IRS revokes an organization's tax-exempt status for commercial operations and missing records

Plain-English summary

The IRS revoked an organization's recognition as exempt under IRC § 501(c)(3), effective on the specified date. The organization had described itself as presenting multimedia art and educational activities, but the examination record showed that it operated like a for-profit business selling and renting fabric structures, maintained a commercial website, and did not provide evidence of public education or charitable activity. The organization also failed to respond to repeated IRS requests to examine its records under IRC §§ 6001 and 6033(a)(1). The IRS required the organization to file Form 1120 and stated that contributions would no longer be deductible under IRC § 170.

Ruling snapshot

• Question: Did the organization continue to qualify for exemption under IRC § 501(c)(3)?
• Outcome: Revocation of exempt status
• Key authorities: IRC §§ 501(c)(3), 6001, 6033(a)(1), 170, 7428, 6104(c), and 6020(b)(2); Treas. Reg. §§ 1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(d)(2), and 1.501(c)(3)-1(d)(3)(b)

Full text (IRS public release)

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

TAX EXEMPT AND U.I.L: 501.03-01
GOVERNMENT ENTITIES
DIVISION
May 16, 2016
Release Number: 201409014 Taxpayer Identification Number:

Release Date: 2/28/2014 Person to Contact:

LEGEND: Identification Number:
ORG = Name of Organization
Contact Telephone Number:
ADDRESS = Address of Organization

Year = xx

ORG
ADDRESS

CERTIFIED MAIL

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 August 6,
19xx is hereby revoked and you are no longer exempt under section 501(a) of the Code effective
July 1, 20xx.

You have failed to establish that you are operated exclusively for exempt purposes within the
meaning of Internal Revenue Code section 501(c)(3), and that no part of your net earnings inure
to the benefit of private shareholders or individuals. You failed to respond to repeated
reasonable requests to allow the Internal Revenue Service to examine your records regarding
your receipts, expenditures, or activities as required by I.R.C. sections 6001 and 6033(a)(1).

Contributions to your organization are no longer deductible under IRC §170.
You are required to file income tax returns on Form 1120. These returns should be filed with the
appropriate Service Center for the tax year ending June 30, 20xx and for all tax years thereafter
in accordance with the instructions of the return.

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

If you decide to contest this determination under the declaratory judgment provisions of section
7428 of the Code, a petition to the United States Tax Court, the United States Claims Court, or the
district court of the United States for the District of Columbia must be filed before the 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:

United States Tax Court United States Court of Federal Claims
400 Second Street, NW 717 Madison Place, NW
Washington, D.C. 20217 Washington, D.C. 20005

United States District Court for the District of Columbia
333 Constitution Avenue, NW
Washington, D.C. 20001

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:

Internal Revenue Service

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

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

Date: January 13, 2012 Taxpayer Identification Number:
Form:
Legend: 990
ORG = Name of Organization Tax Year(s) Ended:
ADDRESS = Address of Organization June 30, 20xx
Person to Contact/ID Number:
ORG
Address Contact Numbers:
Telephone:
Fax:

Certified Mail - Return Receipt Requested
Dear

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

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

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

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

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

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

If we do not hear from you within 30 days from the date of this letter, we will process your case
based on the recommendations shown in the report of examination. If you do not protest this
proposed determination within 30 days from the date of this letter, the IRS will consider it to be a
failure to exhaust your available administrative remedies. Section 7428(b)(2) of the Code
provides, in part: “A declaratory judgment or decree under this section shall not be issued in any
proceeding unless the Tax Court, the Claims Court, or the District Court of the United States for
the District of Columbia determines that the organization involved has exhausted its
administrative remedies within the Internal Revenue Service.” We will then issue a final
revocation letter. We will also notify the appropriate state officials of the revocation in
accordance with section 6104(c) of the Code.

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

Internal Revenue Service
Office of the Taxpayer Advocate

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

Thank you for your cooperation.

Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

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

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG June 30, 20xx
LEGEND:

ORG = Name of Organization

Director = Name of Executive Director
Date = xx

State = Name of State

Issues:

Whether ORG, __. is organized and operating to further tax-exempt purposes as described under
Section 501(c)(3) of the Internal Revenue Code?

Facts:

On December 6, 19xx, the organization's Director, filed Articles of Incorporation with the State
establishing ORG, . The purpose of the corporation is to present multi-media performances of art in
motion, through the interaction of visual and performing arts, using sculptured form, music, lighting and film;
to create and present abstractions of the human body and humanizations of abstract sculptured ideas; to
educate and promote public awareness of this multi-media form of art through workshops, installations,
slide and video shows, seminars and discussion groups.

