United States Claims Court or the District
Court of the United States for the District of Columbia before the 91st day after the date
this determination was mailed to you. Contact the clerk of the appropriate court for
rules for initiating suits for declaratory judgment. You may write to the Tax Court at the
following address:

You also have the right to contact the office of the Taxpayer Advocate. You can call
1-877-777-4778 and ask for Taxpayer Advocate assistance. If you prefer, you may
contact your local Taxpayer Advocate at:

Taxpayer Advocate assistance cannot be used as a substitute for established IRS
procedures, formal appeals processes, etc. The Taxpayer Advocate is not able to
reverse legal or technically correct tax determinations or extend the time fixed by law
that you have to file a petition in the United States Tax 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.

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

Internal Revenue Service
Department of the Treasury
Tax Exempt and Government Entities Division
Exempt Organizations: Examinations
1100 Commerce Street
Dallas, Texas 75242

Date: April 2, 2012 Taxpayer Identification Number:
Form:
Tax Year(s) Ended:
Person to Contact/ID Number:

ORG Contact Numbers:
ADDRESS Telephone:
Fax:

Certified Mail — Return Receipt Requested
Dear

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

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

If you do not agree with our proposed revocation, you must submit to us a written request for
Appeals Office consideration within 30 days from the date of this letter to protest our decision.
Your protest should include a statement of the facts, the applicable law, and arguments in
support of your position.

An Appeals officer will review your case. The Appeals office is independent of the Director, EO
Examinations. The Appeals Office resolves most disputes informally and promptly. The
enclosed Publication 3498, The Examination Process, and Publication 892, Exempt
Organizations Appeal Procedures for Unagreed Issues, explain how to appeal an Internal
Revenue Service (IRS) decision. Publication 3498 also includes information on your rights as a
taxpayer and the IRS collection process.

You may also request that we refer this matter for technical advice as explained in Publication

892. If we issue a determination letter to you based on technical advice, no further
     administrative appeal is available to you within the IRS regarding the issue that was the subject
     of the technical advice.

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

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

revocation letter. We will also notify the appropriate state officials of the revocation in
accordance with section 6104(c) of the Code.

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

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

Thank you for your cooperation.

Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

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

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

1. Whether

(Foundation) is operated exclusively for exempt purposes described within Internal Revenue Code
section 501(c)(3):

a. Whether the Foundation is engaged primarily in activities that accomplish an
exempt purpose?
b. Whether more than an insubstantial part of the Foundation’s activities are in

furtherance of a non-exempt purpose? ;
c. Whether the Foundation was operated for the purpose of serving a private benefit

rather than public interests?

2. Whether any part of the net earnings of the Foundation inured to the benefit of any private
   shareholder or individual?

3. Whether revocation of the Foundation’s exempt status is appropriate given that it has been
   determined that the Foundation engaged in excess benefit with two of its officers?

FACTS
Background:
The Foundation was established by after their daughter,

was diagnosed with autism. The Form 1023, Application for Recognition of Exemption,
states the mission of the Foundation as follows: “To provide optimal outreach, education, and
services to individuals confronting autism and alzhemeimer’s [sic] and their caregivers and families
through our services and staff dedicated to improving quality of life.” The organization is named
after mother,

The Foundation was incorporated on November 23, in as a not-for-profit corporation.
and was recognized by the Internal Revenue Service as a tax-exempt organization as described in
section 501(c)(3) by letter dated October 12, , effective, November 23, . The letter also
stated that the Foundation would be classified as a public charity rather than a private foundation.

Following are the current officers of the Foundation:

Officers Title
President
Vice president
Secretary
All three officers are family members who reside at the same address as that used by the
Foundation, No additional officers or directors
are listed on the Form 990 for the tax year ending January 31, or on the Form 990-EZ for the
Form 886-Arev.4-68) Department of the Treasury - Internal Revenue Service

Page: -1-

Form 886-A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
tax year ending January 31, . The bylaws state at Article Ill, Section 1, that “the Board shall

have up to twenty-one, and no fewer than fifteen, members. The Foundation does not appear to
be operating with the number of directors stated in its bylaws and appears to have no oversight by
anyone other than the three family members.

The Foundation bylaws set forth the following as the Foundation’s purpose:

Article | - Purpose: The purpose is to increase public awareness of autism

and Alzheimer’s; to support and conduct research, educational and informational
activities to increase public awareness of autism and Alzheimer’s; to provide
research and information to patients, families and local community; to sponsor
reports, meetings and workshops for patients, families and caregivers; conduct
research and education about funding for low-income patients; and to educate
the public about the growing need of organizations that provide services or
advocacy for disadvantaged people suffering from these brain diseases.

