Private foundation loses exemption for inurement and unsubstantiated charity

Plain-English summary

A private foundation controlled by two trustees could not substantiate the charitable giveaway it claimed, and its ledger showed no related expenditure. Instead, the examination found insider loans and third-party payments benefiting a trustee and family members, along with options trading that produced large losses and reduced investment and fund balances nearly to zero. The IRS concluded that the organization failed the § 501(c)(3) operational test, served private rather than public interests, engaged in self-dealing, and made jeopardizing investments without ordinary business care and prudence. Its exemption was revoked retroactively to a redacted January 1 date, contributions ceased to be deductible after that date, and it was required to file Form 1120.

Ruling snapshot

• Question: Did the foundation remain operated exclusively for charitable purposes despite unsubstantiated activities, insider financial dealings, and speculative investments?
• Outcome: Revoked
• Key authorities: IRC §§ 501(c)(3), 4941, and 4944; Treas. Reg. §§ 1.501(c)(3)-1 and 53.4944-1

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
Date: June 20, 2014
Number: 201442057 Taxpayer Identification Number:

Release Date: 10/17/2014

Person to Contact:
Employee Identification Number:

Employee Telephone Number:

UIL: 501.03-00

CERTIFIED MAIL — RETURN RECEIPT

Dear

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

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

Organizations described in IRC 501(c)(3) and exempt under section 501(a) must be both organized
and operated exclusively for exempt purposes. You were unable to provide documentation that
would substantiate any charitable activities, or events that further an exempt purpose.
Substantiation provided by you, that was to act as proof of charitable activities, could not be
traced back to you. The substantiation provided traced to a for-profit corporation operated by
your trustees. In addition, your general ledger does not show any expenditures related to the
charitable giveaway. As such, you are not able to show any charitable activities. The absence of
any charitable activities would show that your activities were undertaken for nonexempt purposes.

As such, you do not meet the operational test because you are not operated exclusively for IRC
501(c)(3) purposes as defined in Regs. 1.501(c)(3)-1(d)(1)(i). You are not operated for a charitable
purpose, and have not performed any charitable activities.

In addition to not showing any charitable activities, there were loans between you and that
allowed your fund balances to inure to and his family. These loans allowed a substantial
portion of your fund balances to flow to and not for a charitable activity.

Also, , acting as trustee and investment advisor for you, used the investment account for
personal gain that was not in furtherance of your exempt purpose. General ledger entries for the
investment account show checks were issued for the payment of Long Term insurance for and his

family. Additional general ledger entries show that checks were issued for the payment of long

term debts owed to . These payments jeopardized the carrying out of your exempt
purpose.
Taken as a whole, you have been used to serve the private interests of rather than the public

interest as prescribed in Regs. 1.510(c)(3)-1(d)(1)(ii).
Contributions to your organization are no longer deductible under IRC §170 after January 1, 20XX.

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 December 31, 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 the United States Tax Court at the following address:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

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
Office of the Taxpayer Advocate

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

Sincerely,

Mary A. Epps
Acting Director, EO Examinations

Enclosures:
Publication 892

UIL 501.03-00

Department of the Treasury Date:
Internal Revenue Service 24 June 2013
IRS Tax Exempt and Government Entities Division Taxpayer Identification Number:
Form:

Tax year(s) ended:

Person to contact / ID number:
Contact numbers:
Manager's name / ID number:

Manager's contact number:

Response due date:

Certified Mail - Return Receipt Requested
Dear

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

What you need to do if you agree

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

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

If we don't hear from you

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

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

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

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

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

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

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

Contacting the Taxpayer Advocate Office is a taxpayer right

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

Internal Revenue Service
Office of the Taxpayer Advocate

For additional information

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

Thank you for your cooperation.

Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
20XX12 & 20XX12
Issues:
Should the IRC §501(c)(3) tax exempt status of the be revoked because it is not operated exclusively

for tax exempt purposes?

Facts:
Before founding the ( ), was a Vice-President of at ( ). After
leaving , along with his wife, , founded , a for-profit corporation specializing in landscape

architectural services.

In addition to his architecture business also trades in futures and options. His biography on asserts that in
19XX he began studying and taking classes on trading options in the Futures Market and immediately realized that
trading options had the potential to be the and thus he began his technical analysis training. This
website advises that he currently specializes in trading credit spreads, calendar spreads and the . Also, he
currently offers a course he developed called

The Trust Agreement was signed and notarized on 10 March 20XX. The Trust Agreement was signed by and as
Trustees; acted as notary and witness to the Articles of Trust.