The corporation is organized exclusively for charitable and educational purposes, including, for such
purposes, the making of distributions to organizations that qualify as exempt organizations under Section
501(c)(3) of the Internal Revenue Code. No part of the net earnings of the corporation shall inure to the
benefit of, or be distributable to, its members, directors, officers, or other private persons, except that the
corporation shall be authorized and empowered to pay reasonable compensation for services rendered.
Upon the dissolution of the corporation, the board of directors shall, after payment of all of the liabilities of
the corporation, dispose of all of the assets of the corporation to other organizations organized and
operated exclusively for charitable, educational, religious or scientific purposes as described under Section
501(c)(3) of the Internal Revenue Code.

On February 19, 19xx, the Internal Revenue Service received Form 1023, Application for Recognition of
Exemption Under Section 501(c)(3) of the Internal Revenue Code, from ORG, . Form 1023 Part III
states that the organization is devoted to the promotion of live performance of multi-media art in motion.
The performances include kinetic sculptures using dances to physically move the sculpture presented. In
addition to performances, the organization also gives slide shows and demonstrations. The organization's
principal sources of support will be from grants from private foundations, schools, and state art councils to
enable it to give free performances and workshops. ORG, secondary source of support will be from
receipts from performances to which tickets are sold. On August 6, 19xx, ORG, __. was granted
exemption from federal income tax under Section 501(c)(3) of the Internal Revenue Code.

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

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG June 30, 20xx

On April 29, 20xx a letter was received by the Internal Revenue Service from the Office of the Attorney
General regarding the operations of ORG, __. The letter states that ORG, articles provide for the use of the
same name as a for-profit created on March 10, 19xx by Director. The for-profit ORG, . was created for the
following purposes:

(a) To engage in the business of marketing designs, developing designs and manufacturing
products from developed designs.

(b) To carry on any business or other activity which may be lawfully carried on by a corporation
organized under the Business Corporation Law of the State.

The letter states that the for-profit ORG . was involuntarily dissolved on December 31, 19xx. The letter
states that the majority of information that is publicly available about ORG, activities relate to the rental of
an exhibition space and the creation of fabric structures for commercial purposes. The following
discrepancies were noted by the Attorney General’s Office from ORG, 20xx Form 990:

1) The organization’s website www. .org immediately goes to www. .com which contains no reference to
the non-profit, its charitable mission or activity. The website describes ORG, activities as event marketing,
architecture and retail, exhibits and conferences, hotels and other venues and lists clients.

2) $ million reported in revenue for “rentals and other income” and describes it as “income from furnishing
facilities below fair market value to organizations whose activities are in furtherance of ORG, tax exempt
purpose,” but it would seem that the revenue predominantly comes from creating signs and marketing for
commercial purposes;

3) That more than million in expenses is for “enrich[ing] the public with performance and visual fabric art by
putting on performances and offering below market ticket prices,” but the performances appear to be
commercial in nature, comprised largely of marketing events and trade shows;

4) That the entity made significant revenue over the last several years, $1 in 20xx, $1 in 20xx, $2 in
20xx, and $3 in 20xx, but how that revenue was used for charitable purposes is unclear; and,

5) Creator and President signed the Form 990 identifying herself as its owner.

A comparative analysis of ORG, revenues and expenses as reported on Forms 990 for tax years 20xx,
20xx, and 20xx is detailed below.

Revenue 20xx Form 990 20xx Form 990 20xx Form 990
Rentals and Other Income $1 $2 $1
Total Revenue $1 $2 $1

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

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG June 30, 20xx

Expenses 20xx Form 990 20xx Form 990 20xx Form 990

Production Supply Expenses
Salaries and Wages of Employees
Office Expenses
Compensation of Officers and Directors
Postage and Shipping
Advertising and Promotion
Occupancy
Employee Benefits
Travel
Miscellaneous Expense
Payroll Taxes
Accounting Fees
Bank Charges
Trade Show Entry Fees
Professional Fees
Fees for Services - Other
Legal Fees
Supplies
Insurance
Conferences and Conventions
Commissions
Payroll Fees
Service Charges
Office Expenses
Interest
Information Technology
Computer Expense
Automobile Expense
Utilities
Depreciation and Depletion
Telephone
Equipment Rental and Maintenance
All Other Expenses

Total Expenses (1) (2) (1)
Net Income (Loss) $1 (1) $1

ORG, __. was notified by the Internal Revenue Service on December 13, 20xx of a pending
examination of its books and records to be conducted on March 23, 20xx of the Form 990 for the tax year
ended June 30, 20xx. The Executive Director listed on the organization’s Form 990 is Director. Director
appointed CPA to act as Power of Attorney for the organization. The examination was conducted at the
accounting firm.