Activity Description:

The agent interviewed Vice President, concerning the Foundation’s programs
and activities. stated that the Foundation is a resource center to provide
information on autism and Alzheimer’s. She stated that the activities of

with respect to the Foundation consist of answering calls on their personal telephones
from parents seeking information on autism. She also stated that the Foundation has a website

and conducts some social events at the home. In addition, she stated that she visits
local hospitals, churches and therapy centers and that the Foundation receives referrals from
doctors and government agencies. The invite families with children to their home for

picnics and swimming events on weekends. She added that the Foundation serves as a support
group for families. No diary or log was provided to show the frequency with which
undertakes these activities.

The Foundation provided a copy of a brochure and a list of activities as evidence of activities
carried on. See Exhibit 2. The list of activities provided does not show the dates of events,
locations, times, or the numbers of attendees. Printouts of photographs from the Foundation
website depict children and adults at a party held at the family home. See Exhibit 3.

According to the Foundation’s representative, the took children to an animal sanctuary in
_ No further details on the number of children, times, method of transportation, number
of accompanying adults, or requirements for inclusion in the trip were provided.

The agent asked about whether the Foundation conducts or provides funding for research.
response was that the Foundation does not conduct or fund any research
on autism and Alzheimer’s. The Foundation provided a list of names of organizations from
which the Foundation states that it receives, or to which it makes, referrals. No additional
information was provided concerning the frequency or results of any referrals. See Exhibit 4.

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

r - ve i No. or
Form 886-A Department of the Treasury Internal Revenue Service Schedule
= Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
Funding:

The following sources of revenue are reported on the Forms 990:

Revenue Sources Tax Year ___| Tax Year
Contributions, gifts, grants
Investment income

Totals

Expenditures reflected in the general ledger, bank statements, and cancelled checks in fiscal
tax years ending January 31, and January 31, , reveal numerous transactions in
which the organization expended funds that apparently directly benefited the family
members rather than the Foundation. The following table shows expenditures made using the
Foundation’s funds:

Expenditures Tax Year Tax Year

Security dog

Electronics purchases
| ~~——s« ¥ decorations
Hyperbaric chamber & related

equipment

| Sporting equipment

i purchases

i payment a
Furniture

| Attorney retainer

| Trailer Shop,

Trip to
On Line Books

anuenuanl

Explanations of the above expenditures were requested but were not provided. It does not appear
that the described purchases and payments with Foundation funds were made in furtherance of
the Foundation’s exempt purposes. See Exhibit 1 for a summary of expenses for tax years
ending January 31, and January 31,

The agent issued several Information Document Requests to obtain receipts and information
with respect to how these expenditures are related to the Foundation’s exempt purposes. The
Foundation did provide explanations for some of the expenditures but did not provide
appropriate explanations for those listed above.

Form 886-Aev.4-68) Department of the Treasuty - Internal Revenue Service
Page: -3-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
The Foundation does not have any employees and is operated from the family home in

The financial affairs of the Foundation are controlled by
Vice President of the Foundation. She has management authority over the Foundation’s day to
day operations and decisions; she and her husband have signature authority on the Foundation’s
bank accounts. As noted above and are listed on
the Forms 990 as officers.

The Foundation appears to be operated in a manner that enables the family to engage in
activities that are financially beneficial to them. Any charitable benefits to the public appear to be
insubstantial. The Foundation appears to be operated for non-exempt purposes in that it serves
the private interests of the family members to a more than insubstantial extent.

Use of Funds:

In April of , the Foundation purchased a portable hyperbaric chamber, oxygen concentrator
and pressure kit and training materials for $ The pressurized chamber administers
pure oxygen and is used as an alternate form of treatment for children with autism. Although
the treatment is believed to improve symptoms of autism by increasing oxygen intake in the
brain, the treatment has not been scientifically verified. See Exhibit 5. Typically, a hyperbaric
chamber treatment is conducted in a formal autism clinic or children's hospital and is
administered by a registered medical technician.

The hyperbaric chamber purchased by the Foundation is kept at the family home on the second
floor adjacent to the parent’s master bedroom. The chamber does not appear to be available
for general public use, and no medical technician is employed to operate it.

A chamber log is maintained to document date, name, and time the chamber was used. The
agent reviewed the chamber log and found that from June 2, through January 31, ,
the chamber was used 114 times. The family members and used
the chamber 94 times or % of the times it was used. Other individuals who were close family
friends used the chamber 20 times or % of the times it was used. See Exhibit 6.