The primary purpose, as stated in its Trust Agreement “is to exclusively be for
charitable, religious, scientific, literary, and educational purposes; including, for such purposes, the making of
distributions to foundations that qualify as exempt foundations under § 501(c)(3) of the Internal Revenue Code”.
The Articles of Trust also set out that the trustees will “distribute the income of the for each tax year
in such time and in such manner as not to become subject to tax on the undistributed income imposed by §4942 of
the Internal Revenue Code”. Further, the “trustees will not engage in any acts of self dealing as defined in §4941(d),
nor retain any excess business holdings as defined in §4943; nor any many any investments in such manner as to
incur tax liability under §4944; nor make any taxable expenditures as defined in §4945(d)”.

The Trust Agreement stipulates that the trustees of the

have the powers: “To invest and reinvest the principal and income of the Trust in such property, real, personal, or
mixed, and in such manner as they shall deem proper, and from time to time change investments as they shall deem
advisable; to invest in or retain any stocks, shares, bonds, notes, obligations, or personal or real property (including
without limitation any interests in or obligation of any corporation, partnership, association, business trust,
investment trust, common trust fund, or investment company)”. The Trust Agreement also states that: “No principal
or income, however, shall be loaned, directly or indirectly, to any Trustee or to anyone else, corporate or otherwise,
who has at any time made a contribution to the ”

The submitted its original Form 1023 — Application for Recognition of Exemption under Section
501(c)(3); along with its Articles of Trust to the IRS on 4 June 20XX. The Application for exemption was signed by
as Trustee for the . In its determination letter dated 20 June 20XX, the was held to be

exempt from federal income tax as an IRC §501(c)(3) tax exempt organization and classified as a private foundation.

In its determination letter it is noted that the organization may be liable for excise taxes on taxable expenditures,
failure to distribute income, self dealing, jeopardizing investments, and excess business holdings as imposed by
Chapter 42 of the Internal Revenue Code.

The is currently managed by a two-member Board of Directors; and. These individuals control 100% of
the operations of the with no outside oversight or review.
Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -1-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
20XX12 & 20XX12

During the audit, books and records detailing the ongoing activities of the were requested. The provided a
link to as substantiation of its exempt activities in 20XX.
The link provided leads to a YouTube video promoting the 20XX. This video directs viewers to
. The subsequent link redirects to ; a site dedicated to credit spread trading business a
for-profit company operated under . These sites do not list any affiliation to the , or contain any

links to the website. The general ledger of the does not show any expenditure related to the above
referenced toy giveaway.

advises that created a home study course which includes a 0-page
manual, 0 DVDs and a personal trading journal. These sites insist that spent hours learning how to perform
Credit Spread Trading; and with this training course, an individual could immediately overcome this training hurdle
and begin trading immediately. This course is listed on this website for $0 or free with purchase of a 0 month
membership to the . On 21 December 20XX $0 was donated to the by the . The took a
charitable deduction on its’ 1120s for the 20XX tax year.

During the course of the audit, a Promissory Note between the and was provided. This Promissory Note
shows that on 4 Jun 20XX the entered into an agreement with for a loan totaling $0. The terms of the loan
state that the is to repay before 31 Dec 20XX. The total amount to
be repaid includes principal plus four (4) percent interest charged each year the loan is outstanding. At the beginning
of 20XX, the showed a remaining outstanding balance of $0. During 20XX the following transactions
were posted affecting the loan balance:

Num Date Type Name Memo Split Debit Balance
Opening Balance $0
1017 2/6/20XX Check Bank $0 $0
1016 2/18/20XX Check Health insurance Bank $0 $0
1019 3/20/20XX Check Bank $0 $0
1020 4/17/20XX Check Bank $0 $0
1021 7/9/20XX Check Bank $0 $0

Checks written by the to reduce the outstanding balance included third party payments for continued insurance

for and their children. In addition, payments made by the are not made in a consistent manner to

The final payment made by the exceeded the outstanding balance of the loan and created a receivable from the
to the

A Promissory Note between , , and the was provided during the audit for the created receivables

balance. The terms of the promissory note are as follows: The initial loan amount is equal to $0; and interest will
accrue on the loan at a rate of four (4) percent per year beginning 31 Dec 20XX. The loan is to be repaid in
installments equaling $0 per month starting 1 Aug 20XX; and due the 1st day of each subsequent month until the loan
is paid in full.