On March 23, 20xx, an initial interview was conducted with the organization’s Power of Attorney,
CPA, to obtain an understanding of the organization's activities during the year under examination.
CPA stated that ORG, . generated income from performance fees and renting its art. He stated that the
non-profit organization never received any contributions or ever solicited donations. CPA stated that ORG,
. was leasing space in State to create its art in an apartment owned by an unrelated third party.

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

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG June 30, 20xx

CPA stated that the apartment was never used as a personal residence by ORG, . CPA stated that
ORG, . is no longer operating and is in the process of filing its final returns.

During the year under examination, ORG, . maintained the website, http://www. .com.
The website states that ORG, . creates fabric structures for events, event marketing and architectural
industries. In addition to the tension fabric forms available for rent or purchase, the organization offers
custom design services. ORG, design team has extensive experience in fine arts, graphic and industrial arts,
costume and fashion design. The website states that ORG, rental line represents cost-effective solutions for
stage sets, trade shows, costumes, entrance ways, and ceiling treatments for all design industries including
event, event marketing, exhibit and retail displays, exhibit design, fabric architecture and hospitality. The
website states that fabric solutions are lightweight, flexible, and adaptive to transform any environment
through décor, structure, performance, sculpture and dramatic anchors for live experiences. ORG, stretch
fabric structures are known worldwide for design and manufacturing consistency, reliability and their cost-
effective ability to transform space. The website provides ORG, client list. The website pages of ORG, __.
are included as exhibits beginning on page 9 of the report.

On August 19, 20xx, the Internal Revenue Service mailed Letter 3606 with an Information Document
Request to Director with a copy to CPA. The letter requested the organization to provide a detailed
explanation and contemporaneous supporting documentation for the expenses detailed below:

Expenses: For-Profit Business Purpose: Amount: Percentage:
Total $1 100.00%

On August 25, 20xx Letter 3606 mailed to ORG, address of record was returned to the Internal Revenue
Service. The postal service provided an updated address on the envelope for ORG, __. as State. The
reason provided by the postal service for returning the letter to the Internal Revenue Service was because
the mail forwarding service had expired.

On September 20, 20xx, the organization’s Power of Attorney, CPA, was contacted because no response
was provided to the Information Document Request mailed to him on August 19, 20xx. CPA advised the
Service that he would no longer be representing ORG.

During the year under examination, ORG, . received % of its revenue from sales and rentals of its art.
The organization did not receive any contributions from the general public. The Internal Revenue Service
sampled the organization's expenses and discovered that 0% of ORG, total expenses incurred for the year
were used to further for-profit commercial activities. During the year under examination, ORG, .
activities and resources were directed to benefit a for-profit business, rather than exclusively to accomplish
Section 501(c)(3) purposes. Therefore, ORG, __. does not qualify for exemption from federal income tax
under Section 501(c)(3) of the Internal Revenue Code.

Law:
Internal Revenue Code

Section 501(c)(3) of the Internal Revenue Code provides for the exemption from taxation corporations,
and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable,
scientific, testing for public safety, literary, or educational purposes, or to foster national or international
amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or
equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which
inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is
carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in
subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of
statements), any political campaign on behalf of (or in opposition to) any candidate for public office.

Section 6001 of the Code states that every person liable for any tax imposed by this title, or for the
collection thereof, shall keep such records, render such statements, make such returns, and comply with
such rules and regulations as the Secretary may from time to time prescribe. Whenever in the judgment of
the Secretary it is necessary, he may require any person, by notice served upon such person or by
regulations, to make such returns, render such statements, or keep such records, as the Secretary deems
sufficient to show whether or not such person is liable for tax under this title.

Federal Tax Regulations

Section 1.501(c)(3)-1(a)(1) of the Federal Tax Regulations states in order to be exempt as an
organization described in Section 501(c)(3) of the Internal Revenue 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(c)(3)-1(d)(2) of the regulations states that the term “charitable” is used in Section
501(c)(3) of the Code in its generally accepted legal sense. Such term includes relieving the poor and
distressed or the underprivileged, advancement of education or science, lessening of the burdens of
government, combating community deterioration, lessening neighborhood tensions, and eliminating
prejudice and discrimination.