On November 11, , the Foundation purchased a security dog for ¢ The dog lives
with the family and appears to be the family pet. stated the dog is
helpful in the treatment of autism and is a pet for the children to play with when they visit their
home. See Exhibit 7. It appears that the Foundation does not conduct activities for the public
on a regular basis. No information was provided that indicates that Foundation activities are
conducted at the family home over three times a year.

In August and November of the Foundation made several purchases of electronic
equipment and computer for approximately $ . Purchases were made at

and retail stores. The items were apparently
used by the family members. No receipts and no reasonable explanation was provided
to show how these items benefit the Foundation and the general public.

Form 886-Aev.4-68) Department of the Treasury - Internal Revenue Service
Page: -4-

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

Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer

In November and December of the Foundation purchased and installed a Christmas
wonderland display for ¢ . The decorations are on display in the family home and
appeared to primarily benefit the family. The display is inside a large glass fish tank
and is filled with decorations. stated that the display provided helpful therapy
for the children when they visit on weekends.

Throughout the Foundation’s funds were used to purchase books online, furniture, a
moped and a trailer, to pay attorney retainer fees, and to pay expenses for family
vacations enjoyed in See Exhibit 1 for amounts expended.

The Foundation website, provides some general information about the
organization and displays photographs of some activities. The site also posts the programs offered
by the organization and solicits donations. The website programs show family and patient support
groups. No information was provided to substantiate any face to face contact with individuals or
groups. The Foundation’s education and training involves answering telephone calls from
individuals seeking information on autism. The website shows the Foundation offers programs and
participates in advance treatments. The Foundation does not conduct research or provide funding
for autism and Alzheimer’s. There is no evidence the Foundation participates in collaboration with
healthcare professionals or holds a leadership role for Alzheimer’s related organizations as stated
on their Form 990-EZ return.

Lastly, no evidence was provided to substantiate the Foundation has any educational workshops
for medical professionals programs as shown on the website. The Foundation did provide a list of
individuals and medical professionals as referrals.

LAW
Exempt Status:

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

Section 1.501(c)(3)-1(a)(1) of the regulations provides that in order to be exempt as an
organization described in section 501(c)(3) of the Code, the organization must be one that is both
organized and operated exclusively for one or more of the purposes specified in that section.
Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will not be regarded as
operated exclusively for exempt purposes if more than an insubstantial part of its activities is not in
furtherance of exempt purposes. The existence of a substantial nonexempt purpose, regardless of
the number or importance of exempt purposes, will cause failure of the operational test. Better
Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945).

Section 1.501(c)(3)-1(d)(ii) of the regulations 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. Thus, 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

Form 886-Acrev.4-68) Department of the Treasury - Internal Revenue Service
Page: -5-

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

Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer

interests. Prohibited private interests include those of unrelated third parties as well as insiders.
Christian Stewardship Assistance, Inc. v. Commissioner, 70 T.C. 1037 (1978); American
Campaign Academy v. Commissioner, 92 T.C. 1053 (1989). Private benefits include an
“advantage; profit; privilege; gain; [or] interest.” Retired Teachers Legal Fund v. Commissioner, 78
T.C. 280, 286 (1982).

Section 1.501(c)(3)-1(d)(2) of the regulations provides that the term "charitable" is used in section
501(c)(3) of the Code in its generally accepted legal sense, and includes the promotion of
education.

Private Inurement and Excess Benefit Transactions:

The words “private shareholder or individual” in section 501 refer to persons having a personal and
private interest in the activities of the organization. Treas. Reg. § 1.501(a)-1(c). The inurement
prohibition provision “is designed to prevent the siphoning of charitable receipts to insiders of the
charity ... .” United Cancer Council v. Commissioner, 165 F.3d 1173 (7" Cir. 1999). A “private
shareholder or individual” for purposes of a private inurement analysis has been interpreted to
mean an insider of the organization. See Orange County Agricultural Society, Inc. v.
Commissioner, 893 F.2d 529, 534 (2d Cir. 1990). The prohibited private inurement involves using
the assets of the exempt organization for the benefit of the insider; examples include payment of a
percentage of revenue, lending money, and payment of personal expenses. Founding Church of
Scientology v. United States, 412 F.2d 1197 (Ct. Cl. 1969).

Prohibited inurement is strongly suggested where an individual or small group has exclusive

control over the management of the organization’s funds. The Church of Eternal Life and Liberty,
Inc. v. Commissioner, 86 T.C. 916, 927 (1986); Basic Bible Church v. Commissioner, 74 T.C. 846,

857 (1980); Church of the Transfiguring Spirit v. Commissioner, 76 T.C. 1, 7 (1981).