The General Ledger for the showed that on 1 January 20XX the account, the investment account for the
, had an opening balance of $0. During 20XX the following transactions were posted to the account:
Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -2-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
20XX12 & 20XX12
Date Type Memo Account Split Debit Credit Balance

Opening Balance $0
7/7/20XX Transfer ’ Funds Transfer $0 $0
9/24/20XX Transfer Funds Transfer $0.00 $0
12/31/20XX General Journal Invested on 09/24/20XX $0 $0

The largest of the transactions was a $0 transfer to bank on 7 July 20XX; which subsequently was used to pay off
the loan to . $0 was later transferred back to the investment account so that a large options trade could be
placed. On the same day as the transfer from the bank account, $0 was invested in options. There was no
related entry to increase value of securities or other tangible assets, and the options were written off to zero at the
end of the 20XX tax year. On its 20XX 990-PF, Return of Private , the

shows a $0 loss for the sale of securities or other assets.

The beginning balance of the account at on 1 January 20XX was $0 which was the closing balance of the
20XX year. During 20XX the transactions were posted to the account:

Date Type Memo Account Split Debit Credit Balance
Opening Balance $0
1/29/20XX Check Outgoing Wire Ref #0 Bank $0 $0
12/30/20XX General Journal Trading Fees $0 $ -
The transfer of funds from its bank account was to fund its account; on 30 December 20XX a

general entry was made reducing the account balance to zero.

The corresponding account statements provided during the audit
show the following transactions occurred during 20XX:

Date Description Fees Amount Balance
Opening Balance $0.00
1/31/20XX Wire Transfer - In $ - $0.00 $0.00
2/3/20XX BOT +5 SPX 100 JUN 10 800 PUT @0 CBOE $ - $0.00 $0.00
5/21/20XX SOLD -5 SPX 100 JUN 10 800 PUT @0 CBOE $ - $0.00 $0.00
5/25/20XX BOT +2 SPY 100 SEP 10 119 CALL @0 NYSE $ - $0.00 $0.00
5/25/20XX SEC/ORF Fees: May 25 $ - $ - $0.00
6/14/20XX SOLD -2 SPY 100 SEP 10 119 CALL @0 NYSE $ - $0.00 $0.00
6/18/20XX BOT +19 SPX 100 SEP 10 650 PUT @0 CBOE $ - $0.00 $0.00
6/18/20XX SEC/ORF Fees: June 18 $ - $ - $0.00
8/2/20XX Debit Interest $ - $0.00 $0.00
9/1/20XX Debit Interest $ - $0.00 $0.00
9/15/20XX Commission Adj $ - $0.00 $ -
Form 886-A (Rev.4-68) Department of the Treasury - 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
20XX12 & 20XX12

Throughout the year, the continued to purchase a series of options. None of these
options trades are reflected in the general ledger of the . On its 20XX 990-PF, Return
of Private , the shows a $0 loss for the sale of securities
or other assets.
On its 990-PF for the tax year ending 31 December 20XX the reported charitable
contributions equaling $0. With the addition of the loss on securities of $0, the reported gross income
of -$0. Reported expenses for the year were: $0 for trading fees; $0 for advertising; $0 for depreciation; and $0 for
miscellaneous expenses. Combined the net income of the was -$0. This loss reduced
the fund balances of the to $0.
On its 990-PF for the tax year ending 31 December 20XX the reported charitable

contributions equaling $0. With the addition of the loss on securities of $0 the

reported gross income of $0. Reported expenses for the year were: $0 in penalties from the IRS; $0 for trading fees;
$0 for depreciation; $0 for printing and publications; and $0 for miscellaneous expenses. In total the net income of
the was -$0. This loss reduced the fund balances of the

to $0.

Law:

IRC § 501(c)(3) allows for the exemption from Federal income tax an organization that is:
“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”

Treasury Regulation §1.501(c)(3)-1(a) provides, in general:
“In order to be exempt as an organization described in section 501(c)(3), an organization must be both
organized and operated exclusively for one or more of the purposes specified in such section. If an
organization fails to meet either the organizational test or the operational test, it is not exempt.”

Treasury Regulation §1.501(c)(3)-1(c)(1) provides,
An organization will be regarded as “operated exclusively” for one or more exempt purposes only if it
engages primarily in activities which accomplish one or more of such exempt purposes specified in section
501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose.

Treasury Regulation §1.501(c)(3)-1(c)(2) provides,
That the operational test is not satisfied where any parts of the organization’s earnings inure to the benefit of
private shareholders or individuals, and where the organization serves a private rather than public interest.