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

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG June 30, 20xx

Section 1.501(c)(3)-1(d)(3)(b) of the regulations states that the term “educational” as used in Section
501(c)(3) of the Code relates to the instruction of the public on subjects useful to the individual and
beneficial to the community.

Court Cases

In the case of Airlie Foundation v. Internal Revenue Service., 283 F.Supp.2d 58, the United States
District Court upheld the Service’s position to revoke the organization’s tax-exempt status under Section
501(c)(3) of the Code. The grounds for revocation included the organization’s earnings inuring to the
benefit of its founder and the organization’s operation of a conference center in a commercial manner. The
Court stated that in cases where the organization's activities could be carried out for either exempt or non-
exempt purposes, the manner in which the activities are carried out must be examined in order to
determine their true purpose. In assessing an organization’s claim for tax-exempt status under the
operational test, the court considers competition with for-profit commercial entities; extent and degree of
below cost services provided; pricing policies; reasonableness of financial reserves; whether the
organization uses commercial promotional methods; and the extent to which the organization receives
charitable donations.

In the case of B.S.W. Group, Incorporated v. Commissioner of Internal Revenue., 70 T.C. 352, the
United States Tax Court upheld the Service’s position to deny the organization’s application for recognition
of exemption under Section 501(c)(3) of the Code for failing to meet the operational test by primarily
engaging in a trade or business. The Court stated that under the operational test, the purpose towards
which an organization’s activities are directed, and not the nature of the activities themselves, ultimately
determines the organization's right to be classified as a Section 501(c)(3) organization. The fact that the
organization’s activities may constitute a trade or business does not, of itself, disqualify it from classification
under Section 501(c)(3), provided the activity furthers or accomplishes an exempt purpose. Rather, the
critical inquiry is whether the organization’s primary purpose for engaging in the activities is an exempt
purpose, or whether its primary purpose is the non-exempt purpose of operating a commercial business.
Factors such as the particular manner in which an organization’s activities are conducted, the commercial
hue of those activities, and the existence and amount of annual or accumulated profits are relevant evidence
of a non-exempt purpose.

In the case of the Better Business Bureau of Washington, D.C., v. United States., 326 U.S. 279, 66 S.Ct.112,
the Supreme Court of the United States determined that for the Better Business Bureau of Washington, D.C.
to fall within exemption from taxation, the organization must be devoted exclusively to educational purposes,
and the presence of a single non-educational purpose, if substantial in nature, will destroy the exemption
regardless of the number or importance of truly educational purposes. The Court stated that it is apparent
beyond dispute that an important, if not primary, pursuit of the Better Business Bureau of Washington, D.C.
is to promote not only an ethical but also a profitable business community.

The Court stated that the commercial hue permeating the organization is reflected in its corporate title
and in the charter provisions dedicating the organization to the promotion of the ‘mutual welfare, protection
and improvement of business methods among merchants’ and others and to the securing of the
‘educational and scientific advancements of business methods’ so that merchants might ‘successfully and
profitably conduct their business.’ The Court stated that the organization’s activities are largely animated
by this commercial purpose. Unethical business practices and fraudulent merchandising schemes are
investigated, exposed and destroyed. The Court stated that such efforts to cleanse the business system of
dishonest practices are highly commendable and may even serve incidentally to educate certain persons

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

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG June 30, 20xx

but that they are directed fundamentally to ends other than that of education. The Court stated that any
claim that education is the sole aim of the organization is thereby destroyed.

Revenue Rulings

Revenue Ruling 71-529, 1971-2 C.B. 234, considered whether an organization that provides assistance
in the management of participating colleges and university's endowment fund substantially below cost
qualifies for exemption under Section 501(c)(3) of the Code. Membership in the organization is restricted
to colleges and universities exempt under Section 501(c)(3) of the Code. The organization will not make its
services available to anyone other than the exempt organizations controlling it. Most of the operating
expenses of the organization, including the costs of the services of the investment counselors and the
custodian banks, are paid for by grants from independent charitable organizations. The member
organizations pay a nominal fee for the services performed. By performing this function for the
organization for a charge that is substantially below cost, the organization is performing a charitable activity
within the meaning of Section 501(c)(3) of the Code. Accordingly, it is held that the organization qualifies
for exemption from federal income tax under Section 501(c)(3) of the Code.

