Housing nonprofit loses exemption for commercial activity and private benefit

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Plain-English summary

A housing nonprofit said it would rehabilitate homes, sell them to low- and moderate-income families, and use profits for after-school programs. The IRS found that its rental and property-sale activities operated like ordinary commercial businesses and did not primarily serve charitable beneficiaries. The examination also found compensation and benefits for insiders, use of the nonprofit's office and staff by related entities, health-insurance payments for a director's family, and property transfers without disinterested board approval. In addition, the organization did not produce adequate records to support its annual returns. The IRS revoked exemption under § 501(c)(3) effective on a redacted January 1, and the organization agreed to terminate operations and transfer remaining property and cash to an unrelated exempt organization.

Ruling snapshot

• Question: Did the organization remain operated exclusively for charitable purposes without private inurement and with adequate records?
• Outcome: Revoked
• Key authorities: IRC §§ 501(a), 501(c)(3), 6001, and 6033; Treas. Reg. §§ 1.501(c)(3)-1 and 1.6001-1

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examinations
625 Fulton Street, Room 503
Brooklyn, NY 11201

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

January 12, 2010

Number: 201450022 Taxpayer Identification Number:
Release Date: 12/12/2014 Person to Contact:

Identification Number:

Contact Telephone Number:

LAST DATE FOR FILING A PLEADING
WITH THE TAX COURT, THE CLAIMS
COURT, OR THE UNITED STATES
DISTRICT COURT FOR THE DISTRICT
OF COLUMBIA:

UIL: 501.03-00
CERTIFIED MAIL

Dear

This is a final adverse determination regarding your exempt status under section
501(c)(3) of the Internal Revenue Code (the Code). Our favorable determination letter
to you dated April 17, 19XX is hereby revoked and you are no longer exempt under
section 501(a) of the Code effective January 1, 20XX

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

You are not operating exclusively for any charitable purpose, educational purpose, or
any other exempt purpose. Our examination reveals that you are not engaged primarily
in activities which accomplish charitable, educational or other exempt purposes as
required by Treas. Reg. 1.501(c)(3)-1(c)(1). Your activities, including your financial
transactions, more than insubstantially furthered non-exempt purposes. Moreover, you
failed to establish that you were not operated for the benefit of private interest of your
chairman and private shareholders or individuals, as required for continued recognition
of exemption pursuant to Treas. Reg. 1.501(c)(3)-1(d)(1)(ii). Your income inured to the
benefit of private shareholders and individuals.

Contributions to your organization are no longer deductible under IRC §170 after
January 1, 20XX

You are required to file income tax returns on Form 1120. These returns should be
filed with the appropriate Service Center for the tax year ending December 31, 20XX
and for all tax years thereafter in accordance with the instructions of the return. You
have filed taxable returns on Form 1120 for the years ended December 31, 20XX ,
December 31,20XX , December 31,20XX , December 31,20XX , December 31, 20XX and
December 31, 20XX with us.

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

If you decide to contest this determination under the declaratory judgment provisions of
section 7428 of the Code, a petition to the United States Tax Court, the United States
Claims Court, or the district court of the United States for the District of Columbia must
be filed before the 91st Day after the date this determination was mailed to you. Please
contact the clerk of the appropriate court for rules regarding filing petitions for
declaratory judgments by referring to the enclosed Publication 892. You may write to
these courts at the following addresses:

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

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

You also have the right to contact the Office of the Taxpayer Advocate.
Taxpayer Advocate assistance is not a substitute for established IRS
procedures, such as the formal Appeals process. The Taxpayer Advocate
cannot reverse a legally correct tax determination, or extend the time fixed by law

• that you have to file a petition in a United States court. The Taxpayer Advocate
  can, however, see that a tax matter that may not have been resolved through
  normal channels gets prompt and proper handling. You may call toll-free, 1-877-
  777-4778, and ask for Taxpayer Advocate Assistance. If you prefer, you may
  contact your local Taxpayer Advocate at:

Internal Revenue Service

We will notify the appropriate State Officials of this action, as required by Code section
6104(c). You should contact your State officials if you have any questions about how
this final determination may affect your State responsibilities and requirements.

