Charity’s exemption revoked for private benefit and investor tax schemes

View official IRS release (PDF)

Plain-English summary

The IRS revoked a housing organization’s tax exemption retroactively to January 1, 2006. Although the organization operated low-income housing and provided community services, the IRS found that a substantial part of its operations supported private investors, improper tax benefits, and nonexempt financing schemes. The organization also disbursed funds to its president, treated those payments as undocumented loan repayments, and paid his personal expenses. The IRS concluded that these activities served private interests and caused net earnings to inure to insiders, contrary to IRC § 501(c)(3).

Ruling snapshot

• Question: Did the organization continue to qualify for exemption under IRC § 501(c)(3) despite its investor arrangements and payments benefiting its president?
• Outcome: Revocation effective January 1, 2006
• Key authorities: IRC §§ 501(c)(3), 170, 507, 6104(c), 6110, and 7428; Treas. Reg. §§ 1.501(c)(3)-1 and 1.501(a)-1(c)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury

Appeals Office
Employer Identification Number:

Date: AUG 21 2014

Person to Contact:
Number: 201446029 Employee ID Number:
Release Date: 11/14/2014 Tel:

Fax:

Organization
c/o
Street UIL: 501.03-30

City, State, Zip Code
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”). It is determined that you do not qualify as exempt from Federal income tax
under section 501(c)(3) of the Code: effective January 1, 2006.

Our revocation was made for the following reasons:

You are not operated exclusively for one or more exempt purposes as required by section
501(c)(3) of the Code. You are operated in part to provide tax benefits and investments to private
individuals. You have also made disbursements of funds to your president and paid personal
expenses of your president. You are therefore operated for a substantial purpose of benefitting
private interests.

Additionally, your net earnings inure to the benefit of private shareholders or individuals.
Specifically, you have made disbursements of funds to your president and paid personal
expenses for your president.

Contributions to your organization are not deductible under section 170 of the Code.

You are required to file Federal income tax returns on Forms 1120. File your return with the appropriate
Internal Revenue Service Center per the instructions of the return. For further instructions, forms, and
information please visit www.irs.gov.

If you were a private foundation as of the effective date of the adverse determination, you are considered
to be taxable private foundation until you terminate your private foundation status under section 507 of
the Code. In addition to your income tax return, you must also continue to file Form 990-PF by the 15th
Day of the fifth month after the end of your annual accounting period.

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 Code.

We will make this letter and the proposed adverse determination letter available for public inspection
under Code section 6110 after deleting certain identifying information. We have provided to you, in a
separate mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the
documents attached that show our proposed deletions. If you disagree with our proposed deletions, follow
the instructions in Notice 437.

If you decide to contest this determination, you may file an action for declaratory judgment under the
provisions of section 7428 of the Code in one of the following three venues: 1) United States Tax Court,
2) the United States Court of Federal Claims, or 3) the United States District Court for the District of
Columbia. A petition or complaint in one of these three courts must be filed within 90 days from the date
this determination letter was mailed to you. Please contact the clerk of the appropriate court for rules for
filing petitions for declaratory judgment. To secure a petition form from the United States Tax Court, write
to the United States Tax Court, 400 Second Street, N.W., Washington, D.C. 20217. See also Publication
892.

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 matters
that may not have been resolved through normal channels get prompt and proper handling. If you want
Taxpayer Advocate assistance, please contact the Taxpayer Advocate for the IRS office that issued this
letter. You may call toll-free, 1-877-777-4778, for the Taxpayer Advocate or visit www.irs.gov/advocate
for more information.

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

Sincerely Yours,

Acting Appeals Team Manager
CC:

Enclosure: Publication 892 and/or 556

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

May 22, 2012 Taxpayer Identification number:
Form(s):
Tax Year(s) Ended:
Person to Contact/ ID Number:

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.

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

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:

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
Form 6018

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

Schedule number or

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX — 20XX
LEGEND

ORG - Organization name XX - Date Address - address

City - city State - state President —- president BOD-
1 through BOD-9 - Board of Directors 1 through 9 CO-1 through
CO-22 - 1st through 22nd COMPANIES Investor-1 through
Investor-4 Law Firm through Law Firm Partner-1 through
Partner-6 Partnership-1 through Partnership-11

Apartments-1 through Apartments-6

ISSUE:

Whether the ORG qualifies for tax exempt status under section 501(c)(3) of the Internal
Revenue Code (the Code):

(1) Whether ORG operated for non-exempt purposes to a more than insubstantial extent.

(2) Whether ORG operated a scheme to mislead investors in order to maintain the operation
of an insolvent organization and benefit the founder and some initial investors.

(3) Whether ORG promoted investments in which a false basis in property was created in
order to produce inappropriate deductions in income tax

(4) Whether net earnings inured to the benefit of private individuals.

FACTS:

Background:

ORG was established in 19XX by President, as a non-profit corporation in State; it was
recognized by the Internal Revenue Service as an organization described in section
501(c)(3) of the Internal Revenue Code in that same year. ORG filed Forms 990,
Information Return of an Organization Exempt from Income Tax under Section 501(c), for
the calendar years 20XX, 20XX, and 20XX. Form 990s for 20XX and 20XX were filed
delinquent on November 15, 20XX, and December 15, 20XX, respectively.

See Exhibits 0-1, 0-2, 0-3, and 0-4.

The purpose of ORG as stated on its Form 1023, Application for Recognition of Exemption is
as follows:

The foundation will facilitate the formation of limited partnerships

which will help keep low-income properties as low-income properties

for the future. The foundation will use proceeds derived from organization
fees to provide grants to the housing cooperatives for education of the
public and for the promotion of the positive merits of home ownership

for low-income people. In addition, the foundation will provide grants

to non-profit organizations which sponsor the formation of cooperatives

or subsidized housing and grants to help low income properties to

remain safe, crime-free, family conducive, affordable and clean.

See Exhibit 1(a).

Form 886-A (1-1994) Page 1 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

Form 886-A EXPLANATIONS OF ITEMS exit

(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX — 20XX

ORG owned and operated, directly or indirectly, about 65 affordable housing apartment
communities in State, State, State, State, State, State, State, State, State, and States
containing 13,417 units. ORG provides a variety of programs and services for its tenants.
These include operating neighborhood learning centers through a HUD initiative with GED
classes, computer classes, life skills classes, parenting classes, substance abuse prevention
presentations, employment readiness classes, and cultural exchange nights. See Exhibits 1
& 30. pp. 53-70.

Officers and Board of Directors:

President served as President during all years of operation of ORG from its founding until his
death in 20XX. Secretary served as Secretary.

The Board of Directors of ORG from January 1, 20XX through September 20XX consisted of
the following:

Chairman

BOD-1

BOD-2 — President’s Mother

BOD-3

BOD-4, Resident / Community Member

BOD-5, Resident / Community Member - replaced by BOD-6

See Exhibit 3.

Upon President’s death on April 1, 20XX, the following Members resigned:
e BOD-2
e BOD-1
e BOD-3

The board was reconstituted in June 20XX with the following members:
Chairman

BOD-7

BOD-8

BOD-9

BOD-4, Resident / Community Member

BOD-6, Resident / Community Member

Chairman, resigned in October 20XX. In November 20XX, BOD-7 a member of the CO-1
who filed the involuntary bankruptcy, was selected as Chairman.

During the years at issue, the board met on February 16, 20XX, April, 20, 20XX, July 20,
20XX, January 25, 20XX, April 18, 20XX, August 1, 20XX, October 31, 20XX, February 12,
20XX, April 28, 20XX, June 8, 20XX, July 1, 20XX, July 13, 20XX, August 4, 20XX, August
18, 20XX, October 30, 20XX, November 13, 20XX, and December 14, 20XX.

Board minutes were maintained and taken by a court reporter through April 20XX,
President controlled the agenda, and directed the meetings. The majority of the feedback in

Form 886-A (1-1994) Page 2 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX — 20XX

the minutes was provided or directed by him. Board approvals were documented in board
resolutions. Each board member signed to show approval of ORG board resolutions.

For the years 20XX through 20XX, various board resolutions approved the following actions
with respect to related entities:

(a) CO-2 loans in amount of $ to CO-3 (Exhibit 16(a));

(b) CO-4 loan in the amount of $ on November 1, 20XX for CO-5 (Exhibit 5(a));

(c) Sale of CO-6, to CO-7 and Partner-5, (Exhibit 5(b)) ;

(d) ORG sale of unreported property to CO-8 for $ with XXXX XXXXXX (Exhibit

5(d));
(e) ORG guarantee on 635 Limited Partnership loan in amount of $ (Exhibit 5(e)); and
(f) ORG guarantee loan in the amount of $ from CO-9 to CO-10 (Exhibit 8(a))

ORG served as the general partner on all the limited partnerships that owned the 65
housing communities. Each housing community limited partnership owns a “Special
Purpose Entity” or “SPE” which may be a corporation or LLC. Each SPE has a 1% or less
interest in a partnership. As stated in the Form 1023, ORG sets up limited partnerships to
provide resources, including funding, for the acquisition of affordable housing properties.
Typically, limited partners receive the greater share of tax credits and losses derived from
the operations of housing units. Limited partners receive as much as 99% interest in the
partnerships. The properties were acquired using limited partnership funding offering Low
Income Housing Tax Credits (LIHTC), Conventional Financing, and Bond Financing.

The number of housing communities financed in each way is as follows:
17 by Tax-Credit Equity Financing from investors (with 3,179 units);
13 by conventional financing from: XXXXX (the “CO-11 Portfolio”); and

35 by tax-exempt bond financing including 11 in the “CO-12” portfolio (with 2,098 units).
17 in the “CO-13” portfolio (with 4,730 units), 4 in the “CO-14” portfolio (with 861 units),
and 3 in other housing communities.

These total 65 housing communities. See Exhibits 1 and 2.

Overview of the Assets of the Organization:
(1) Tax Credit Equity Financing

Seventeen Housing Communities were acquired using this financing method between 19XX
and 20XX; of these, 15 were in State, and 2 were in State.

Utilizing low income housing tax credit (LIHTC), ORG sold various partnership interests to
various investors. These housing communities are also financed by mortgages. ORG owns
very small percentages (normally .001%) in each partnership and is the general partner in
these financing arrangements. The 17 partnerships file Forms 1065 and issue Forms K-1 to
corporations that file Forms 1120. ORG is 100% owner of these corporations. All were set-
up in this manner to avoid general liability insurance. The corporations are shown on
Schedule R on the Form 990 filed by ORG.

Form 886-A (1-1994) Page 3 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

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

The housing communities have a 10 year credit life with a 15 year compliance period. If the
housing community does not meet the requirements before that time, there are recapture
provisions for the tax credits. The State CO-10 Housing Credit Authority (SDHCA) reviews
the housing community property for compliance on an annual basis and provides a report to
HUD.

(2) Conventional Financing

Thirteen housing communities were purchased from CO-11 for $ with conventional financing
and were refinanced with XXXXX for a total of $. (All were section 8 properties.) They
are owned by limited liability companies that are 100% financed by ORG through XXXXX.