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

Page: -4-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
20XX12 & 20XX12

Treasury Regulation §1.501(c)(3)-1(d)(1)(ii) provides:
That an organization is not organized or operated exclusively for one or more of the purposes specified in
IRC §501(c)(3) unless it serves a public rather than a private interest.

Treasury Regulation §1.501(c)(3)-1(e) provides, in general:
“An organization may meet the requirements of section 501(c)(3) although it operates a trade or
business as a substantial part of its activities, if the operation of such trade or business is in furtherance
of the organization's exempt purpose or purposes and if the organization is not organized or operated for
the primary purpose of carrying on an unrelated trade or business, as defined in section 513.”

IRC § 509(b) holds:
If an organization is a private foundation (within the meaning of §509 (a)) on October 9, 1969, or becomes
a private foundation on any subsequent date, such organization shall be treated as a private foundation for
all periods after October 9, 1969, or after such subsequent date, unless its status as such is terminated under
IRC §507

IRC § 4941(d)(1) Defines Self Dealing as:
Any direct or indirect sale or exchange, or leasing, of property between a private foundation and a
disqualified person; lending of money or other extension of credit between a private foundation and a
disqualified person; furnishing of goods, services, or facilities between a private foundation and a
disqualified person; payment of compensation (or payment or reimbursement of expenses) by a private
foundation to a disqualified person; transfer to, or use by or for the benefit of, a disqualified person of the
income or assets of a private foundation.

IRC § 4941(d)(2)(B) Sets out the following special rule:
the lending of money by a disqualified person to a private foundation shall not be an act of self-dealing if
the loan is without interest or other charge (determined without regard to IRC §7872) and if the proceeds of
the loan are used exclusively for purposes specified in IRC§ 501(c)(3).

Treasury Regulation § 53.4944-1(a)(2)(i) provides
that an investment is a jeopardizing investment if it is determined that the foundation managers, in making
the investment, have in providing for the long- and short-term financial needs of the foundation to carry out
its exempt purposes failed to exercise ordinary business care and prudence under the facts and
circumstances prevailing at the time of making the investment.

No category of investments is to be treated as a per se violation of IRC §4944; However, the following are
examples of types or methods of investment which will be closely scrutinized to determine whether the
foundation managers have met the requisite standard of care and prudence: Trading in securities on margin,
trading in commodity futures, investments in working interests in oil and gas wells, the purchase of “puts”
and “calls”, and “straddles,” the purchase of warrants, and selling short.

Treasury Regulation § 53.4944-1(b)(2)(i) Provides:
A foundation manager shall be considered to have participated in the making of an investment “knowing”
that it is jeopardizing the carrying out of any of the foundation's exempt purposes only if:

(a) He has actual knowledge of sufficient facts so that, based solely upon such facts, such investment would
be a jeopardizing investment under paragraph (a)(2) of this section,

(b) He is aware that such an investment under these circumstances may violate the provisions of federal tax
law governing jeopardizing investments, and

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

Page: -5-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
20XX12 & 20XX12

(c) He negligently fails to make reasonable attempts to ascertain whether the investment is a jeopardizing
investment, or he is in fact aware that it is such an investment.

Treasury Regulation § 53.4944-1(b)(2)(ii) Provides:
A foundation manager's participation in a jeopardizing investment is willful if it is voluntary, conscious, and
intentional. No motive to avoid the restrictions of the law or the incurrence of any tax is necessary to make
such participation willful. However, a foundation manager's participation in a jeopardizing investment is not
willful if he does not know that it is a jeopardizing investment

Treasury Regulation § 53.4944-1(b)(2)(iii) Provides:
A foundation manager's actions are due to reasonable cause if he has exercised his responsibility on behalf
of the foundation with ordinary business care and prudence.

IRC § 4946(a)(1) Defines a Disqualified individual as:
a person who is a substantial contributor to the foundation; a foundation manager (within the meaning of
subsection (b)(1)), an owner of more than 20 percent of the total combined voting power of a corporation
the profits interest of a partnership, or the beneficial interest of a trust or unincorporated enterprise, which is
a substantial contributor to the foundation.

IRC § 4946(b)(1) Defines foundation manager as:
An officer, director, or trustee of a foundation (or an individual having powers or responsibilities similar to
those of officers, directors, or trustees of the foundation)

Orange County Agricultural Society, Inc. v. Commissioner of Internal Revenue 893 F.2d 529 Held
That the organization operated for substantial, non-exempt purpose sufficient for it to lose its tax exempt
status through its association with another corporation formed by disqualified individuals as alter ego to
operate a racetrack. Also, that the organizations unsecured, interest free loans to disqualified individuals
was inurnment of the organizations earnings for the benefit of private interest, causing the organization to
lose its tax exempt status.