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

Sincerely,

Nanette M. Downing
Acting Director, EO Examinations

Enclosure:
Publication 892

UIL 501.03-00

DEPARTMENT OF THE TREASURY
Internal Revenue Service
9350 Flair Dr., 2nd Floor
El Monte, CA 91732-2828

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

October 21, 2009

Taxpayer Identification Number:
Form:

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 (04-2002)
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,

Sunita B. Lough
Director, EO Examinations

Enclosures:
Publications 892 & 3498
Report of Examination
Form 6018

Letter 3618 (04-2002)
Catalog Number 34809F

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)
Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

12/31/20XX, 20XX and 20XX

ISSUE

1. Whether the activities conducted by (“ ”) throughout the years of
   its existence were in compliance with the rules and regulations under the Internal Revenue Code

(“the Code”) §501(c)(3).

2. Whether net earnings inure to the benefit of its officers and board members within the
   meanings of the Income Tax Regulations (“the Regulation”) §1.501(c)(3)-1(c)(2).
3. Whether complied with record keeping requirements as required under the Code §§ 6001
   and 6033.
   FACTS

Organizational Information:

was incorporated on October 21, 19XX, in the State of . The
specific purpose of the organization, as stipulated by Article II of the Articles of Incorporation is “to
engage in the solicitation, receipt and administration of property and from time to time to disburse
such property and the income therefrom [sic] for activities related to the development of new housing,
for low to moderate income families, or for other charitable purposes, in accordance with Section
501(c)(3) ...”

The Internal Revenue Service (“The Service”) received the Form 1023, Application for
Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue code, signed by
, the President of , on February 6, 19XX. Its intended purposes as described
in the application were:

“(1) Rehabilitation of dilapidated single family dwellings

(a) The organization will purchase dilapidated single family dwellings from the
Department of Housing and Urban Development (“HUD”). The purchase of
each unit will be financed through loans from HUD (approximately % of the
purchase price) and loans (at market interest rates) from private investors,
including , the president of the organization
(approximately % of the purchase price). The organization will then
rehabilitate each unit so that it meets all applicable building codes and is
suitable for marketing. All rehabilitation work will be done by local building
contractors at prevailing rates. The rehabilitation of each unit will be financed
through loans from HUD (approximately % of rehabilitation costs) and loans
(at market interest rates) from private investors, including

, the president of the organization (approximately % of rehabilitation
costs). This activity will consume about % of the organization’s time. This

Form 886-A (1-1994) Page 1 of 19 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)

Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

12/31/20XX, 20XX and 20XX

activity furthers the organization’s goal of rehabilitating existing housing stock in
depressed urban neighborhoods, thereby helping to halt the deterioration of
such neighborhoods and contributing to their revitalization.

(b) This activity will begin as soon as the organization locates a suitable property
being offered for sale by HUD, and HUD determines that the organization is
eligible to participate in its sale and loan programs.

(c) This activity will be conducted in depressed urban neighborhoods located within
County. The organization’s president, , will
handle all day to day tasks related to purchase, rehabilitation, and financing.

(2) Sale of rehabilitated dwellings to low and moderate income families

(a) The organization will sell the units it rehabilitates to low and moderate income
families at market prices. The units will be marketed through periodicals and
through local real estate agents who specialize in home for low and middle
income buyers. The organization will provide education and advice to first-time
homebuyers, especially with regard to available sources of financing. This
activity will consume about % of the organization’s time. This activity furthers
the organization’s goals of (i) assisting low and moderate income families to
achieve the goal of home ownership and (ii) contributing to the stability and
revitalization of depressed urban neighborhoods by helping families become
“stakeholders” in those neighborhoods.

(b) This activity will begin as soon as the organization completes rehabilitation of
its first property.

(c) This activity will be conducted in depressed urban neighborhoods located within
County. The organization’s president, , and
volunteers who support the organization’s goals will handle all day to day tasks
related to marketing and sales.

(3) Development and support of after-school tutoring and sports programs for “at risk”
high school and junior high school students

(a) All profits from the sales of rehabilitated units will be used to finance after-
school tutoring and sports programs for “at risk” high school and junior high
school students. The organization will work with school district personnel and
other non-profit organizations to strengthen existing programs and to develop
new programs of this type. It is anticipated that most programs will recruit and
compensate credentialed teachers and physical education instructors to
provide students with academic tutoring and sports instruction after school
hours. This activity will consume about % of the organization’s time. This

Form 886-A (1-1994) Page 2 of 19 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)

Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

12/31/20XX, 20XX and 20XX

activity furthers the organization’s goals of providing constructive activities for
“at risk” youth which will encourage them to stay in school and which will
counteract the negative influences which they encounter each day.