(3) Tax Exempt Bond Financing

a. CO-12

These 11 apartment complexes are owned by CO-10. CO-10, in turn, is owned 100% by
ORG. The apartment units are managed by the CO-16. CO-12 owes $ to XXXXX.

b. CO13

The 18 apartment complexes in CO-13 were also acquired through tax exempt bond
financing and are in default.

c. CO-14

The 4 apartment complexes in the CO-14 portfolio were also acquired through tax
exempt bond financing for which the bonds are in default. These are 100% owned and
operated by ORG; the complexes are managed by CO-15, a third party management
company.

d. Other

Three additional apartment complexes were acquired through tax exempt bond
financing.

All the apartment complexes are managed by tenant managers, including in-house
management, CO-16, and CO-15; these tenant managers, collect rent, operate the facilities,
and maintain accounting for each complex.

President used the exempt status of ORG as a marketing element to attract new and
existing investors. Finding of Fact 71 of the adversary proceeding by the bankruptcy
trustee against Investor-1 in the ORG bankruptcy proceeding summarizes the testimony of
investor Investor-1 as follows:

Form 886-A (1-1994) Page 4 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

Form 886-A EXPLANATIONS OF ITEMS one

(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX — 20XX

Investor-1 testified that at the November 4, 20XX meeting, President promoted the
utilization of “housing tax credits.” In doing so, he provided Investor-1 and
Investor-2 with various promotional materials, which included a detailed brochure
with

financial information and photographs of various housing units; a copy of a
January 20XX letter from the IRS regarding an audit of ORG for the 20XX tax year;
and a promotional letter from ORG that highlighted the following quote from the
IRS audit letter:

“Our examination of the information return(s) indicated above discloses
that your organization continues to qualify for exemption from Federal
income tax. Accordingly, we accept the return(s) as filed.”

The ORG letter then states that “[t]his no change opinion from the

National Office of the IRS equates to the ‘GOOD HOUSEKEEPING SEAL OF

APPROVAL’ for any charitable organization.” He also showed them a September 7,
20XX letter from the Law Firm to President that summarizes the IRS’s 20XX audit of
ORG as comprehensive and highly favorable to ORG”.

See Exhibit 13A p. 23, #71.

• -10) and i i hip to G:

CO-10 is a limited partnership created by President and approved by the Secretary of the
State of State on September 17, 19XX. See Exhibits 4, 4(a)/4(c). ORG is the General
Partner of CO-10. The registered address for CO-10 is Address, the same as that of ORG.
Secretary served as the Secretary for CO1-, just as she did for ORG. The ORG board
passed a corporate resolution on March 23, 20XX, approving President to have full signatory
authority and to act as the agent of ORG with full powers to negotiate and execute
documents as General Partner of CO-10 in order to borrow $ and establish a banking
relationship at CO-17 in City, State. See Exhibit 5

In July of 20XX, the Limited Partnership Agreement of CO-10 was amended to change
Article II to add that its primary purpose was “to serve or provide investment capital for
low-income communities or low income persons.” The revised article also stated the
purpose contained in the initial partnership agreement, “to acquire, hold, sell, dispose of
and otherwise deal with multi-family residential CO-10s.” See Exhibit 6. Prior to 20XX
there was apparently a change in ownership; however, no document was provided to
indicate when the change occurred.

The CO-10 partnership was set up in 19XX, with the ownership percentages shown below
for the year 19XX and later changed by 20XX as indicated:

Partner Name 19XX 20XX
ORG 2.00% 1.00%
Partner-1 24.50% 16.50%
Partner-1 Trust 24.50% 16.50%

Form 886-A (1-1994) Page 5 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

Form 886-A EXPLANATIONS OF ITEMS exibi

(Rev. January 1994)

Name of taxpayer : Tax Identification Number Year/Period ended
ORG 20XX — 20XX
Partner-2 0.00% 16.50%

Partner-3 0.00% 16.50%

Partner-3 Trust 0.00% 16.50%

Partner-4 24.50% 0.00%

Partner-4 Trust 24.50% 16.50%

Total per 19XX partnership agreement 100.00% 100.00%

The 20XX ownership percentages were reflected on CO-10 20XX unfiled partnership return
provided by ORG. See Exhibit 7. Per statements by both the Controller and Vice President
of financial matters, CO-10 was operated in 20XX in the same format as it had operated in
the later years.

President, with assistance from ORG employees, directed the acquisition of funds through
CO-10. CO-10 did not have any employees or incur any payroll expenses during either 20XX
or 20XX. CO-10 did not own or have possession of any property, inventory or other
tangible assets during 20XX or 20XX.

CO-10 has existed since 19XX as a limited partnership with investors in related soft-money
partnerships. As indicated below, additional similar limited partnerships were in operation
during 20XX and 20XX:

Ownership Partner

Partner Number/Partner Name % Type

1) Partner-5 9.90000% Limited
2) Partner-6 9.90000% Limited
3) Partner-7 9.90000% Limited
4) Partner-8 9.90000% Limited
5) Partner-2 9.90000% Limited
6) Partner-1 9.90000% Limited
7) Partner-3 9.90000% Limited
8) Partner-1 Trust 9.90000% Limited
9) Partner-3 Trust 9.90000% Limited
10) Partner-4 Trust 9.90000% Limited
11) Secretary 0.50000% General
12) ORG 0.50000% General
Totals 100.00000%

Four entities filed returns for 20XX and claimed losses identified as coming from CO-10.
For tax year 20XX only one of these entities, Partner-7, claimed a loss from the CO-10, on
its Form 1065. (Note: The use of Partner-7 name for the separate entity is similar to the
name of CO-13 properties (tax exempt bond financed property) owned by ORG.)

The amount of the losses claimed by these entities for respective years is shown below:
Partnership Name 20XX Loss Claimed 20XX Loss Claimed
Partner-5 $ 6() $ -

Form 886-A (1-1994) Page 6 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX — 20XX
Partner-6 $ () $ -

Partner-7 $ () $ ()

Partner-8 $ () $ -

Totals $ () $ ()

An entanglement of funds is reflected by the ORG board action to guarantee a $ loan from
the CO-9 to CO-10. (See Exhibit 8(a)). Vice President was in control of CO-9, serving as
Vice-President. While this amount was guaranteed by ORG, the loan was made to CO-10.
The proceeds from this debt, however, were paid to ORG, according to testimony by Vice
President in a bankruptcy proceeding:

Vice President discussed what he considered when extending credit to CO-10
as well as his theories on lending. He explained that he has a policy against
lending to nonprofits because a nonprofit is a “bankruptcy remote entity.” He
said they are charitable and he equates charity with poverty. He explained
his reluctance to get into a situation where he would have to “throw out the
poor” in order to foreclose. For these reasons, he insisted the loan be made
to CO-10, not ORG, and that he specifically relied upon CO-10 separate
corporate existence. Regardless of this reliance, the evidence reveals that
Vice President knew the loaned funds went to the ORG “enterprise.” He
testified that he knew he would not be getting repaid from the primary
obligor, CO-10, and, in fact, did not consider CO-10 financial information prior
to making the loan. He did, however, look at and rely on financials of
President, audited financials of ORG, and information from
XXXXX, ORG's accounting firm. He said the loaned funds were to be used by
CO-10 as “enterprise banker” as it saw fit. He believed the borrower should
have the discretion to determine the way the money is actually used. Vice
President filed proofs of claim for $ against both CO-10 as obligor on the note
and against ORG as guarantor of the loan”.

See Exhibit 9, p. 8.

Vice President's testimony confirms that funds of ORG and CO-10 were comingled. CO-10
was apparently a for-profit stand in for the financial purposes of ORG “enterprise.” ORG
“enterprise” refers to the complete operations of ORG, CO-10, and all related entities,
corporations, partnerships and parties. Vice President admits to knowingly loaning monies
to be used by ORG and explaining why he entered into a loan with CO-10. He also referred
to the funds he loaned as being distributed to the ORG “enterprise” for whatever purposes it
saw fit and referred to CO-10 as the “enterprise banker.”

Controller, Controller of ORG, stated on June 29, 20XX, that there were millions of dollars
received and disbursed by CO-10 to ORG and related entities including the 65 low income
housing units, Mirror Entities (more fully discussed below), and individuals who were
purported to be donors and investors in various properties and real estate activities. The
agent reconciled the bank records of CO-10 for 20XX and 20XX. The total
amount of the deposits for the two years is illustrated below: See Exhibit 10(a) and (b).

Form 886-A (1-1994) Page 7 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

Form 886-A EXPLANATIONS OF ITEMS exnibit

(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended

ORG 20XX — 20XX
Reconciled Bank Account 20XX12-1065 20XX12-1065 Totals 2 years
Total Deposits S $ S

Total Disbursements $ $ $

Totals $ $ $

The chart shows that CO-10 was used as a conduit account. Most of the monies were
placed in the account to be transferred or paid to causes for the ORG enterprise. CO-10
was a holder of funds for ORG. The accounting method and recordkeeping on the books of
other factions of ORG were not maintained in the same fashion as that of CO-10.

CO-10 was operated using the services provided by officers and employees of ORG.
Controller, Controller, and CFO, CFO, provided substantial services to CO-10. Further, the
Controller and CFO maintained all records for CO-10. The CFO would post the items in
QuickBooks and upload all CO-10 expenses previously provided in the form of a check
ledger prepared by the controller. The CFO, with President’s approval, controlled the
outcome of CO-10 accounting. This is illustrated by the following excerpt from the
Memorandum Opinion by the Bankruptcy Court for the Northern District of State, City
Division, concerning the dismissal of CO-10 in its bankruptcy proceeding on August 17,
20XX:

The evidence at trial further established that CO-10 did have a bank account,
the signatories of which were all ORG employees. The account was closed in
March of 20XX, several months prior to the bankruptcy filing. CO-10 also had
a set of books, QuickBooks or Excel spreadsheet, which was maintained by
Controller, an employee of ORG. The entities engaged in unusual accounting
practices. CO-10 filed a tax return in 20XX, but such return reflects no
income. It had partial financial statements or a partial general ledger for
20XX which do not match the tax return for that year”.

See Exhibit 9, p. 7.

At the end of the year the audit team from a CPA firm posted journal entries. The CPA firm
tested payables, receivables, checks, and provided the correction to journal entries for the
Controller to ultimately post. These final numbers were used for the tax returns. The CPA
firm would review the CO-10 bank account and Controller’s journal entries. The CFO
reviewed information with the CPA in order to prepare the year end journal entries and tax
returns. The CFO would post the amount at year end as a journal entry to show a liability
on ORG’s part for the amounts received from CO-10.

The CFO was responsible for posting the adjusting journal entries between ORG and CO-10.
The Controller had no role in the uploads. CFO maintained the Quick Books accounts.
Controller, Controller, maintained the disbursement list (spreadsheet) of CO-10 and
received either invoices or direction from President on when to pay liabilities or to determine
whether to transfer monies from CO-10 to ORG or vice versa. CFO CFO and Controller
Controller, were responsible for, and reconciled the CO-10 bank account.