Church of Transfiguring Spirit, Inc. v. Commissioner of Internal Revenue 76 TC 1, 1981 Held:
Part of the net earnings of a religious organization inured to the benefit of a private individual within the
meaning of §501(c)(3), where virtually all of the church’s income was expended in years in question as
housing allowances for the benefit of the President and Vice-President of the organization. The court
observed that the husband and wife who served as president and vice-president together with their daughter
the secretary had control not only of the expenditures and reimbursements, but also of the board of
directors. Furthermore, the court said all the income for 1 year, and virtually all of its income for the next
year consisted of contributions from the President and Vice-President. The court could not characterize the
amounts paid by the organization to the President and Vice-President as reasonable compensation.

Kenner v Commissioner (1963, CA7) 318 F2d 632, 63-2; Held:
The court determined that the founder indiscriminately commingled his own personal funds and the fund of
the hospital in the latter’s bank accounts and that no systematic records of any sort were kept by the
hospital. The founder withdrew from the hospital's bank account thousands of dollars, the court said, to pay
for his personal and farm expenses, as well as his liquor bills, gasoline bills, and the expenses of his
personal residence. The court rejected the founder's contention that his withdrawals from the hospital funds
were limited to funds which he had previously lent the hospital, finding that these loans were merely devices
by which the founder used the hospital's bank accounts to drain off hospital funds to pay his personal
expenses.

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

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

Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer

20XX12 & 20XX12

Effective date of revocation

An organization may ordinarily rely on a favorable determination letter received from the Internal Revenue
Service. Treas. Reg. §1.501(a)-1(a)(2). An organization may not rely on a favorable determination letter, however,
if the organization omitted or misstated a material fact in its application or in supporting documents. In addition, an
organization may not rely on a favorable determination if there is a material change, inconsistent with exemption, in
the organization’s character, purposes, or methods of operation after the determination letter is issued. Treas. Reg. §
601.201(n)(3)(ii); Rev. Proc. 2008-9, Section 12

The Commissioner may revoke a favorable determination letter for good cause. Treas. Reg. § 1.501(a)-1(a)(2).
Revocation of a determination letter may be retroactive if the organization omitted or misstated a material fact or
operated in a manner materially different from that originally represented. Treas. Reg. § 601.201(n)(6)(i), Rev.
Proc. 2008-9, Section 1

Governments Position:

The Internal Revenue Code (IRC) states: for an organization to be exempt under §501(c)(3) the organization needs
to meet both the organization and operational tests as defined in Treasury Regulation §1.501(c)(3)-1(a). In addition,
IRC §501(c)(3) and Treasury Regulation §1.501(c)(3)-1(c)(2) holds that: an organization shall not be exempt if any
of its earnings inure to the private benefit of any of its shareholders or individuals. Treasury Regulation
§1.501(c)(3)-1(c)(1) provides: an organization will be regarded as “operated exclusively” for one or more exempt
purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes.

The was unable to provide documentation that would substantiate any charitable activities, or events
that further an exempt purpose. Substantiation provided by the , that was to act as proof of charitable
activities, could not be traced back to the . The substantiation provided traced to a for-
profit corporation operated by the trustee’s of the . In addition, the General Ledger does not
show any expenditures related to the charitable giveaway. As such, the is not able to show any charitable
activities.

In Orange County Agricultural Society V. Commissioner, organization had substantial nonexempt activities and
acted in a manner consistent with a for-profit business than a non-profit organization. The courts held that an
organization with substantial nonexempt activities can’t avoid revocation of its tax exempt status simply by paying

taxes or penalties. In the case of the , the absence of any charitable activities would
hold that the activities of the were undertaken for nonexempt purposes.
As such, the does not meet the operational test because it’s not operated exclusively

for IRC §501(c)(3) purposes as defined in Treasury Regulation §1.510(c)(3)-1(d)(1)(i). The
is not operated for a charitable purpose, and has not performed any charitable activities.

In addition to not showing any charitable activities, the foundation engaged in acts of self-dealing that allowed the
fund balances of the to inure to and his family.