(b) This activity will begin as soon as the organization realizes a profit from the sale
of rehabilitated units.

(c) Initially, the organization will focus on developing and supporting programs at
High School, located in , , and High School,
located in ; . The organization's president,
, and volunteers who support the organization’s goals will handle all day to
day tasks related to the development and support of these after-school
programs.”

In response to the Service’s questioning about whether any contractors would be related in
any way to the officers or directors, stated “The contractors used in the rehabilitation of
the dwellings will not be related to any of the officers or directors of the organization.”

In response to the Service’s requesting a list of steps taken to involve the community or the
residents, stated that it would “provide education and advice to local residents who would
like to become home owners.”

In response to the Service’s questioning about what would be doing for the estimated
$0 annual compensation, provided a list of matters would be doing and stated “The
president will spend in excess of 150 hours per unit conducting his duties. The basis of setting the
compensation will be to provide “token” compensation for his services.”

In response to the Service’s request to adopt the safe harbor guidelines with a statement
signed by two officers under the penalties of perjury, made the following statement:

. is very familiar with the Department of Housing and Urban
Developments requirements for low income housing providers. We will comply with all
safe harbor guidelines described on page 3 of your March 28 letter.”

Three individuals, as the President, as the
Director, and as the Secretary and the Director, signed the safe harbor
statement and the response letter without the penalty of perjury statement on April 9, 19XX.

A determination letter was issued on April 17, 19XX granting exemption status under the Code
§501(c)(3) as an organization described under the Code §509(a)(2) with an advanced ruling period
through December 31, 20XX. In a letter dated April 25, 20XX, the Service reaffirmed the exempt
status of as a publicly supported organization.

Form 886-A (1-1994) Page 3 of 19 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)
Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

12/31/20XX, 20XX and 20XX

Issue 1 — Operational Test

On April 21, 20XX, the Service initiated a review of the Forms 990, Return of Organization
Exempt From Income Tax, and activities of for the years ending December 31, 20XX
through 20XX. was involved in two separate but related activities: low-income-housing
rental, and rehabilitating and selling of old homes purchased from HUD.

owned 6 properties in the beginning of 20XX and rented 5 of them out.
stated the units were rented to low-income tenants and provided rental agreements. A review of the
20 rental agreements indicated 75% of the tenants received Section 8 housing assistance from HUD.
Each tenant would pay the same amount of rent regardless of the Section 8 assistance. For
example, if the rent was $1,000.00 a month and the tenant received $850.00 in Section 8 voucher,

than would receive $850.00 from the Housing Authority of the County of and
this tenant would pay the difference of $150.00 with his own money.
We visited the website of the Housing Authority of the County of at which provided

information related to Section 8 program. To become a participating owner, all one need to do is to
lease the rental unit to a Section 8 voucher-holder. There is no requirement that a participating
owner/landlord has to be an exempt organization, nor does it have any special rules or regulations to
follow.

would not explain how this rental activity constituted a charitable activity.

The other activity involved in was the purchasing, refurbishing and reselling HUD
properties. This activity began in 19XX and reached its peek in 20XX and tapered off. By 20XX,

was no longer purchasing properties from HUD. However, fixed-up and sold two of
the 6 properties in 20XX. We searched the public records for property transactions by . The
HUD properties sold to individuals are summarized in the table below:

Year | #of prop Total sale Total cost | Total Gross Gain 10% gain

19XX 0 0 | none found 0 0

19XX 0 0 0 0 0

19XX 0 0 0 0 0

20XX 0 0 0 0 0

20XX 0 0 0 0 0

20XX 0 0 0 0 0

20XX 0 0 0 0 0

Total 0 0 0 0 0

The “total gross gain” was mathematically determined by subtracting “total cost” from “total
sale’. It doesn’t represent the actual gain, since the cost of refurbishing and the cost of sale were not
accounted for. We understand that HUD allows for a 10% profit for these kinds of properties. With
that in mind, we made a conservative estimate of a 10% gain, or $0 gain over 7 year period.