In Basic Bible Church v. Commissioner, 74 T.C. 846 (1980), the court found that although the
organization did serve 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 the need to be open and candid about financial
matters; the applicant failed to provide information concerning financial affairs.

Section 4958(c)(1)(A) of the Code, in part, defines an "excess benefit transaction" as “any
transaction in which an economic benefit is provided by an applicable tax-exempt organization
directly or indirectly to or for the use of any disqualified person if the value of the economic benefit
provided exceeds the value of the consideration (including the performance of services) received
for providing such benefit.” in addition, section 4958(c)(1)(A). also provides that “an economic
benefit shall not be treated as the consideration for the performance of services unless such
organization clearly indicated its intent to so treat such benefit.” IRC § 4958(c)(1)(A).

Section 4958(e) of the Code defines an "applicable tax-exempt organization" as an organization
described in either section 501(c)(3) or section 501(c)(4) of the Code or an organization which was
so described at any time during the five-year period ending on the date of the excess benefit
transaction. “Such term shall not include a private foundation as defined in section 509(a).” I.R.C.
§ 4958(e).

Form 886-Acev.4-68) Department of the Treasury - Internal Revenue Service
Page: -6-

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

Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer

Section 4958(f)(1) of the Code defines "disqualified person" as “(A) (A) any person who was, at
any time during the five-year period ending on the date of such transaction, in a position to
exercise substantial influence over the affairs of the organization, (B) a member of the family of a
disqualified person, [and] (C) a 35 percent controlled entity.

Treasury Regulation section 53.4958-3(c) provides that voting members of the governing body,
presidents, chief executive officers, or chief operating officers are persons who are in a position to
exercise substantial influence over the affairs of the organization.

Treasury Regulation section 53.4958-4(a)(1) provides that in order to determine whether an excess
benefit transaction has occurred, all consideration and benefits exchanged between a disqualified
person and the applicable tax-exempt organization and all entities it controls are to be taken into
account.

Treasury Regulation section 1.501(c)(3)-1(f)(ii) provides that all the relevant facts and
circumstances must be considered in determining whether to continue to recognize the tax exempt
status of an organization that has engaged in excess benefit transactions, and lists the following
five relevant factors that will be considered in that determination.

(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 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 Treasury Regulation section 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.

ANALYSIS
Exempt Status:

The Foundation appears to have engaged in few activities that further its exempt purpose. Vice
President states that she and her husband have answered some telephone

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

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

Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer

calls and have invited autistic children and their families into their home for activities. The
Foundation maintains a website and has published a brochure about its activities.

The address of the Foundation is the same as the residence of the officers. The expenditures
appear to primarily benefit the family. Funds of the Foundation have been used for the
purchase of an animal that appears to be a family pet and to purchase furniture, Christmas
decorations, and electronic equipment for the personal residence. The hyperbaric chamber
purchased by the Foundation is located off the master bedroom of the residence and is used by
the family members and close friends. Foundation funds were used to finance a family trip to

. Though some exempt purpose activity has occurred, the Foundation does not appear to
operate exclusively exempt purposes as required by section 501(c)(3) and Section 1.501(c)(3)-

1(c)(1).

Similar to the organization in Basic Bible Church v. Commissioner, 74 T.C. 846 (1980), the
Foundation appears to exist to serve the private benefit of its founders, and thus fails the
operational test of section 501(c)(3) even though it may operate for some exempt purposes. As in
that case, control over financial affairs by the founders creates an opportunity for abuse. More
than an insubstantial part of the Foundation’s activities appear to benefit the family
members rather than the general public.

Since the Foundation does not operate exclusively for exempt purposes and operates to the
private benefit of the family to a more than insubstantial extent, the Foundation is not

described by section 501(c)(3).

Excess Benefit Transactions and Revocation:

and are classified as disqualified persons with respect to of the
Foundation because they are officers and founders of the Foundation who exercise substantial
control over the Foundation’s operations and financial affairs. I.R.C. § 4958(f)(1)(A); Treas. Reg. §
53.4958-3(c).

The expenditures listed on the Expenditures Chart above appear to be excess benefit transactions
as to and in that they are transactions in which economic benefits were
provided by an applicable tax-exempt organization directly or indirectly to or for their use and the
value of those economic benefits exceeds the value of any consideration received by the
Foundation. I.R.C. § 4958(c)(1)(A)

The Foundation’s facts and circumstances can be evaluated under the five factors listed in
Treasury Regulation section 1.501(c)(3)-1(f)(ii) as follows.