The received a loan from on 4 Jun 20XX in the amount
of $0. IRC §4941(d)(1) defines acts of self dealing to include: acts of lending of money between a private
foundation and a disqualified person; payment of compensation; or payment of reimbursement of expenses by a
private foundation to a disqualified person. Though IRC §4949(d)(2) sets out certain exemptions from being

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

Page: -7-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
20XX12 & 20XX12

considered an act of self dealing; these exemptions do not apply to the as the loan
included interest. In addition, loan payments were not paid directly to but to a third
party on behalf of . Total payments on the loan exceeded the outstanding balance
creating a loan payable to the . This subsequent loan created another act of self-

dealing, as it also included interest. These loans allowed a substantial portion of the
fund balances to flow to a disqualified individual and not for a charitable activity.

As in Orange, an organization will not qualify for tax exempt status if even a small part of its income inures to a

disqualified individual. The loans between and the are acts of
self-dealing, and have allowed the income of the to inure to the benefit of disqualified
individual,

In Church of Transfiguring Spirit, Inc v. Commissioner, the court held that an organization was not exempt where the
net earnings of the organization inured to the benefit of a private individual. Virtually all of the organization’s
income was expended as housing allowances for the benefit of the President and Vice-President. In addition, sole
control of the organization was held by one family. As in the Church of Transfiguring Spirit, substantially all of

the fund balance was expended as payments of outstanding loans to or on investments that
jeopardized the ongoing nature of the

As such, the has failed to meet the requirements of Treasury Regulation §1.501(c)(3)-
1(c)(2); and Treasury Regulation §1.501(c)(3)-1(d)(1)(ii) by engaging in acts of self dealing as defined in IRC
§4941(d)(1). These acts allowed for the income of the to inure for the personal
benefits of the trustee’s and not in furtherance of an exempt purpose.

In his capacity as trustee for the made risky
investments that jeopardized the ability to conduct charitable activities. These
investments reduced the investment accounts to zero, and reduced its overall fund
balances to near zero. He failed to exercise ordinary business care and prudence in looking out for the long term
future of the and its ability to perform charitable activities. Based on facts the facts
and circumstances at the time of the investments, the is not able to show that
exercised his due diligence when selecting investments options for the funds. The

has consistently taken substantial losses on its investments. At no time is it shown that as trustee,
considered re-evaluating, changing, or reducing its exposure in the options market. As such the balance of the
investment accounts at the end of the year taxable period 31 January 20XX was zero.

In addition, , acting as trustee and investment advisor for the
, used the investment account for personal gain that was not in furtherance of the exempt purpose of the
. General Ledger entries for the investment account show checks were issued for the payment of Long Term

insurance for and his family. Additional General Ledger entries show that checks
were issued for the payment of Long Term debts owned to . These investments not
only jeopardized the carrying out of the exempt purpose, but were in and of

themselves acts of self-dealing as defined in IRC §4941

In Kenner v. Commissioner, checks totaling $230,000 were drawn on the bank accounts of the organization for the
payment of the personal and living expenses of the founder. The court determined that the founder indiscriminately
commingled his own personal funds and the fund of the organization in the latter’s bank accounts and that no
systematic records of any sort were kept by the organization. The founder withdrew from the organization’s bank
account thousands of dollars to pay for his personal and farm expenses, as well as his liquor bills, gasoline bills, and

the expenses of his personal residence. As in Kenner, used checks to pay for personal
expenses from the investment account. This shows that
Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -8-

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

Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer

20XX12 & 20XX12
had no regard for the exempt purpose of the , and consistently failed to show business
care and prudence.
Taken as a whole, the has been used to serve the private interests of its trustee’s rather than public
interest as prescribed under Treasury Regulation §1.510(c)(3)-1(d)(1)(ii).
Taxpayer’s Position:
The Taxpayer does not currently have a stated position.
Conclusion:
Therefore, it is the Governments position that the no longer meets the guidelines

under Internal Revenue Code §501(c)(3) and Treasury Regulation 1.501(c)(3)-1(c), as the income of the
organization inures to the personal benefit of the Trustees.

The subsequently does not meet the operational test because it is not operated
exclusively for IRC §501(c)(3) purposes as required and defied by Treasury regulation §1.510(c)(3)-1(d)(1)(i), and
has been used as a vehicle to serve the private interests of its trustees rather than public interest as prescribed under
Treasury Regulation §1.510(c)(3)-1(d)(1) (ii).

It is recommended that that exempt status of this organization be Revoked as of 1 January 20XX

As such, the organization will be Treated as a taxable private foundation as of this date until such time that the
terminates its Private status under IRC §507.

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