Form 886-A (1-1994) Page 4 of 19 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)
Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

12/31/20XX, 20XX and 20XX

We reviewed Forms 990 for the years ending December 31, 19XX through 20XX. The sales of
the properties were only in 19XX through 20XX, and they were reported on Forms 990 as follows:

Account Description 19XX12 20XX12 20XX12 20XX12 20XX12
Housing sales 0 0 0 0 0
HUD discount 0 0 0 0 0
Total Income 0 0 0 0 0
1st time home buyer gift 0 0 0
Acquisition costs 0 0 0 0 0
broker commission 0 0 0 0 0
buyer costs pd by seller 0 0 0 0 0
carrying costs 0 0 0 0 0
closing costs at Acq 0 0 0 0 0
Development fees 0 0
Rehab costs 0 0 0 0 0
Sales Closing costs 0 0 0 0 0
Total Expenses 0 0 0 0 0
Net Gain(loss) 0 0 0 0 0
% of net Gain(loss) % % % % %

Even though it appeared that made little or no profits from these transactions,

received substantial compensations and benefits. The follow table is a summary of the
expenses reported on Forms 990 and displays how the funds earned from the two activities were
utilized for the years 19XX through 20XX.

Account Description 19XX12 20XX12 20XX12 20XX12 20XX12 20XX12 | 20XX12
Comp to officers, directors, etc. 0 0 0 0 0
Pension plan contribution (n1) 0 0 0 0 0 0
Health insurance 0 0 0 0 0 0
Payroll Taxes 0 0 0 0 0
Total pymt to/for

0 0 0 0 0 0
after school program 0 0 0 0 0 0
Interest (n2) 0 0 0 0 0
Professional Fees 0 0 0 0 0 0
EE related expenses 0 0 0 0 0 0 0
Office related expenses 0 0 0 0 0 0 0
Total Office/Administrative
Expenses 0 0 0 0 0 0 0
% paid to/for
ni was on cash basis. Therefore, when these amounts were contributed to the pension account is not know. We adjusted the

expenses to reflect and correct this timing difference the best we could.
n2 Since it was not a part of the office or administrative expenses, the 20XX percentage computation did not include the $0 interest.

Form 886-A (1-1994) Page 5 of 19 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)

Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

12/31/20XX, 20XX and 20XX

The table above indicates over % of the net revenues in 19XX through 20XX were paid to
in the forms of compensations and benefits, which was substantially higher than the $0
estimated annual compensation to him on Form 1023.

In the Form 1023, indicated it would be operating after-school programs for “at risk”
school students. There was one expense named “after school program”. Our review of the financial
records indicated for 20XX through 20XX the payments were for school/personal related expenses of
the office manager's daughter.

Issue 2 — Net Earnings Inuring to the Benefit of Officers and Directors
Issue 2, Category 1 — Office space and staffs utilized by related entities

In order to determine whether there were net earnings inuring to the benefit of its officers and
board members, we need to look at how day-to-day matters were handled. For the 5 rental
properties, contracted a property management company to rent out each unit, collect rents,
maintain the property, etc. At the end of each month, the property management company would
produce a monthly statement that summarized the rent collected, expenses incurred, including its
management fees, and paid the net amount to . This property management company was
also the contact person for the Section 8 assistance. In other words, work related to
the rental activities were to record net rental income, and pay some bills such as mortgages, property
taxes and utilities. We wanted to review the exact responsibilities of the property management

company, but would not provide a copy.
During 20XX, rebuilt/constructed properties and made the following payments:
Payee Description/purpose Total paid in | Recorded
20XX in 20XX
did handy-man work for rental properties 0
paid it directly for the work it did $0
through
Did construction work for $0 $0
The works related to rebuilding/constructing were primarily, if not entirely, handled by , an
entity wholly owned by the husband of a director of work for this activity was
limited to issuing checks to had no written contracts with
nor did it receive bills and invoices. (See Issue 2, Category 2 for transactions with .)
For the amount of work described above, rented a space in ; that

appeared to be a 2-room apartment converted into office for over $1,100.00 per month.
hired a full-time office manager with compensation and benefits exceeding $0 per year. Since there
were more works than the office manager could handle, hired a part-time helper and paid

Form 886-A (1-1994) Page 6 of 19 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)

Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

12/31/20XX, 20XX and 20XX

her $0 in 20XX, $0 in 20XX, and $0 in 20XX. The payment to the part-time helper included $0 bonus
each year, including 20XX, the year she was compensated by for the first 2 months only.