Revenue Ruling 72-369, 1972-2 C.B. 245, considered whether an organization formed to provide
managerial and consulting services at cost to unrelated exempt organizations qualifies for exemption under
Section 501(c)(3) of the Code. The services consist of writing job descriptions and training manuals,
recruiting personnel, constructing organizational charts, and advising organizations on specific methods of
operation. To satisfy the operational test the organization's resources must be devoted to purposes that
qualify as exclusively charitable within the meaning of Section 501(c)(3) of the Code. An organization is
not exempt merely because its operations are not conducted for the purpose of producing a profit.
Providing managerial and consulting services on a regular basis for a fee is a trade or business ordinarily
carried on for profit. The fact that the services are provided at cost and solely for exempt organizations is
not sufficient to characterize the activity as charitable within the meaning of Section 501(c)(3) of the Code.
Accordingly, it is held that the organization’s activities are not charitable and therefore the organization
does not qualify for exemption from federal income tax under Section 501(c)(3) of the Code.

Taxpayer’s Position:

ORG, position with respect to the issues, facts, applicable law, and government's position as
discussed in this report is unknown. The organization will be allowed 30-days to review this report and
respond with a rebuttal if considered necessary.

Government’s Position:

In order to qualify for exemption under Internal Revenue Code Section 501(c)(3), an organization must
be both organized and operated exclusively for charitable or educational purposes, provided that no part
of the net earnings of such corporation inures to the benefit of any private shareholder or individual. The
purpose of ORG, __. as provided in its Articles of Incorporation is to present multi-media performances of
art in motion, through the interaction of visual and performing arts, using sculptured form, music, lighting
and film; to create and present abstractions of the human body and humanizations of abstract sculptured
ideas; to educate and promote public awareness of this multi-media form of art through workshops;
installations, slide and video shows, seminars and discussion groups. However, there has been no

Form 886-A (1-1994) Catalog Number 20810W Page 7 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG June 30, 20xx

evidence provided in the record to demonstrate that ORG, __. has provided any form of education, public
awareness seminars or discussion groups to benefit the general public.

During the year under examination, ORG, . operated in a manner similar to the for-profit corporation
considered in Airlie Foundation v. Internal Revenue Service., 283 F.Supp.2d 58 in which the United States
District Court upheld the Service’s position to revoke the organization’s tax-exempt status under Section
501(c)(3) of the Code. The Court ruled that Airlie Foundation operated in a commercial manner and did not
further tax-exempt purposes as described under Section 501(c)(3) of the Code. Similarly, ORG, . sold
its products in a commercial manner and competed with for-profit entities providing similar services. During
the year under examination, ORG, __. did not operate to further tax-exempt purposes as described under
Section 501(c)(3) of the Code.

In the case of B.S.W. Group, Incorporated v. Commissioner of Internal Revenue., 70 T.C. 352, the
United States Tax Court upheld the Service’s position to deny the organization’s application for recognition
of exemption under Section 501(c)(3) of the Code for failing to meet the operational test by primarily
engaging in a trade or business. The Court stated that factors such as the particular manner in which an
organization’s activities are conducted, the commercial hue of those activities, and the existence and
amount of annual or accumulated profits are relevant evidence of a non-exempt purpose. During the year
under examination, ORG, __. operated solely in a manner indistinguishable from a for-profit business. The
organization maintained a website similar to a for-profit business advertising its products for sale or rent.
The website also listed for-profit companies as its clients and there is no mention on the website of any
charitable or educational services provided by the organization.

In the case of the Better Business Bureau of Washington, D.C., v. United States., 326 U.S. 279, 66
S.Ct.112, the United States Supreme Court ruled that to obtain exemption from taxation, an organization
must be devoted exclusively to exempt purposes, and the presence of a single non-exempt purpose, if
substantial in nature, will destroy the exemption regardless of the number or importance of truly exempt
purposes. It is clearly evident that the primary purpose of ORG, . is to sell or rent its fabric structures
rather than to accomplish exclusively Section 501(c)(3) purposes. ORG, . has not provided records to
demonstrate that the organization is furthering tax-exempt purposes. During the year under examination,
ORG, . did not engage in any educational activities as described in the regulations. ORG, . did not
instruct the public on subjects useful to the individual or beneficial to the community.

Conclusion:

The exempt status of ORG, . is to be revoked effective July 1, 20xx, for failing to operate in
accordance with the requirements under Section 501(c)(3) of the Internal Revenue Code. For the tax year
ended June 30, 20xx, the organization is required to file Form 1120. ORG, . is required to file Form
1120 for all subsequent tax periods. Per Internal Revenue Code Section 6020(b)(2), the Internal Revenue
Service has the authority to file substitute for returns, and assess the correct amount of tax in situations
where the taxpayer fails to file the required returns.

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