Form 886-A (1-1994) Page 8 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

Form BB6-A EXPLANATIONS OF ITEMS empl

(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended

ORG 20XX — 20XX

The agent summarized the statements made by CFO in an interview on October 12, 20XX as
follows:

CO-10 activity uploads was done on a quarterly basis. President was
approving uploads for posting of CO-10 income and expenses to ORG system.
Controller, Controller would input deposits and checks and in an excel
spreadsheet (check ledger). She would provide him the excel spreadsheet
with notations. CFO would record them as entries in QuickBooks. Deposits
were logged in like journal entry and a disbursement was logged in like a
check. QuickBooks had its own account numbers. Activity in QuickBooks
would compare new quarterly trial balance to the previous quarter’s trial
balance. In order to export or initiate the upload back to ORG he would
export a Comma Separated Value (CSV) file. The CSV file would contain
certain fields including account number, amount, date, and contro! number.
The YARDI system was programmed to match the QuickBooks account
numbers. The upload did not bring over the detail of transactions in CO-10 to
the ORG system but rather showed the amount as an upload (similar to
journal entry).”

See Exhibit 11, p. 3.

The agents inquired of CFO, “Why were you putting information in QuickBooks versus
Controller? Considering you had to await his approval, why couldn’t she have done this?”
His response was summarized in interview notes as follows:

QuickBooks gave better accounting records than an Excel spreadsheet.
President wanted activity to be maintained separate. Just felt like it could not
be consolidated since ORG ownership was only 1%. The auditors may have
had a separate conversation with ORG regarding consolidation of CO-10, and
how it was recorded, but he was not privy to such conversation.

See Exhibit 11, p. 3

The manner in which the books were maintained appears to be a duplication of
effort. The agents inquired of CFO, “Did you ever question the deduction”? The
interview notes state the following as his response: “May have had some discussion
with President, however the items existed prior to his conduct business for
employment with ORG and auditors approved it every year”. See Exhibit 11, p. 3.

The agents asked CFO, “Any interaction with auditors”?
The interview notes reflect the following response: “CFO would coordinate the
review of all properties and provided information on such properties that ORG owned

or managed. He deferred questionable transactions to President”. See Exhibit 11,
p. 3.

The agents also asked, “Did you consider this (CO-10) a legal entity? Why?”

Form 886-A (1-1994) Page 9 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

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Form 886-A | EXPLANATIONS OF ITEMS one

(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX — 20XX

The interview notes record his response as follows: “Did not have any reason to
question the legal entity. It was there when he started, and auditors had reviewed it
and they did not question it either”. CFO stated, “I gave the auditors CO-10 check
ledgers and QuickBooks general ledger annually.” See Exhibit 11, p. 3.

The agents stated that it appears that CO-10 was just a bank account and asked CFO
how he described the entity. The agents also asked whether CFO ever felt that there
was any wrong doing on the part of ORG or CO-10.

The interview notes record CFO’s response as follows: “CFO believed auditors were
asking the questions to President and Controller while conducting annual audits and
testing items, so, if there was anything to question, the auditors should be the one
to determine any wrongdoing. CFO relied on the auditors and President.” See
Exhibit 11, p. 3.

Controller, Controller, has worked for ORG from April 1, 20XX through 20XX. CFO worked
as the Senior Vice President-Portfolio Finance and CFO for ORG from 20XX through 20XX.

The testimony of a forensic accountant, XXXXX XXXXXX, who has extensive experience, was
summarized by the Bankruptcy Court as follows:

XXXXXX concluded that CO-10 and ORG were effectively one entity and
should be consolidated. He testified that the books and records of each entity
were in terrible condition, that there was massive commingling of funds and
that the accounting practices were “unusual” at best. He testified that
reconciling several thousand transfers would be time consuming, expensive,
and essentially impossible. He explained the reconciliation process requires
that one look at the substance of a transaction over its form. That is to say,
one must look beyond merely the recording of debits and credits in a
transaction and analyze the purpose of a transfer in order to accord it proper
characterization. According to XXXXXX, there were basically four purposes for
the funds transferred into CO-10 and that were subsequently transferred out
of CO-10. 1) The funds went back to ORG, 2) to President personally, 3) to
pay bills on behalf of ORG, or 4) for “Ponzi”-like payments to investors in the
ORG enterprise. XXXXXX concluded that President was carrying-on a Ponzi
scheme; XXXXXX defined a Ponzi scheme as a “phony investment plan in
which monies paid by later investors are used to pay artificially high returns
to the initial investors, with the goal of attracting more investors.” (Exhibit
9, p.11).

“XXXXXX concluded that [ORG] CO-10 and ORG [-EO] were effectively one entity and
should be consolidated.” (Exhibit 9, p.12).

The Bankruptcy Court, in its memorandum opinion concerning the dismissal or consolidation
hearing for CO-10 and ORG, stated the following with respect to the relationship between
CO-10 and ORG:

In the few years prior to the bankruptcy filing, [ORG] CO-10 conducted no
business operations and provided no goods or services from which a

Form 886-A (1-1994) Page 10 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

Form 886-A exhibit
(Rev. January 1894) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX — 20XX

receivable can arise. XXXXXX concluded that in excess, of $ million passed
through [ORG] CO-10. It is naive to conclude that some discreet amount
represents a receivable held by [ORG] CO-10 simply because a portion of the
funds were ultimately spent by ORG [-EO] in some fashion. The Court accepts
XXXXXX's basic conclusion that [ORG] CO-10 was nothing more than a
conduit bank account. The Court likewise accepts XXXXXX’s assessment that
unraveling the funds that passed through [ORG] CO-10 is impossible”.

(Exhibit 9, p.24)

The investors themselves stated in their proofs of claim filed with the Bankruptcy Court,
“Investor-1 admitted at trial that President's scheme was designed as a fraudulent tax
scheme and that he really could not defend it..” (Exhibit 13A, p. 33, ¶ 107).

XXXXX testified in bankruptcy court case, “XXXXX concluded that the Investor-1 Deal was a
transaction structured and papered as part of an abusive tax shelter transaction ...” (Exhibit
13A, p. 30, ¶ 95).

Soft Money Partnerships or “Mirror Entities”:

Prior to the purchase of one of the 65 housing communities, the Executive Director of ORG
would form a partnership and identify all the general and limited partners to be involved.
ORG was the general partner in all cases and owned a .001% or 1% interest in the
partnership upon formation. Once the partnership was formed, an application would be
submitted in an attempt to receive status as Low Income Housing by HUD standards in
order to secure Low Income Housing Tax Credits. Upon approval, the limited partners
would purchase their investments in the partnership and the funds would be used to
rehabilitate the housing to bring it up to HUD standards.

In addition to these limited partnerships to obtain and rehabilitate the housing communities,
the Executive Director of ORG also set-up soft money partnerships which appear to hold the
same assets as the initial 65 housing community partnerships, and are denoted herein as
“Mirror Entities.” Funds received from the soft money investors were deposited into ORG
CO-10 and were not transferred to ORG. Former Senior Vice President, former Senior Vice
President of ORG, investigated the CO-10 bank records and determined that the Executive
Director had set up this second set of partnerships, the “Mirror Entities” to facilitate
payment of expenses during the setup phase of the initial limited partnership. Former
Senior Vice President found that these “Mirror Entity” partnerships had no assets for
collateral. Former Senior Vice President stated that she believed the soft-money investors
were repaid through payment of the developer’s fees and accelerated depreciation
deductions generated by the “Mirror Entities.”

The “Mirror Entities" would be tied to the legitimate entities only by the fact that money had
been fronted by the soft-money investors to cover short term financing payments or other
expenses incurred prior to securing long term financing. It was not determined if any other
connection between the legitimate property partnership and the mirror entity other than the
use of soft-money investor's funds to cover costs incurred during the short term financing
period. Through CO-10 ORG received substantial funds from individuals and trusts acting as
investors in these partnerships. There were between 62 and 86 of these “soft money limited
partnerships” or “Mirror Entity” partnerships.

Form 886-A (1-1994) Page 11 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX — 20XX

In most of the partnership agreements, President, guaranteed investment on loans provided
within one year at 18% interest. President also had ORG guarantee the note.

Investors received benefit of millions of dollars in donations, non-recourse losses, and
credits on their individual and business tax returns. They also received some return of
capital or interest. ORG has less than 1% interest as General Partner in the Limited
Partnership, CO-10; however, ORG controlled all the financial activities of CO-10.

Soft money limited partnerships or “Mirror Entities’ received monies and deposited
approximately 70 to 80% to CO-10. Disbursements were written from this CO-10 account
with the majority of funds distributed to ORG, related entities, officers, and investors.

ORG Bankruptcy Proceeding:

President died on April 1, 20XX, 20 days before the bankruptcy petition was filed on April
21, 20XX, in a car crash that officials ruled a suicide. The death of President started a chain
reaction of events. The circumstances of his death in a fiery automobile crash on an
interstate highway outside City caused local creditors of ORG to become suspicious and
begin an investigation into the financial affairs of President and ORG. These local creditors
pooled their resources and hired the law firm of Law Firm-2 to file an involuntary
bankruptcy petition on behalf of ORG. The involuntary petition was filed on April 21, 20XX,
by the creditors who signed the petition (Petitioning Creditors).

The investigation revealed that President had transferred ownership of a number of ORG’s
assets to family trusts and foundations in the weeks before his death, including the right to
receive the proceeds of $ million worth of key man life insurance policies. Upon this
discovery, on May 18, 20XX, the Petitioning Creditors filed a lawsuit to recover these
proceeds for the benefit of all ORG creditors. Certain members of ORG’s management were
replaced and ORG filed a voluntary petition in bankruptcy on June 11, 20XX. On that same
date, a preliminary injunction was entered in favor of the Petitioning Creditors placing $
million of life insurance proceeds under the jurisdiction and control of the Bankruptcy Court.

After the filing of the involuntary bankruptcy petition, the CO-1 was formed. It consisted of
four Petitioning Creditors and a representative from CO-1, a creditor that loaned monies to
ORG. Since its creation, the CO-1 has met regularly to map strategy to recover the
insurance proceeds and other assets for the ORG estate, and to develop a plan of
reorganization that would ensure the largest possible recovery to creditors in the shortest
period of time. The Trustee and the CO-1 believe that the Plan accomplishes these goals.

The Bankruptcy Plan creates a Liquidating Trust to take possession of the insurance
proceeds and the other liquid assets of ORG in an attempt to preserve as much of these
funds as possible for the benefit of the Creditors. It also provides for the certain properties
it owns or controls - with the dual objectives of increasing revenues and profits that can be
paid over to the Liquidating Trust and eventually paid to creditors, and also to avoid the
creation of additional claims against the bankruptcy estate that would dilute the percentage
paid to creditors who are the beneficiaries of the Liquidating Trust - for the period of time
necessary to maximize value to the Estate. (See Exhibit 2)

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Schedule number or

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

Name of taxpayer Tax Identification Number Year/Period ended

ORG 20XX — 20XX

Appointment of Trustee and President:

On April 28, 20XX, Trustee was appointed by the United States Trustee to serve as Chapter
11 Trustee in this case. The bankruptcy Plan, effective December 31, 20XX, appoints the
Chapter 11 Trustee (Trustee) to serve as the Liquidating Trustee, whose responsibility will
be to (i) take possession and/or control of various assets, including Life Insurance Proceeds,
Causes of Action, and Miscellaneous Assets, that fund the Liquidating Trust and (ii) establish
the number and amount of claims and then calculate and pay dividends to Creditors.

Further, the plan reconstitutes the board of directors with members who are experienced in
running and managing a business similar in size and complexity as the business of the ORG
as reorganized.