A search of public records indicated several other entities were using the same Post Office
Box and/or the office addresses. We asked to identify its related entities and percentage of
ownership by the officers and directors. provided the ownership of for each of
the entities. The following table summarizes his ownership:

Entity Name ownership
owned 25% in the past
owned 25% in the past

currently owns 50%

currently owns 100%

currently owns 50%
currently owns 50%

We searched the records within the Service and found that it confirmed the ownership stated

above plus the ownership of as follows:
Entity Name
owned 25% owned 25%
owned 25% owned 25%
President of this EO
owns 50% owns 50%

owns 100%

owns 100%
owns 100% through

his wife
owns 50% owns 50%
owns 50% owns 50%
The ownership of is significant for our consideration
because his ownerships represent the ownerships of the operating director,
We questioned whether employees provided any services to these related entities

and responded by stating:

Form 886-A (1-1994) Page 7 of 19 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)
Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

12/31/20XX, 20XX and 20XX

In 20XX, [the office manager] and [the part-time helper] did handle
general office work for some of the entities above. We are unable to provide and
accurate percentage of the time spent. In the past, the majority of their time was spent
on matters. From 20XX to present, the time spent on matters has
reduced and time spent on other companies’ matters has increased. In 20XX and
20XX, many of the office expenses paid by were phased out and these
expenses are now paid by other companies. no longer pays for Health
Insurance for , payments to , cell
phone bills, telephone bills, P.O. Box rent, office rent, or office supplies.

This explains why the part-time employee received $0 bonus at the end of 20XX, even thought
she was not compensated by for the last 10 months. She was doing the same thing she
had been doing for the remaining 10 months for the same group of entities but paid by an entity other
than . The people in charge of allowed other entities to utilize in this
manner because they were benefiting from such usage.

We reviewed 3 phone bills from Cingular Wireless, and observed that there were 4 phone
lines. In response to our question of who were the individuals using the phones, stated “

and were two of the users. We have to check the other two numbers.” did
not provide the names of the other 2 users.

Beginning in the year 20XX, borrowed funds from to
cover some of the office expenses. By early 20XX, the borrowed funds accumulated to over $0.
agreed to apply this loan as corrections toward office expenses inuring to the benefits of
and during the years under examination totaling $0.

Issue 2, Category 2 — Health Insurance for Family
had 2 full-time employees, and the office manager. Since 5/1/XX,
provided health insurance coverage for the entire family of these 2 employees. However,

beginning on 5/1/XX also provided health insurance for

family at $0 per month. We questioned why was paying for

family and the response was “It was agreed that would pay the health insurance
for from 5/1/XX. His insurance was paid for until 10/26/XX.”
The coverage for family continued through October 20XX. This represented

a total benefit of $0 in 20XX and around $0 in 20XX.

agreed and utilized the loan from to as
corrections for these excess benefit transactions.

Issue 2, Category 3 — Properties transferred out of

We observed several questionable property transactions from the public records.
quitclaimed 3 of the rental properties ( property, the property, and the

Form 886-A (1-1994) Page 8 of 19 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)

Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

12/31/20XX, 20XX and 20XX

property) to back in 20XX and remained under his name throughout these years. We
questioned why this was the case. response was “The properties were quitclaimed to

in order to obtain favorable financing terms from Bank of America. The properties were
supposed to be quitclaimed back to on the same day as the closing of the loan. This is
what was done with on 12/14/XX. The fact that this was not done on subsequent properties was an
error. has signed quitclaim deeds back to has not recorded
those deeds because it would trigger a reassessment of the property.”

The property records indicated that quit claimed the property to
on 9/23/XX, who then quit claimed to (“ ”) on the same day. quit
claimed the property to on 9/20/XX, who then quit claimed to on the same
day. quit claimed the property to on 10/29/XX, who then quit claimed to
on 2/6/XX. We questioned what received in exchanged for these properties and the
response was “The properties were sold in 20XX for valuable consideration. The sales were
recorded on the 20XX tax returns.” We questioned why rental incomes from the property and
the property were recorded on general ledger in January 20XX, and the
response was “Rental income deposited in January 20XX would have been for November or
December 20XX rents. Since is on the cash accounting basis, the income was recorded in
20XX when the checks were received.” This response did not match the records, because one
property was quitclaimed out of in September 20XX and the other in October 20XX.