(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 ongoing

Form 886-A Rev.4-68 Department of the Treasury - Internal Revenue Service
) P

• Servi
  Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer

activities that further exempt purposes;

Taking the above two factors together, the Foundation does not appear to have extensive regular
and ongoing activities furthering its stated exempt purposes. The value of the aggregate excess
benefit transactions involving the are substantial when compared to the scope of the
Foundation’s other activities. The Foundation reports revenue in the amount of ¢ for the
fiscal year ending January 31, and expended $¢ over twice that amount, in the
excess benefit transactions in which it engaged in that year. The Foundation reports revenue in
the amount of $ for the fiscal year ending January 31, and expended ¢

in the excess benefit transactions in which it engaged in that year. When combined, the revenue
for the two years totals ¢ and the amount expended in excess benefit transactions
totals ¢ Thus, over 80 percent of the revenue of the Foundation was expended to
benefit the family during the two fiscal years examined.

(C) Whether the organization has been involved in multiple excess benefit transactions
with one or more persons;

The Foundation appears to have engaged in multiple excess benefit transactions with the
family. Seven were indentified in the fiscal year ending January 31, and six were identified
in the fiscal year ending January 31,

(D) Whether the organization has implemented safeguards that are reasonably
calculated to prevent excess benefit transactions;

No safeguards appear to have been implemented. The same family remains in control of the bank
accounts and the day to day operations of the Foundation. Further, the Foundation is not adhering
to the terms of its current bylaws that the board shall contain no fewer than 15 members and
continues to operate with only three family members on its board.

(E) Whether the excess benefit transaction has been corrected (within the meaning of
section 4958(f) (6) and Treasury Regulation section 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.

The Foundation has not sought correction, as defined in the section 4958 regulations, from the
family.

Accordingly, when all the factors are taken into consideration, the Service has concluded that it is
appropriate to pursue revocation as a result of the transactions described above in addition to the
failure of the Foundation to operate exclusively for an exempt purpose.

TAXPAYER’s POSITION:

Taxpayer's position with respect to the issues, facts, applicable law and conclusions is unknown.
The organizations will be allowed 30 days to review this report and respond with a protest if
desired.

Form 886-Acev.4-68) Department of the Treasury - Internal Revenue Service
Page: -9-

; Form 886 A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
GOVERNMENT’S POSITION

Based on the facts learned during the examination, the Foundation does not qualify for exemption
under IRC Section 501(c)(3) as a charitable organization. Revocation of the Foundation’s exempt
status is appropriate since it is not operated exclusively for exempt purposes. The Foundation
clearly confers a private benefit on the family members. The Foundation funds appear to
be used primarily for the benefit of the As noted above, an organization that operates
for the benefit of its creators’ private interests is not operating exclusively for exempt purposes.

CONCLUSIONS

1. The above facts demonstrate that the Foundation is not operated exclusively for exempt
   purposes described within Internal Revenue Code section 501(c)(3):
   a. The Foundation is not engaged primarily in activities that accomplish an exempt
   purpose.
   b. More than an insubstantial part of the Foundation’s activities are in furtherance of a
   non-exempt purpose.
   c. The Foundation was operated for the purpose of serving a private benefit rather
   than public interests.

2. A substantial part of the net earnings of the Foundation inured to the benefit of and
   , two officers of the Foundation.

3. Revocation of the Foundation’s exempt status is appropriate in addition to the determination of
   section 4958 excise tax with respect to the officers due to the following factors:

a. The Foundation engaged in few exempt purpose activities;

b. The scope of the excess benefit transactions is substantial when compared with the
scope of other activities and expenditures;

c. The Foundation engaged in multiple excess benefit transactions;

d. The Foundation has implemented no safeguards that are reasonably calculated
to prevent excess benefit transactions;

e. The excess benefit transactions have not been corrected (within the meaning of section
4958(f) (6) and Treasury Regulation section 53.4958-7, and the organization has made
no good faith efforts to seek correction from the disqualified persons who benefited from
the excess benefit transactions.

Accordingly, the Foundation does not qualify for exemption under section 501(c)(3) and its tax
exempt status should be revoked. This proposed revocation would be effective February 1,
Any contributions to the Foundation will not be deductible as charitable contribution.

The Foundation will be required to file Form 1120 for the tax period ending January 31, and
for all subsequent tax years

Form 886-Arev.4-68) Department of the Treasury - Internal Revenue Service
Page: -10-

Form 886A

Department of the Treasury - Internal Revenue Service

Explanation of Items

Schedule No. or
Exhibit

Name of Taxpayer

Year/Period Ended

Form 886-Acrev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -11-