The Bankruptcy Plan appoints XXXX XXXXXX of XXXXX XXXXXXXX XXXX to serve
as the president and chief executive officer of the Reorganized ORG who along with the
reconstituted board of directors, will establish and follow a policy designed to maximize
value to Creditors.

Per the Bankruptcy Plan, effective December 31, 20XX, Management of the Reorganized
Debtor is described as follows, in part:

XXXX XXXXXX will manage the Reorganized Debtor as its President and Chief
Executive Officer. The President shall be responsible and report to the
Reorganized ORG Board and see that the orders and resolutions of the
Reorganized ORG Board are carried into effect. Subject to direction from the
Reorganized ORG, the President will be responsible for administering the Plan
on behalf of Reorganized ORG, including, without limitation, taking all
appropriate actions to transfer the Trust Assets to the Liquidating Trust, and
managing the future operations of Reorganized ORG. The President shall also
have general supervision and control of the Reorganized Debtor’s affairs and
all of its business”. (See Exhibit 2, pg 33, Art. VI, § 6.06)

XXXXX XXXXXXXX XXXX prepared a recommendation in its role assisting trustee Trustee
who now runs the ORG Liquidating Trust. The recommendation suggests listing most of the
company's 65 low-income housing properties scattered across the United States for sale by
October 31, giving others to bondholders, and terminating all employees by the end of the
year.

Objections to Bankruptcy Claims:
Claim of Investor-1:

In an adversary proceeding, the Bankruptcy Court found that the claim of soft money
investor Investor-1 was disallowed as a “constructively fraudulent obligation” of ORG. (See
Exhibit 13(a), p.2.) In reaching that ultimate conclusion, the Court also found that
“Investor-1 was receiving credit for $ million in losses on an ‘investment’ of approximately $
million ..... (Exhibit 13(a), p. 33. 4 106). In addition, the Court found as a fact that
“Investor-1 admitted at trial that President’s scheme was designed as a fraudulent tax

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Form 886-A EXPLANATIONS OF ITEMS exioi

(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX — 20XX

scheme and that he really could not defend it. His position is that he was simply taken
along for the ride.” (Exhibit 13(a), p. 22, ¶ 107).

The Bankruptcy Court also found that President sent the following chart as an attachment to
an email message on November 5, 20XX the day after a meeting with Investor-1 and his
family members on November 4, 20XX, stating that the schedule reflects the proposed
investment in CO-18,

EXHIBIT REMOVED

See Exhibit 13(a), pp. 8-9.
Claims of Investor-3 and Investor-4:

Investor-3 and Investor-4 are additional examples of soft money investors who filed claims
in the bankruptcy proceeding of ORG and to which the Chapter 11 Trustee for ORG objected
on the grounds that the claims should be avoided as fraudulent obligations. See Exhibit
14, pp. 12-13 and Exhibit 15, pp.18-20.

Financial Status of ORG:

As a result of the review of financial documents of ORG and related entities, XXXX XXXXXX
of the XXXXX XXXXXXXX XXXX summarized his conclusions as follows:

1. As of the end of 20XX, the end of 20XX, and the end of 20XX, ORG’s Total
   Liabilities exceeded the value of its Total Assets which included its major assets,
   the CO-12 portfolio of apartment properties, CO-13 portfolio of

apartment properties and the CO-14 portfolio apartment properties.

2. The Tax Credit Investments entered into during the time period 19XX
   through 20XX had extensive guaranty liabilities and obligations incurred
   through explicit guarantees of ORG executed by ORG at the inception

of such Tax Credit Investments.

3. The assets of ORG with any material value were receivables owed to it
   by the Tax Credit Entities. The value of these receivables were limited
   (considerably less than face value), due to operational losses at several
   of these tax credit entities.

4. In addition, ORG had notes payable to various financial institutions during
   this period of time.

5. Asa result of items one through four, above, ORG was insolvent during the
   period from December 31, 20XX, through December 31, 20XX.

See Exhibit 2(a), p. 2.

Form 886-A (1-1994) Page 14 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

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

Name of taxpayer Tax identification Number Year/Period ended

ORG 20XX — 20XX

XXXX XXXXXX and XXXXX XXXXXXXX concluded in the report that ORG was
insolvent from December 31, 20XX, through December 31, 20XX. The net equity of ORG
was between a negative $ and $ million. (Exhibit 2(a), p. 12-13).

XXXXX (XXX) Loans to ORG:
CO-3 made three different loans to ORG in the total amount of $ as follows:

(1) Loan agreement dated April 17, 20XX in the amount of $ to ORG;
(2) Loan agreement dated April 17, 20XX in the amount of $ to ORG; and
(3) Loan agreement dated April 17, 20XX in the amount of $ to ORG.

See Exhibit 16,

The monies from these loans were distributed to CO-3 I, CO-3 II, and CO-3 III. ORG is
100% owner of all CO-3 entities. CO-3 entities were set up on April 4, 20XX. Officers of all
CO-3 included President, President, Secretary and Controller, Secretary, and Controller.
ORG board approved the loans. (Exhibit 16(a)) The monies were deposited in separate
partnership bank accounts and transferred in the accounts of ORG CO-10 and ORG. No
partnerships returns were filed for CO-3 I, II, or III.

All amounts loaned to ORG were unsecured. ORG issued a guarantee of payment, but not
of collection per the contract. Loan interest repayments were made through 20XX to XXX.
Interest payments were the only repayment of such loans. The proceeds of the loan were
intended to be used for the purchase of investment property.

A memorandum dated, February 20, 20XX, from President to Officer, Officer of CO-3, states
as follows:

The funds in each LLC were utilized to buy limited partnership interest [sic] in four

apartment complexes ($), Series E Bonds on the Portfolio-1 Portfolio from
CO-14 Housing Limited Partnership ($), and $ was paid to be Construction Company
for pre-CO-10 cost at Apartments in City, State. These expenditures account for $ of
the $ funds advanced. The remaining $ was transferred into CO-10 and used for
various operating purposes.”

See Exhibit 16.

Further, President states in the memorandum that the four City apartment complexes had
sale agreements for a combined sales price of $.

An email dated August 26, 20XX, addressed from CFO, CFO, to Controller and (cc) to CPA-1
and CPA-2, CPAs and Auditors for Accounting Firm, and to President, indicates that monies
from XXX were wired in various dates and amounts up to $. See Exhibit 16(c).

Monies distributed from XXX were ostensibly paid to invest in the Partner-8, Partner-6, Pre-
CO-10 and Portfolio-1 portfolio limited partnerships. In fact, monies were paid directly to
soft-money investors in these limited partnerships. See Exhibits 16(c), 16(d) and
16(e).

Form 886-A (1-1994) Page 15 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

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Form 886-A EXPLANATIONS OF ITEMS one

(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX — 20XX

EXHIBIT REMOVED

Although the partnership agreements reflect that ORG-XXXXX, a taxable entity, is the
general partner of the ORG-XXX I, ORG-XXX II, and ORG-XXX III limited partnerships,
ORG was listed on the Schedules K-1 as the general partner of these limited partnerships
for both 20XX and 20XX. President directed how the amounts were to be booked. Exhibit
16(c)

The CO-3 limited partnerships did not maintain any books or records and did not have bank
accounts during either 20XX or 20XX.

The loss amount listed on the ORG-XXXXX, Inc’s 20XX return line 7, Other income (loss), was
labeled as coming from ORG-GCL CO-10. During the course of the examination the agent
was unable to find an entity which matched this name; the ORG staff also was unable to
identify the entity or property which matched this description.

Partnership-9 and Partnership-7 are some of the mirror entities that were set up by
President. Partnership-9 was set up as a limited partnership in August 20XX. Its stated
purpose appears to have been related to the residential rental activities associated with the
ORG enterprise. The original partners in the XXXXX @ Bwere ORG-@ & Inc. (1% general
partner), Partner 5 (42.5% limited partner), Investor-3(42.5% limited partner) and
additional unnamed limited partners 14%. Partner-6 and Partner-5 each made capital
contributions of $ in return for their ownership interests.

Partnership-9 appears to have amended the partnership agreement in 20XX when Partner-5
and Partner-6 assigned their ownership interests to CO-3 II a limited liability company
wholly owned by ORG. (CO-3 II did not file a return for 20XX or 20XX)

The Schedules K-1 attached to Partnership-9’s 20XX Form 1065, however, show that as of
December 31, 20XX, ORG owned 1% as general partner and 99% as a limited partner. The
20XX Schedules K-1 also shows that Partner-5 and Partner-6 had no ownership in the
Partnership-9 at the end of the year. No Schedule K-1 was located for either CO-3 II or
ORG-XXXXX Inc.; it is unknown why these entities were not issued Schedules K-1 since
partnership documents indicated they owned an interest in the Partnership-9.

On the 20XX Schedule K-1 issued by Partnership-9 to Partner-6 there were two entries,
capital gain income and cash distributions. Partner-6 received a cash payment for the
amount of his initial investment plus the exact amount of capital gain income reflected on
the Schedule K-1. (Note: The cash distribution payment was issued to Partner-6 by CO-10,
an entity that has been determined to be an alter ego of ORG. Partnership-9 did not have a
bank account or funds from which it could have made any cash distributions during 20XX or
20XX.)

On the 20XX Schedule K-1 issued by Partnership-9 to Partner-5 there were again two
entries: capital gain income and cash distributions. In this particular instance however, no
actual cash was distributed to Partner-5; instead he received “credit” towards his
investment in Partnership-7 (Note: Partnership-7 was determined to have been a partner
in CO-10; Partner-5 included this “credit” as part of his proof of claim against CO-10)

Form 886-A (1-1994) Page 16 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX — 20XX

In 20XX, Partnership-9 again amended the partnership agreement and ownership appears
to have been assigned back to Partner-5 and Partner-6 from ORG-XXXt | on May 23,
20XX.

For 20XX four Schedules K-1 were attached to Partnership-9’s Form 1065, one each to
Partner-6 and Partner-5, one to ORG as general partner and one to ORG as limited partner;
no other partner was issued a Schedule K-1 for this period.

The 20XX Schedules K-1 issued to Partner-6 and Partner-5 reflected an ordinary loss

deduction of $ to each partner, no other amounts were listed. The 20XX
Schedule K-1 issued to ORG reflected a $ ordinary loss deduction and a $ cash
distribution.

Partnership-9’s 20XX Schedule M-2 reflects capital contributions of $, $ from each individual
partner, for this period. Since the Taxpayer did not have a bank account these capital
contributions were deposited into the ORG CO-10 bank account.

ORG-XXXXX, a “Mirror Entity,” was listed on the partnership agreement as the general
partner for both 20XX and 20XX; this entity has not filed a return with the IRS since its
inception in 20XX. While it is understood that this corporation was created by President for
use within the ORG entity structure, its exact purpose with respect to this ORG was
unknown.

It was also unknown why the partnership agreement listed ORG-XXXXX, a taxable entity,
as the general partner while ORG was listed on the Schedule K-1 for both 20XX and 20XX as
the general partner.

ORG-XXXXX did not maintain any books or records and did not have a bank account during
either 20XX or 20XX.

The function and purpose of “Mirror Entity” was similar to that of Partnership-

9. Both were set-up by President and owned 100% by ORG. Both received monies through
   ORG CO-10. Neither had books and records, assets, or a bank account.