quit claimed the property to on 9/23/XX, who then quit
claimed to on 10/31/XX. then sold it to an individual on 9/5/XX for $0. We
questioned what received in exchange for this property, and the response was “The
property was sold in 20XX for valuable consideration. The sale was recorded on the 20XX tax
returns.”

quitclaimed the property to on 1/1/ /XX but did not record
the quit claim until 6/17/XX. then sold it to an individual on 9/12/XX for $0. We
questioned what received in exchange for this property, and the response was “The

property was sold in 20XX for valuable consideration. The sale was recorded on the 20XX tax
returns.” We questioned why the recording of the quitclaim did not take place until 2 and ½ years
later, and the response was “The property was sold on 12/26/20XX to . If the deed was
not recorded until later, that was an error.”

quitclaimed the property to on 7/12/XX. then
sold it to an individual on 8/6/XX for $0. We questioned what received in exchange for
this property, and the response was “The property was sold on 9/23/20XX for $0. The sale was
recorded on the 20XX tax returns.”

The transactions related to the property were unusual, and we have to summarize it
as follows:

Form 886-A (1-1994) Page 9 of 19 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)

Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

12/31/20XX, 20XX and 20XX

• 8/3/ — sold it to , the 501(c)(3) organization with as its
President, for $0.
• 12/21/XX — sold it to for $0.
• 12/29/XX — quit claimed it to
• 6/8/XX — quit claimed it to
• 12/27/XX — quit claimed it back to
• 10/17/XX — quit claimed to
We questioned what paid for in exchange for this property, and the response was
. purchased the property for valuable consideration.” We questioned how was
utilizing this property, and the response was “ is maintaining the property as low to moderate

income housing.” The general ledger for 20XX indicated that the rental income was recorded starting
in November 20XX. The purchasing of the property was recorded on 1/3/XX with a journal entry
offsetting “Loans-Mortgage” account for $0.

stated there were no appraisals for any of these properties when they were

transferred out of . We requested documentations regarding discussions and approval of
these transfers, and response was there were “no written minutes, memos, or emails”
regarding these transfers. We requested general ledgers for 20XX and 20XX to
understand how these property transactions were records. chose not to provide them.

In September 20XX, made corrections for these property transactions.
quitclaimed three properties at ; , and to for the purpose of
getting a better mortgage rate. transferred these properties back to . We
determined that the excess benefit amounts for the remaining 5 properties that went to him or
totaled to $0. The remaining balance of loan to in the amount of $0 was used to

reduce these excess benefit amounts. The remaining excess benefit amounts of $0 plus applicable
interest were given to an unrelated organization exempt under the IRC § 501(c)(3).

Facts Applicable to All Issues:

Board Members:

Section 6.02 of the Bylaws stated that the authorized number of directors shall be five (5). The
Form 1023 listed the following 5 individuals for officers, directors, trustees, etc. under #4 of Part II:

Name Title Address
Brand President, Chairman, Director

Chief financial Officer, Director

Secretary, Director
Director

Form 886-A (1-1994) Page 10 of 19 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit
Form 886-A
(Rev. January 1994) EXPLANATION OF ITEMS
Name of Organization/Taxpayer Tax Identification Number | Year/Period ended
12/31/20XX, 20XX and 20XX
Director

An analysis of Forms 990, for the calendar years. 19XX through 20XX indicated there were
only 4 officers or directors. These officers and directors remained the same throughout the seven

years. In other words, failed to comply with its own bylaws since 19XX. The table below
indicated that was the only one receiving compensations.
Name Title 19XX12 | 20XX12 | 20XX12 | 20XX12 | 20XX12 | 20XX12 | 20XX12
Chairman | Comp 0 0 0 0 0 none
Pension 0 0 0 0 0 0)
Total 0 0 0 0 0) 0
Secretary none none none none none none none
Oper. Dir. none none none none none none none
Director none none none none none none none

Minutes of Meetings:

In response to our request for the minutes of the meetings of the governing body, including
committee meetings, provided the minutes of annual meetings dated 12/19/XX,
12/16/XX, and 12/15/XX. All three minutes have the following statements except as indicated:

Minutes of Annual Meetings of Both Shareholders and Directors of

We, the undersigned, being all of the shareholders, directors, and the secretary of
the Corporation, hereby agree and consent that the annual meeting of the
shareholders and the annual meeting of directors of the Corporation be held on
the date designated hereunder, and do hereby waive all notice whatsoever of
such meeting and of any adjournment thereof. [Emphasis added.]