Partnership-10:

The Partnership-10, Limited Partnership has many facts in common with those described
above. Individuals who were family related members (M-Trust) were to receive $ from sale
of land from their trust to an individual. They transferred their interest into a “mirror entity”
partnership, Partnership-11, with the hopes of receiving tax abatement on their capital gain
through a series of structuring loan documents and ownership with ORG and its other ORG
related entities (ORG and Construction Company) to increase basis (non-recourse note),
thereby reducing their capital gain. Proceeds from the sale were delivered to ORG, and the
individuals received interest in a “mirror entity”, Partnership-10 which had no assets. ORG
used the monies received for other uses of ORG and payments to other soft-money
investors. See Exhibit 16(e).

The amounts received from the sale of the Ranch were not reported on any partnership or
K-1 return or by Partnership 10. It was determined that a gain of $ should have been
reported.

ORG orchestrated the scheme through borrowed or invested monies used from soft money
investors ostensibly for the purposes of purchasing, improving, or selling property; the
funds from the soft money investors were actually used to pay back other soft money
investors from other previous loans, investments, or interests in “mirror entities”. As

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(Rev. January 1994)

Name of taxpayer Tax identification Number Year/Period ended

ORG 20XX — 20XX

historically patterned, Partnership-10 filed no returns to show gain from sale of property and
had no assets, no operations, no bank accounts, no substantive services performed, no
bidding or speculative business rendered for monies received.

Foundation, formerly Corporation (CORP):

Foundation was incorporated in the State of State August 25, 19XX as CO-19. One of its
listed charitable activities was “[t]o increase the availability of financing and grants for
affordable community housing and CO-10 activities and projects that benefit low-and-
moderate income persons in County, .” The organization applied for exempt status on
September 14, 20XX, it was recognized as an organization described in section 501(c)(3),
by letter dated November 22, 20XX.

On February 18, 20XX, the name of the organization was changed to CO-19. On September
28, 20XX, the organization’s name changed again to Foundation.

CORP provided property construction and repair for all of ORG’s housing units. CORP was
operated by President of CORP, son-in-law of President, President of ORG. The boards of
both entities met together during most of their general meetings. ORG officers commingled
use of CORP’s bank accounts; the approving of payments, jobs worked, and estimates on
repairs were conducted by CORP but approved by ORG. The Controller of ORG maintained
the use of the bank account of CORP; she withdrew monies from the account of CORP and
transferred them to ORG via wire. Further, the accounting system for CORP used
QuickBooks and was maintained by the Controller of ORG.

President of CORP, served as the President of CORP until October of 20XX. CORP provided
construction, repair, and maintenance services to ORG. Over 90% of the business activities
transacted by CORP were with ORG and its related entities. CORP entered into various
construction and repair contracts as a result of damage to ORG properties due to
hurricanes, water damages caused by hai! and flooding, fires, and other insurable claims.
Monies from insurance proceeds were paid from CO-10. The contracts were with ORG,
however, rather than CO-10.

CORP’s reported revenues went from a low in 20XX of $ to a high in 20XX of $ and were $
in 20XX. For the years 20XX through 20XX, CORP reported on its Form 990 under “Other
Note and Loan Receivables” amounts that it described as “N/R from” or CO-10 fees from
nine related entities of ORG for a total of $. . (Exhibit 17). When asked about
these amounts, President of CORP stated that they were “booked” by CORP before he
became president and that he believes that the amounts were parked on CORP’s books from
ORG to claim additional cost in connection with housing credits. He stated that there was a
corresponding liability posted to the books; however, these liabilities changed from year to
year in amounts and accounts. President of CORP and BOD-9 stated that the amounts were
written off the books in late 20XX or early 20XX, as they had no value, they were offsetting
amounts, and they did not affect the organization. The amounts were uncollectible; XXXX
XXXXXX testified such amounts were not receivable and should not be included in ORG’s
books. (Exhibit 2(a), p. 10/11)

Apartments-1, owned by ORG, were located in City, State as a low income housing complex.
During the years ended December 31, 20XX through 20XX, the complex suffered extreme

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

Name of taxpayer Tax identification Number Year/Period ended
ORG 20XX — 20XX

damage and was later designated as in the flood plain by FEMA. FEMA insured the property.
During the year 20XX, flood damages caused damages resulting in a claim for $. See
Exhibit 18(a). The claim was based on written estimates provided by President of CORP of
CORP for approval of construction and rehabilitation work. During the same year,
Controller, serving as Controller for ORG, withdrew $ twice from the Apartments-1 proceeds
from CORP bank account to deposit in the ORG account. Controller stated the following an
email message dated, October 30, 20XX, to President of CORP: “President had me take
another $ from Apartments-1 today. I have recorded everything in QB for you.” See
Exhibit 18(b).

This money was not replaced in the project. There was no evidence provided to indicate the
work was ever completed. This incident indicates the level of control, President, as
President of ORG, exercised over related entities such as CORP in that monies received by
related entities for specific purposes were used for other finance purposes of ORG.

Fire Loss at Apartments-2 owned by ORG in City, State:

On February 9, 20XX, a building containing 16 low-income rental units was fire damaged.
The building was not replaced nor was any portion of the ORG City LLC Bonds redeemed.
The acquisition of the property was made through the bond proceeds. The bond proceeds
were used to purchase the three apartment complexes in . These properties were
collateral for the bonds. The Apartments-2 fire converted the 16 units of collateral into net
insurance proceeds of $, which is also collateral for the bonds. The 16 units were not rebuilt
nor were any of the bonds redeemed with the insurance proceeds. This was a material
event, reportable to the bondholders under SEC rules. ORG failed to issue such report,
which could have triggered some of ORG’s guarantees to the investors.

The $ in insurance proceeds was paid to and deposited into CORP’s bank account. Only $
was paid by CORP for the demolition of the 16 destroyed units. CORP billed ORG the
amount of $ for this demolition. The amount of $ was used to pay a soft money investor
(Partner-4 Trust). In short, only $ could be deemed a proper use of the proceeds. The
amount of $ is a diversion of collateral as to the bondholders and is considered bad use
under section 145.

The insurance claim was paid from Specialty Insurance Company, as
follows:

Whole Loss on Property $

Less Depreciation ( )

Less Deductible ( )

Net Insurance Proceeds $ - Insurance paid to ORG

The $ was deposited into CORP’s account; CORP served as a general contractor on July 9,
20XX. The amount of $ was paid to ORG CO-10 from CORP. The amount of $ was returned
to CORP from ORG and was reported as a wash entry.

Form 886-A (1-1994) Page 19 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or
Form 886-A exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX — 20XX
Date Amount Description
7-27-XX $ transferred to Partner-4 Trust attributed to
Apartments-3 — CO-12 (soft money)
8-20-XX Property Management (Property Mgt) for Apartments-4
8-20-XX Property Management (Property Mgt) for Apartments-5
8-20-XX Property Management (Property Mgt) for Apartments-6
8-20-XX Bank Fees
2-16-XX $ Mid-Continent for demolition Billing
11-29-XX $ Mid-Continent for demolition
11-6-XX $ Mid-Continent for demolition
$ Unaccounted Insurance proceeds
$ Net Insurance proceeds not spent on Apartments-2 Rehab

Apartments-2 still shows no change in the number of low-income units even after one of the
16 unit apartments had been destroyed. Instead of rehabilitating the units CORP
demolished them. Although, the demolition billings were excessive; an invoice shows the
actual demolition costs for the destroyed building was $ billed by CO-20. Project Manager
was project manager. Completion of work had to be no later than October 17, 20XX.
XXXXX billed CORP on October 14, 20XX. CORP check number XXXXX dated November 7,
20XX, was paid to XXXXX. (Exhibit 19). CORP billed the much higher cost
to ORG as stated in Controller’s summary. On August 2, 20XX, CORP sent $ back to ORG
and $ to the Partner-4 Trust fund on July 27, 20XX. (Exhibit 20). The total disbursed by
CORP equals the total billed ($ + $ = $); CORP provided questionable billings in order for
ORG to qualify for the insurance proceeds. No rehabilitation was conducted and the
demolition was performed for substantially less than the insurance billings.

There should be a recapture in credits for 20XX, 20XX, 20XX pertaining to credits taken on
this property. Apartments-2 was to provide housing in order to qualify for the tax credits.

Other Activities of CORP:

As stated previously, operations of CORP were managed with oversight by ORG. CORP also
had interest in the following through ORG:

e CO-21 (Address, City, )
e Partnership-11 (Address, City, )

Partnership-11 owned 100% of XXXXX (Exhibits 21(a), (b), (c), and (d)).
The Form 1065 for 20XX of CO-21 shows assets of $, mortgage liability of $, other liabilities
of $, and partner's capital of $. (Exhibit 21(e)). CORP owned a 1% interest in
Partnership-11 as the general partner through the 100% interest in XXXXX

President of CORP is the registered agent. President signed and prepared all CO-
21 and Partnership-11 20XX and 20XX returns.

The 20XX Form 1065 tax return for Partnership-11 per K-1 shows capital contribution by
CO-22 and net income loss distributive to partners in the amount of - $. (Exhibit 22). The
K-1 also reflects other deductions (loss) in the amount of ($) and capital gain of $.

Form 886-A (1-1994) Page 20 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

Form 886-A EXPLANATIONS OF ITEMS omen

(Rev. January 1994)

Name of taxpayer Tax Identification Number ; Year/Period ended

ORG 20XX — 20XX

The 20XX return for Partnership-11 provides a K-1 showing ORG -
EO as recipient of the CO-22 interest of 99.90%. The donor per Form 8283 is CO-21.
(Exhibit 23). The Form 8283 was signed by President as President of ORG as donee and

XXXXX as appraiser indicating the donor’s cost of $ and donation of $ on December
31, 20XX. The appraised value of the property as of February 29, 20XX pursuant to the
appraisal signed by Appraiser, was $. See Exhibit 24(a).

Partnership-11 filed Form 1065 for 20XX reflecting Line 9 assets in the amount of $.
Liability is indicated in the amount of $, which consists of a note of $ from CO-22 to CORP
and $ from . (Exhibit 22, p. 16). The Deed of Trust and Security Agreement,
however, indicates that loan and property were acquired on December 31, 20XX by CO-21,
rather than by CORP, with a note in the amount of $. (Exhibit 25). The loan terms were
for one year. This same note was extended on December 31, 20XX. (Exhibit 26).

CO-22 initially acquired property in foreclosure located at Address, City, State. The
property was reacquired by CO-22 on September 7, 20XX, in a short sale for $. See
Exhibits 27 and 28. It is unknown how Partnership-11 acquired the property. While Form
8283 shows the donee as ORG, no transfer of the deed has been provided. Further, there is
no evidence that a Form 8282 was filed reflecting a transfer of property from ORG to CO-21.
See Exhibit 24(b).

The Form 990 for 20XX filed by Housing Foundation, an entity operated by ORG, reflects a
public donation of $ from CORP. The property description is “Address, City, State (5.193
Acres and 109 room Motel) - Bargain Sale.”

President’s Son, son of President, made the following announcement to the board of ORG
and CORP on August 1, 20XX:

City, as discussed in the previous board meeting, we have purchased an old Inn
in XXX XXXXXX. We are going to be, in the next few
months, looking at doing a tax credit project on that property, but as of right
now, we've got the property and we're looking at our plans and options of what
we are going to do and how we are going to move forward on that project.

Exhibit 30, p. 30

Following are notes with respect to an interview by agents with President of CORP on
September 22, 20XX:

Per President of CORP, President purchased a hotel in XXX XXXXXX to turn it into
a Senior Citizen’s place. CORP did a scope of work. CORP took out a loan with
CO-22 for $. This loan was never repaid and the property was foreclosed upon.
Property was owned by CO-22. CO-22 foreclosed on the loan as a result of lack
of action and basically received property back that it initially owned. Under the
banking rules the time period for owning property was exceeding and that is the
reason the circumvention of the rules to distribute property that they intended to
keep. After the two year holding period expired and no work performed to rehab
or make payments upon supposed debt, the property was then returned back to

Form 886-A (1-1994) Page 21 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX — 20XX

the initial owner, CO-22. President of CORP stated that he signed the note as
CO-22. It was a non-recourse note.

President of CORP stated in the interview that he was unaware of transactions, although his
company participated in the valuation, ownership, and ultimate increase in value that
benefitted donors.

Appraiser provided an appraisal of the property at Address, City, State, that was formerly
known as Inn and Suites. The appraised value pursuant to that appraisal, as noted above,
is $; the projected sales price was $. The adjusted value of the donation was $. (Exhibit
24).

Following is an excerpt from the appraisal:

Based on the income and expense statements provided to this appraiser and
assuming that all of the proposed remodeling is completed in a
workmanship-like-manner and according to the proposed plans and
specifications and assuming that the units are leased according to the
proposed rent schedules, it is this appraiser's opinion that the Potential
Market Value for the subject, as of February 29, 20XX, is: ($). (Exhibit
24(a) emphasis added).

The appraisal was based on future work and future rental rather than the fair market value
at the time of the appraisal. CO-22 ultimately received the same property back without
harm or risk.

Initially, the property is shown as donated by CORP to Housing Foundation on 20XX.
Further, the same asset is to have been included on the return of Partnership-11. and LLC.
The appraisal was completed on March 3, 20XX. The property is reflected as being donated
by Partnership-11. to ORG. There was no verification that the deed was ever acquired by
CORP or ORG and property was returned without any financial transactions to the original
owner within three years. CO-22 transferred the property to Partnership-11., and county
records show no other transfer or sale of the property until Herring reacquired it on
September 7, 20XX.

Overail Pattern of Operations:

President caused ORG to form many partnerships throughout 20XX through 20XX, in which
ORG promised a guaranteed rate of return, a return of principal invested, a portion of any
ultimate profit, and the ability to deduct operating losses. He apparently commingled funds
invested and diverted substantial sums for unrelated purposes. He executed non-recourse
notes on behalf of the partnerships payable to ORG. The aggregate original balances of the
notes were approximately equal to the operating losses allocated to the partnerships.

In the case of fire loss insurance proceeds for the Apartment, the proceeds, for the most
part, were not used to restore the property. The inflated appraised value of the Inn in XXX
XXXXXX was apparently used to provide the purported donor with an increased charitable
deduction. The same property appears to have been donated by several entities, and the
initial donor retains ownership afterward.

Form 886-A (1-1994) Page 22 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

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

Name of taxpayer Tax Identification Number Year/Period ended

ORG 20XX ~ 20XX

ORG, through the actions of its President, appeared to be engaged in an overall pattern of
deceptive financing practices and tax avoidance plans during the years examined.

Payments to or on Behalf of President:

Form 990 for 20XX (Exhibit 0-1) indicated a loan from President President to ORG in the
amount of $. By year end, $ was purportedly due, and this amount was purportedly paid in
full in 20XX. See Exhibit 0-2

TABLE DELETED

Although the Form 990 indicates amounts for a loan to the officer with stated interest, no
notes. were provided to the agent. In Information and Document Request 21, the agent
requested all known notes, loans or transactions between President and the organization,
ORG. See Exhibit 36

When the agent asked Senior Vice President, Senior Vice President of AH-EO on October 13,
20XX, whether he had seen a note to President for monies owed him by ORG, CFO
responded that he never saw a note and that President had an agreement and note in place
before he was hired. See Exhibit 12, p. 3.

For the years 20XX, 20XX, and 20XX President received substantial amounts of monies from
ORG and various related entities. See Exhibit 31.

The officer had received funds from various ORG accounts since 19XX. Payments to the
officer were classified as repayment of an outstanding loan from ORG CO-10, ORG
Management, and ORG accounts. Occasionally, President would also deposit monies back
into the account from his personal account, trust account, and other personal accounts.
Most of the deposits were wired.

Amounts received by President were not included in his Forms W-2, shown on an
information return as other income (1099-misc), or included in any partnership returns, or
on a Form K-1. The disbursements received were treated as a repayment of a loan. No
amounts were classified as interest income. No board approvals of additional disbursements
to President were provided.

Following is an excerpt from notes with respect to an interview of prior Controller Controller:
“Payments to President were booked as a repayment of loan (Per acct

[numbers redacted]). President directed as Controller to apply
amounts received by him as a repayment of loan. Previous to Controller’s

Form 886-A (1-1994) Page 23 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

Form 886-A EXPLANATIONS OF ITEMS exipi

(Rev. January 1994)

Name of taxpayer Tax identification Number Year/Period ended
ORG 20XX — 20XX

employment with ORG amounts were treated as a payable on loans due to
officer. Controller is unaware of any note for a loan due to. officer and
particularly to President. Amounts received by President for loan repayments
were not included in a Form W-2 or Form 1099”.

Exhibit 32, p. 1.

It appears that President as President directed funds to himself for his own personal benefit.
In addition, President used the corporate American Express Credit Card for his personal
benefit which included paying for travel, vacations, meals, hotels, household items, clothing
and gifts. No evidence of reimbursements to ORG for such amounts has been provided; the
amounts received were not included in Forms W-2 or Forms 1099. For the year ended
December 31, 20XX and December 31, 20XX, he received payments and American Express
Charge personal benefits in the amounts of $ and $, respectively. Exhibit 31(a) through

(j)-
TABLE DELETED

No loan documents were provided. The transactions for actual payments received and
American Express charges paid on behalf of the officer were not listed on the Form 990. No
loan interest was reported on the Form 990. No payment of interest was documented.
Distributions occurred since 20XX, and the balance appeared to increase with additional
disbursements received; there is some indication of repayment or transfer of monies from
the officer to the organization. It does not appear that President pledged any collateral for
a loan, and there is no evidence that there was any demand for payment for the loan.
Although there were several business dealings involving bank, commercial, and bond
financing and hundreds of partnership agreements, as well as loans and the loan documents
to third-party investors, there is no evidence of any loan documentation on unsubstantiated
disbursements provided to President.

At President's direction, amounts paid to him or on his behalf were characterized as loan
repayments. The amounts determined by CPA firm’s auditors were less than the amounts
determined by examination. ORG has not provided an explanation to indicate the large
variance in amounts per the return and the records.

President, did not manage or operate ORG as directed by its Bylaws and Conflicts of Interest
Policy for Board Members and Officers which clearly states that the corporation shall not fail
to disclose corporate opportunities for an officer or employee, receive personal benefits,
receive unsecured loans, favors, and self-dealing or inurement as stated below:

A. “Compensation includes direct and indirect remuneration as well as gifts of
nominal value or favors that are substantial in nature.

B. Corporate Opportunity. It may be a conflict of interest when a board
member or officer fails to inform the Corporation of a corporate opportunity
and instead diverts it to himself or herself (or immediate family member) to
the detriment of the corporation. The opportunity must be in a line of

Form 886-A (1-1994) Page 24 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX — 20XX

business similar to those the Corporation currently operates and must be one
that could be advantageous to the Corporation.

C. Nonpublic Inside Information. It is a conflict of interest to disclose
nonpublic inside information relating to the Corporation and/or any of its
Affiliates’ business and/or use such information for the personal profit or
advantage of any board member or officer, his or her immediate family, or
any other entity of which the board member or officer is an employee, officer,
director or shareholder.

D. Gifts, Gratuities and Entertainment. It may be a conflict of interest for a
board member or officer (or immediate family member) to accept gifts of
nominal value, excessive entertainment, unsecured loans or other favors from
any outside concern that does, or is seeking to do, business with, or is a
competitor of, the Corporation and/or any of its Affiliates under circumstances
from which it might be inferred that such action was intended to influence or
possibly would influence the board member or officer in the performance of
his or her duties.

E. Other Areas of Conflicting Interest. Other circumstances may arise which
could result in a conflict between a board member's or officer's personal
interests and those of the Corporation. These Policy guidelines are not
intended to describe all potential conflict situations. In general, any
circumstance that may give rise to reasonable questions of possible
favoritism, self-dealing or undue influence may be a conflict of interest. All
such conflicts should be avoided, if possible. The Corporation's board
members and officers should also be sensitive to the appearance of conflict,
even if no actual conflict exists. If an actual or possible conflict cannot be
avoided, it shall be disclosed according to the procedures set forth in Article
IV of this Policy.”

Exhibit 33 , section III. A/B

Further the conflicts of interest section with respect to loans stipulates as follows:
“The Corporation is prohibited from lending money to or guaranteeing the obligation
of any board member or officer”. Exhibit 33, section VI

As stated previously, no evidence of a note was provided. There were no board approvals
for such loans. There is no defined period for repayment or any interest accrued. President
did not enforce the collection of the supposed loan; he merely extended it. President
appeared to repay some of the monies while consistently receiving additional funds as
loans, which increased the year end balance due each year. The unpaid amounts from
19XX through 20XX totaled $. In 20XX, President received an additional $ from ORG. In
total, the amount from cash disbursements and payment of personal expenses appears to
be $, from 19XX through 20XX

Cash paid directly to President and payments of personal expenditures for him from the
corporate American Express card, shows that he received hundreds of thousands of dollars
for his personal benefit.

Form 886-A (1-1994) Page 25 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

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

Name of taxpayer Tax Identification Number Year/Period ended

ORG 20XX — 20XX

TABLE Deleted

For the periods ended December 31, 20XX, 20XX, and 20XX, President received $, $ and $,
respectively, from ORG and its related entities.

During the ORG bankruptcy proceeding, it was disclosed that President caused the proceeds
of the key man life insurance policies on his life by ORG and other ORG assets to be
transferred to his family’s trusts.

LAW:
Must Operate Exclusively For Exempt Purposes

Internal Revenue Code section 501(c)(3) describes organizations exempt under this code
section as follows:

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.

Treasury Regulation section 1.501(c)(3)-1(c)(1) provides that “[a]n 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 section 1.501(c)(3)-1(c)(2) provides that “[a]n organization is not operated
exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the
benefit of private shareholders or individuals.” “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).

Treasury Regulation section 1.501(c)(3)-1(d)(1) states that in general:
(ii) An organization is not organized or operated exclusively for one or more of the

purposes specified in subdivision (i) of this subparagraph unless it serves a public rather
than a private interest. Thus, to meet the requirement of this subdivision, it is necessary

Form 886-A (1-1994) Page 26 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX — 20XX

for an organization to establish that it is not organized or operated for the benefit of
private interests such as designated individuals, the creator or his family, shareholders
of the organization, or persons controlled, directly or indirectly, by such private interests.