We do further agree and consent that any and all lawful business may be transacted at
such meetings or at any adjournment or adjournments thereof as may be deemed
advisable by any shareholder or director present thereat. Any business transacted at
such meetings or a any adjournment or adjournments thereof shall be a valid and legal
and of the same force and effect as if such meeting or adjourned meetings we held after
the notice.

The directors and shareholders of this company pursuant to statutory requirements of
that law held its annual meeting of the shareholders and immediately thereafter, held its
annual meeting of board of directors as of the day set forth below.

Form 886-A (1-1994) Page 11 of 19 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)

Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

12/31/20XX, 20XX and 20XX

The undersigned constituting all the shareholders, directors, and the secretary of this
company hereby acknowledge that by placing their signatures below they consent to the
waiver notice of these meetings and consent to said meetings being held by said
shareholders, board of directors and secretary.

Upon motion duly noted and seconded and unanimously carried out, the following was
considered and voted upon by the undersigned. ... [The minutes listed some of the
matters that took place during the year.]

has not paid dividends. ...

There being no further business to come before the meeting of the undersigned, upon
motion duly make and seconded and unanimously carried, the meeting was adjourned.

Date: ...

Secretary

A review of Bylaws indicate that Section 6.03 states “Directors shall be elected at
each annual meeting of the board of directors to hold office until the next annual meeting by plurality
vote of the directors in office immediately preceding the election; ...”

Section 6.06 of the Bylaws states “Annual meetings of the board of directors shall be held for
the purpose of organization, election of directors and officers and the transaction of other business.
Annual meetings shall be held on the first day of February of each year at 10:00 a.m.”

Section 6.09 of the Bylaws states “A majority of the authorized number of directors shall
constitute a quorum for the transaction of business ... A meeting at which a quorum is initially
present may continue to transact business, notwithstanding the withdrawal of directors, if any action
taken is approved by at lease a majority of the required quorum for that meeting.”

We compared the minutes to the bylaws to see whether complied with its own
rules, and observed the following inconsistencies:

• With the references to shareholders and dividends, the minutes appeared to follow the format
of a for-profit corporation.

• None of the minutes mentioned which officers and board members were present, and whether
a quorum was met.

• The minutes began with the statement “We, the undersigned, being all of the shareholders,
directors, and the secretary of the Corporation, hereby agree and consent...” It appeared to
imply that was the sole shareholder/director/secretary of

• These annual meetings were held in December, even though the Bylaws required them to be
held on or the nest working day after the first day of February.

• There were no elections of directors.

Form 886-A (1-1994) Page 12 of 19 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)

Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

12/31/20XX, 20XX and 20XX

• The property transfers from to and to Residential Investment were
director related transactions. However, there were no discussions or approval by the board.
The use of office space and sharing office staffs by related entities were not addressed.

In May 20XX, family was added into the health
insurance policy, and was paid for by . In other words, the board member,
wife, was receiving benefits from without the

board’s approval and without consideration of conflict of interest. This transaction was not
discussed or approved by the board.

LAW

The Code §501(a) states “An organization described in subsection (c) ... shall be exempt from
taxation under this subtitle.”

The exempt organization listed under the Code §501(c)(3) is described as “Corporations...
organized and operated exclusively for religious, charitable ... no part of the net earnings of which
inures to the benefit of any private shareholder or individual...” [Emphasis added.]

The Income Tax Regulations (“the Regulation”) §1.501(a)-1(c) states “The words “private
shareholder or individual” in section 501 refer to persons having a personal and private interest in the
activities of the organization.”

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

The Regulation §1.501(c)(3)-1(c)(2) states “An organization is not operated exclusively for
one or more exempt purposes if its net earnings inure in whole or in part to the benefit of
private shareholders or individuals.” [Emphasis added.]

The Regulation §1.501(c)(3)-1(d)(1)(ii) states “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 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.”