(iii) Since each of the purposes specified in subdivision (i) of this subparagraph is an
exempt purpose in itself, an organization may be exempt if it is organized and operated
exclusively for any one or more of such purposes. If, in fact, an organization is organized
and operated exclusively for an exempt purpose or purposes, exemption will be granted
to such an organization regardless of the purpose or purposes specified in its application
for exemption. For example, if an organization claims exemption on the ground that it is
“educational”, exemption will not be denied if, in fact, it is “charitable”.

In Better Business Bureau v. United States, 326 U.S. 279 (1945), the Supreme Court held that
regardless of the number of truly exempt purposes, the presence of a single substantial non-
exempt purpose will preclude exemption under section 501(c)(3) of the Code. See also
American Campaign Academy v. Commissioner, 92 T.C. 1053, 1065-66 (1989) (when an
organization operates for the benefit of private interests, such as designated individuals, the
creator or his family, or persons directly or indirectly controlled by such private interests, the
organization by definition does not operate exclusively for exempt purposes); and Old Dominion
Box Co., Inc. v. United States, 477 F.2d 340 (4th Cir. 1973) (operating for the benefit of private
parties who are not members of a charitable class constitutes a substantial nonexempt
purpose.) :

In Founding Church of Scientology v. United States., 412 F. 2d 1197 (Ct. Cl. 1969), the court
stated that loans to an organization’s founder or substantial contributor can constitute inurement
that is prohibited under section 501(c)(3). In that case, the church made loans to its founder
and his family and failed to produce documentation that demonstrated that the loans were
advantageous to the church. The church also failed to produce documentation to show that the
loans were repaid. Significantly, the court stated that “the very existence of private source of
loan credit from an organization’s earnings may itself amount to inurement of benefit.”

In Leon A. Beeghly Fund v. Commissioner, 35 T.C. 490, 518 (1960), aff’d, 310 F.2d 756 (6th Cir.
1962), the Tax Court stated:

We think that although the ultimate purpose of the trust to benefit
charities may have remained unchanged by this transaction,
nevertheless, the primary objective of the trust entering into this
transaction was for the benefit of stockholders of [the business
company] with the objective of ultimately benefiting charities
running a poor second, and that when the trust was utilized for
such a purpose it fell without the scope of both the language of
section 101(6) [now Code §501(c)(3)] and the congressional
intent in enacting this exemption provision.

In Best Lock Corporation v. Commissioner, 31 T.C. 620 (1959), the Tax Court upheld the denial
of recognition of exempt status to an organization that loaned funds to members of the founder's
family, even though the loans were repaid. The Tax Court determined that loans to family

Form 886-A (1-1994) Page 27 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

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

members and unsecured loans to friends of the founder were for the personal purposes of the
founder and his family rather than for charitable purposes.

In Revenue Ruling 67-5, 1967-1 C.B. 123, it was held that a foundation controlled by the
creator's family was operated to enable the creator and his family to engage in financial
activities which were beneficial to them, but detrimental to the foundation. It was held that the
foundation was operated for a substantial non-exempt purpose and served the private interests
of the creator and his family, and therefore was not entitled to exemption from Federal income
tax under section 501(c)(3) of the Internal Revenue Code.

In Kenner v Commissioner, 318 F2d 632, (7th Cir. 1963) ; the court determined that the founder
commingled his own personal funds and the funds 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, 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
CO-10s by which the founder used the hospital's bank accounts to drain off hospital funds to
pay his personal expenses.

Elements of a Loan

In Haag v. Commissioner, 88 T.C. 604, 615 (1987), aff’d without published opinion, 855 F.2d
855 (8th Cir. 1988), and Beaver v. Commissioner, 55 T.C. 85, 91 (1970) the elements of a bone
fide loan are discussed. The cases emphasize that the recipient must intend to repay the
amounts and the transferor must intend to enforce payment.

The Tax Court in Dean v. Commissioner, 57 T.C. 32, 43 (1971), held that the determination of
whether a transfer is a loan is not based on a single factor, standing alone: each factor is
considered with all the facts and circumstances present.

In Vinikoor v. Commissioner, T.C. Memo. 1998-152, the Tax Court states as follows:
The determination of whether a transfer was made with a real expectation
of repayment and an intention to enforce the debt depends on all
the facts and circumstances including whether:
(1) There was a promissory note or other evidence of indebtedness;
(2) Interest was charged;
(3) There was security or collateral;
(4) There was a fixed maturity date;
(5) A demand for repayment was made;
(6) Any actual repayment was made;
(7) The transferee had the ability to repay;
(8) Any records maintained by the transferor and/or the transferee reflected the transaction
as a loan; and
(9) The manner in which the transaction was reported for Federal tax purposes is consistent
with a loan.

Form 886-A (1-1994) Page 28 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

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

Name of taxpayer . Tax Identification Number Year/Period ended
ORG 20XX — 20XX

Taxpayer’s Position:

The organization has not confirmed a position at this time.

ANALYSIS:

Exempt Purpose Activities:

ORG operated low-income housing properties and served an exempt purpose in so doing.
In addition, it provided such services at its housing communities as operating neighborhood
learning centers through a HUD initiative with GED classes, computer classes, life skills
classes, parenting classes, substance abuse prevention presentations, employment
readiness classes, and cultural exchange nights.

Non-exempt Purpose Activities:

ORG also operated to enable various arrangements for some investors to receive high rates
of returns and generate large deductions and losses. For later investors, the promised ~
returns were not materialized. The Bankruptcy Court described one scheme facilitated by
ORG as an “effort to obtain [an] improper tax benefit.” See Exhibit 13(a), p. 43, ¶ 8.

The non-exempt purpose activity of ORG was substantial; as noted in Better Business
Bureau v United States, supra, a single non-exempt purpose, if substantial, will preclude
exemption under section 501(c)(3).

The schemes directed by the President caused the assets of a huge organization to be
drained such that they were no longer available for exempt purpose activities. See Exhibit
2(a), p. 2. Although ORG provided low income housing, more than an insubstantial portion
of its activities were directed to the benefit of private individuals and was a camouflage to
the many non-charitable activities conducted by the officer.

CO-10

President created CO-10 using cash from soft-money investors and donations to inflate the
values of assets, as a source of funds for ORG, and to receive monies as an improper tax
scheme. CO-10 funds were transferred for four basic purposes: 1) to create an “off the
book” entity that could be used to cover-up cash-flow deficiencies within the ORG
enterprises, 2) obtain loans and investments under the ORG CO-10 name in order to avoid
negatively impacting the ORG Balance Sheet, 3) to receive and disburse investor funds
while also serving as the source of the tax deductions/losses promised to the various
investors, and 4) receipt of personal benefits and monies recharacterized as payment of
business expenditures and loans payable to President as an officer. (See CO-10 section
under Facts.)

Regulation section 1.501(c)(3)-1(d)(ii) states that a 501(c)(3) organization must serve a
public rather than a private purpose and it is necessary for the organization to show that it
is not operated for the benefit of private interests such as the creator. The operation of CO-

Form 886-A (1-1994) Page 29 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

Form 886-A EXPLANATIONS OF ITEMS exit

(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX — 20XX

10 appeared to further the private interests of the creator and third party investors rather
than to further a public charitable purpose.

Soft Money Investors/Partnerships:

The court appointed trustee for ORG, Trustee, filed numerous objections to claims of the
soft money investors. The Bankruptcy Court concluded that claims such as that filed by
Investor-1 were disallowed pursuant to Section 548(a)(1)(B) of the Bankruptcy Code as
constructively fraudulent obligations of ORG.

A finding of fact in the adversarial proceeding in the bankruptcy case indicates the
relationship of the soft money investors to the President of ORG, President and ORG’s
involvement in the soft-money investor matters:

Investor-1 and Investor-2 [Investor-1's office assistant] both admitted that in
retrospect, the Investor-1 Deal, when coupled with the information
concerning the pass-through losses flowing from to t and
ultimately to Investor-1, constituted an illegitimate or improper tax scheme
orchestrated by President. (Exhibit 13(a), p. 22, 167).

The Bankruptcy Court also found the following in that proceeding:

ORG is an asserted non-profit entity and thus has no shareholder
involvement. There is no evidence that ORG’s board exercised any control
over President or that it ever monitored the transactions of ORG. ORG was a
participant in the Investor-1 Deal and thus significantly contributed to the
effort to obtain the improper tax benefit for Investor-1. Investor-1 said he
was investing in President’s “housing fund.” Exhibit 13(a), p. 43, ¶ 8

Further the court stated,“[T]he scheme here is a tax scheme. The evidence establishes that
the refund sought was illegitimate.” Exhibit 13(a), p. 44, ¶ 10

Unlike the organization described in Revenue Ruling 68-71, supra, where the benefits to
private interests were found to be quantitatively incidental and insubstantial in amount, the
benefits conferred on some investors in related limited partnerships of ORG were substantial
and drained the resources of ORG. More like the organization described in Revenue Ruling
76-152, supra, formed to promote community understanding of modern art trends that
conducted an art sales activity that provided artists with direct monetary benefits and
enhanced their careers, provided a substantial benefit, ORG provided benefits that were
quantitatively substantial to some investors. ORG used the employees of ORG to prepare
and construct loan documents of shell entities, and generate mirror entities to obtain
improper tax benefits.

Because ORG provides a substantial private benefit which is not qualitatively or
quantitatively incidental to its exempt purposes, ORG has failed the operational test set
forth in section 1.501(c)(3)-1(c)(1) of the regulations.

Form 886-A (1-1994) Page 30 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

Form 886-A EXPLANATIONS OF ITEMS oe

(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended

ORG 20XX — 20XX

Insolvency:

The methods and manners in which operations were conducted were not standard business
practices for an exempt organization in the low-income housing business. Methods
employed did not serve a charitable purpose, but rather led to the dysfunctional business
practices which guided the organization to insolvency.

In his expert report, XXXXX concludes that as of December 31, 20XX, shortly after

the Investor-1 deal, ORG [-EO] had total assets valued at $ and total

liabilities of $. The total liabilities include claims arising from guaranties

issued by ORG [-EO] in connection with seventeen tax credit properties,

which ORG [-EO] or an ORG-affiliated entity served as a general partner in

limited partnerships and typically owned approximately a 1% interest.”
Exhibit 13(a), p. 33, 7 109

The Bankruptcy Court concluded that ORG was insolvent. (See Exhibit 13(a), p. 34, ¶
111). It appears the certified annual reports of ORG did not reflect the true assets and
liabilities of ORG. A comparison of the face value to the total value of the assets revealed a
large variance of around $ in the true value of the assets owned by ORG for years 20XX,
20XX and 20XX. Exhibit 2(a), p. 10-11

See summary below:

Table Deleted

The variance in the amounts reported and the value of the assets shows again an
overstatement of the assets value per expert testimony of XXXX XXXXXX. Assets largely
were uncollectible amounts owed from the related partnerships and Tax Credit properties
that were unprofitable, some of which have been foreclosed upon. Secondly, ORG shows
large note receivables for Developer Fees over $ which was uncollectible due to being
obligations of the aforementioned unprofitable partnerships. The partnership agreements
stipulate the Developer Fees and contain a provision that, if not paid within the tenth
anniversary of the partnership’s respective property placed in service, then the general
partnership (ORG or ORG Affiliate) is required to contribute the sum of money needed to
allow the respective partnership to pay the Developer’s Fee. Basically, then it becomes a
non-asset as it would be offset by the corresponding liability owed to ORG or ORG Affiliate
(ORG would owe itself). Last, there is no history of ORG receiving Developer Fees;
therefore, the receivable should never have been included in income. The over stated
receivables were not presented in the certified audit report, and, therefore, the gross values
were included in the report. The returns were filed without mention or notation.

The actions of the President of ORG to make large guarantees of investment profit to limited
partners and guaranteed loan repayment of others’ obligations in the face of the insolvency
of an organization indicate poor management of the resources of the exempt organization
and a use of its assets for nonexempt purposes.

CO-2:

Form 886-A (1-1994) Page 31 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

Form 886-A EXPLANATIONS OF ITEMS exnibi

(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended

ORG 20XX — 20XX

ORG received a non-collateral loan in the amount of $. The board of ORG approved the
granting of the loan. While the monies were represented to be for the use of low-income
property needs, the proceeds were used to payoff soft-money investors through the
creation of other entities including the following: CO-3 I Partnership-9, CO-3 II Partnership-
7, CO-3 III Partnership-7, CO-3 I Partnership-7, CO-3 I Pre-CO-10, CO-3 I Series E Bonds
and others. The partnership agreements listed both ORG and other entities as the general
partners. President, President, directed the control and flow of funds.

The CO-2 loan is a substantial loan used by ORG for non-exempt purposes. The created
entities had no assets, no bank accounts, and no operations and were similar in name to
partnerships that did have assets to give the appearance of an exempt low income housing
property partnership. ORG orchestrated a maze of entities to provide monies to the soft
money investors. Funds were borrowed from s by ORG to meet the obligations to soft
money investors and were a private benefit to those investors.

ORG has not documented that any exempt function was met in the use of the loan
proceeds. Funding an investment scheme does not further an exempt purpose for an
organization described in IRC Section 501(c) (3).

CORP:

Corporation (CORP) later changed its name to Foundation and was closely related to ORG
through the business practices and its operations. The manner in which it operated was
through the “ORG Enterprise”. Construction duties performed were strictly for ORG and its
related organizations. The board functions of CORP were held with the board meetings of
ORG. President of CORP, CORP President, was a son-in-law to President. He was also an
employee of ORG. Accounting services and records were conducted through ORG.

It appears that CORP was used to enable inflated asset building by ORG. Uncollectible
revenues were booked on CORP records in the amount of $ for supposed deferred revenues
to ORG. In essence, the deferred revenue was uncollectible and should not have been
booked. In this case as in Petzoldt v. Commissioner, 92 T.C. 490,518 (1960), the failure to
adequately keep the required books and records, therefore, requires the respondent to
reconstruct income per IRC section 446. In this case the improper recording of deferred
revenue increased the value of the assets and liabilities. The ultimate intent to overstate
values was to create an opportunity for additional loan leveraging and credit qualification.

Spinoff entities through XXXXX for CO-21 and Partnership-11 were created for non-exempt
purposes. Additional spinoff companies were formed with ORG maintaining a similar role as
the general partner. The acquiring of the hotel property from CO-22 was served non-exempt
purposes. CO-21 shows its only asset for 20XX as being the XXXXX in City valued at $.
The liability reflected was $, which appears to be the amount owed CO-22. It appears that
CO-22, through an entity created by President has or created basis of $. In 20XX, ORG is
shown as a recipient of donated property (from Partnership-11), when in essence the donor
is indicated as XXXXX. In this period the donor’s cost is indicated at $. CO-22 is
attributed as making a donation of $ as a 99.90% owner. The appraisal was completed in
20XX, and the Potential Market Value is stated at $.

Form 886-A (1-1994) Page 32 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

Form 886-A EXPLANATIONS OF ITEMS one

(Rev. January 1994)

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX — 20XX

The agent’s review indicates that several investors received benefit from this transaction,
per flowchart (Exhibit 21(a) and 22) from the acquiring of the property through inflated
appraisal and a charitable deduction of over $ in which the CO-22 was the recipient.
Further, the bank loaned to CORP the amount of $. The same asset was shown as owned
by CO-21, and Foundation and donated by CORP. CO-22 did not pay. any monies but rather
acquired and forgave the loan and eventually received the property back.

The acquiring of the hotel from CO-22 by the supposed investors appeared to benefit the
bank. The entities involved received multiple charitable contributions for the same property
through ORG, CORP, and Housing Foundation. ORG perpetuated acts of creating “Mirror
Entities” and used a professional appraisal service to document an overvalued basis in a
property. As noted previously, the appraisal value was based on future improvement to the
property that did not take place. During the entire period the property was not
rehabilitated; there was no business activity, no business records for the spinoff
partnerships, and no bank activity. This arrangement appeared to be a tax scheme that
benefitted private and business investors.

Inaccurate documents were filed including indications of transfer or property via donation
Form 8283 when no transfer had occurred. The filing appeared to reflect that a donation
had been made; investors could then benefit from charitable contribution deductions and
overstated losses. The same property was transferred between multiple entities for which
the benefactors received improper tax benefits. Providing improper tax benefits is not an
exempt purpose activity.

to Officer /Founder:

ORG distributed money to its founder and paid for his personal American Express charges.
The principal and the interest on any purported loans have not been paid to ORG. Pursuant
to ORG books, the amounts were recorded and indicated as a loan repayment to President.
Both the Controller and Senior Vice President of Finance for ORG indicated that President
received large sums of monies from ORG. No evidence (other than the amount recorded)
was provided that any loan was made by the officer to ORG; further, it was a prohibited as
a policy of the organization. No note to or from the officer was provided. The tax return
reflected Loans from Officer in the amount of $ for the end of the year 20XX. The return for
20XX shows no amount owed.

The Service determined for the years ended December 31, 20XX through December 31,

20XX, with accumulated balances, that‘ XXXXXXXXX received check payments from
ORG, ORG CO-10 and ORG related organizations in the amounts of $, $, and $, respectively.
These amounts represent cash XXXXXXXXX received from ORG. In addition,€

received monies from the use of the corporate American Express card in the amounts of $
and $ for the years ended 20XX and 20XX, respectively.

Based on the factors discussed in Vinikoor v. Commissioner, T.C. Memo. 1998-152, the
amount of money that ORG distributed to XXXXXXXXX does not meet the qualifications of a
loan. .

Form 886-A (1-1994) Page 33 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX — 20XX

The Tax Court in Vinikoor explained that whether a transfer was made with a real
expectation of repayment and an intention to enforce the debt depends on all the
facts and circumstances including whether:

(1) There was a promissory note or other evidence of indebtedness;

(2) Interest was charged;

(3) There was security or collateral;

(4) There was a fixed maturity date;

(5) A demand for repayment was made;

(6) Any actual repayment was made;

(7) The transferee had the ability to repay;

(8) Any records maintained by the transferor and/or the transferee reflected the
transaction as a loan; and

(9) The manner in which the transaction was reported for Federal tax purposes is
consistent with a loan.

The transaction that was listed on the Form 990 as a loan does not meet the above criteria.
No interest or investment income from the loan was ever reported on the Form 990. No
interest on the principal was ever paid on the purported loan, as the interest was merely
accrued into additional loans. Moreover, no executed loan document was provided.

The determination of whether there is a true debtor-creditor relationship is a factual
question to be decided based on all of the facts and circumstances. According to the Tax
Court, in Haag v. Commissioner, 88 T.C. 604, 615 (1987), aff’d without published opinion,
855 F.2d 855 (8th Cir. 1988) and Beaver v. Commissioner, 55 T.C. 85, 91 (1970), the
recipient must intend to repay the amounts and the transferor must intend to enforce
payment. Dean v. Commissioner, 57 T.C. 32, 43 (1971) provides that the determination of
as to whether a loan exists is not based on a single factor, standing alone, but each factor is
considered with all the facts and circumstances present.

The use of the assets of ORG for the personal use of President constitutes private
inurement. To be described as an exempt organization pursuant to Internal Revenue Code
section 501(c)(3), “no part of the net earnings inures to the benefit of any private
shareholder or individual.”

In Leon A. Beeghly Fund, 35 T.C. 490, 518 (1960), the Tax Court stated:

We think that although the ultimate purpose of the trust to benefit
charities may have remained unchanged by this transaction,
nevertheless, the primary objective of the trust entering into this
transaction was for the benefit of stockholders of [the business
company] with the objective of ultimately benefiting charities running
a poor second, and that when the trust was utilized for such a purpose
it fell without the scope of both the language of section 101(6) [now
Code §501(c)(3)] and the congressional intent in enacting this
exemption provision.

Although the inurement prohibition is stated in terms of net earnings, it applies to any of a
charity’s assets that serve the interests of its private shareholders. Harding Hospital, Inc. v.
United States, 505 F.2d 1068, 1072 (6th Cir. 1974). The payments to XXXXXXXXX

Form 886-A (1-1994) Page 34 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or

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

Name of taxpayer Tax Identification Number Year/Period ended
ORG 20XX — 20XX

served the financial interests of the XXXXXXXXX . When a charity's investments are
decided in part by the needs of private interests, the charity is not operating exclusively for
exempt purposes. Western Catholic Church v. Commissioner, 73 T.C. 196, 214 (1979),
aff'd 631 F.2d 736 (7th Cir. 1980).

ORG’s net earnings have inured to the benefit of insiders. Treas. Reg. § 1.501(a)-1(c);
Ginsburg v. Commissioner, 46 T.C. 47 (1966). The very presence of a private source of
loan credit may amount to inurement. Founding Church of Scientology v. United States,
412 F.2d 1197 (Ct. Cl. 1969); Church in Boston v. Commissioner, 71 T.C. 102 (1978).
Loans to disqualified persons promote private rather than charitable purposes. Best Lock
Corporation v. Commissioner, 31 T.C. 1217, 1235-37 (1959).

An organization is described in section 501(c) (3) only if no part of its net earnings inures to
the benefit of any private shareholder. The inurement prohibition is designed to insure that
charitable assets are dedicated to exclusively furthering public purposes. It is clear that
part of the earnings of ORG inured to the benefit of its founder, and it is, therefore, not
described by section 501(c)(3).

Conclusion:

ORG operated low-income housing properties and served some exempt purpose in so doing;
nevertheless, ORG does not qualify for exempt status under section 501(c)(3) of the
Internal Revenue Code for the following reasons.

(1) ORG also operated for non-exempt purposes to a more than insubstantial extent;

(2) ORG operated a scheme to mislead investors in order to maintain the operation of
an insolvent organization and to benefit the founder and some initial investors;

(3) ORG promoted arrangements whereby investors received improper tax benefits;

(4) Further, the income of ORG inured to the benefit of the founder in the form of
payments to him and payments for personal American Express charges.

Accordingly, it is determined that ORG is not properly described in section 501(c)(3) and its
exempt status should be revoked effective January 1, 20XX.

Please note that this is not a final report. This draft report is subject to review and modification by
our review staff. You will receive the final report from review.

Form 886-A (1-1994) Page 35 of 35 publish.no.irs.gov Department of the Treasury-Internal Revenue Service