The Regulation §1.501(c)(3)-1(d)(1)(ii), although states in terms of the "net earnings" of an
organization, the inurement doctrine applies to any of an organization's charitable assets. See
People of God Community, 75 T.C. 127, 133 (1980). Payment of excessive compensation is a form

Form 886-A (1-1994) Page 13 of 19 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)
Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

12/31/20XX, 20XX and 20XX

of inurement. For example, in Mabee Petroleum Corp. v. U.S., 203 F. 2d 872, 875 (5th Cir. 1953), the
Fifth Circuit held that the organization’s payment of a full-time salary for part-time work was
inurement.

The Regulation §1.501(c)(3)-1(d)(2) states “The term “charitable” ... includes: Relief of the
poor and distressed or of the underprivileged; ... or (iv) to combat community deterioration and
juvenile delinquency.”

In Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279, 283 (1945), the
Supreme Court held that the “presence of a single...(nonexempt) purpose, if substantial in nature, will
destroy the exemption regardless of the number or importance of truly...(exempt) purposes.”

Revenue Ruling 70-585, 1970-2 C.B. 115, provides that nonprofit housing organizations
created to aid low and moderate income families by lessening neighborhood tensions, eliminating
prejudice and discrimination, and combating community deterioration may qualify for exemption under
§501(c)(3) of the Code.

Receipt by an exempt organization of less than fair market value in a sale or exchange of
property with an insider is also a form of inurement. In Sonora Community Hospital v. Commissioner,
46 T.C. 519 (1966), two doctors transferred their private practice of medicine, including the building in
which the practice was housed, to a non-profit hospital they controlled. A portion of the building was
occupied by a for-profit laboratory under a prior agreement with the two doctors. The doctors caused
the hospital to acquiesce in the arrangement with the laboratory. The hospital received no
consideration for the assignment of its space to the laboratory either as part of the sale or through a
share of the laboratory’s gross revenues. Payments in consideration of the assignment that should
have been paid to the hospital were paid directly to the two doctors. The doctors performed no
services for the laboratory. The Tax Court held that the arrangement resulted in an inurement of the
hospital's charitable assets to the two doctors.

In Anclote Psychiatric Ctr. v. Commissioner, T.C. Memo 1998-273 (1998), an organization's
board of directors caused the organization to sell its largest asset — a hospital — to a for-profit entity
formed by the directors. The board of directors obtained an independent appraisal of the hospital and
hired independent counsel to represent the organization. The closing, however, occurred almost two
years after the appraisal. The parties failed to make adjustments to the values established in the
appraisal. The Tax Court determined that the purchase price received by the organization on the sale
of the hospital was not within a reasonable range of what could be considered fair market value.
Accordingly, the Tax Court held that the sale transaction resulted in inurement within the meaning of
§501(c)(3).

The provision of inurement can be direct or indirect. In Anclote Psychiatric Ctr., supra, the sale
transaction giving rise to the inurement was between an exempt organization and a for-profit
corporation formed by the organization’s directors. Although the for-profit corporation was the direct
beneficiary of the below-market sale transaction, the Tax Court held that the transaction resulted in
“an advantage” to the shareholders of the for-profit corporation and that this “advantage” constituted
inurement of the organization’s charitable assets to the shareholders.

Form 886-A (1-1994) Page 14 of 19 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)
Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

12/31/20XX, 20XX and 20XX

In Church by Mail, Inc. v. Commissioner, 765 F.2d 1387 (9th Cir. 1985), the Ninth Circuit
treated as inurement compensation paid by a controlled entity to the organization’s insiders. In
Church by Mail, two individuals, Reverend Ewing and Reverend McElrath, ran a church that mailed
printed sermons to several million homes. They also owned a for-profit advertising agency which
provided the Church's printing and mailing services. The Ninth Circuit found that the combined
compensation paid to Reverend Ewing and Reverend McElrath by the Church and the advertising
agency was excessive. The Ninth Circuit rejected the Church's argument that the portion of the
compensation paid by the advertising agency should not be included in the determination of
reasonableness and treated this portion as indirect inurement of the Church’s earnings to the
Church’s insiders. Id. The Ninth Circuit based its conclusion on the following legal principle: “[W]hen
a second organization is created which serves to funnel income to the individual who controls the
purportedly exempt organization and the income exceeds a reasonable salary, the income inures to
the benefit of a private person within the meaning of I.R.C. section 501(c)(3).” Id.

Indirect inurement can occur even if the organization’s insiders are not formally in control of the
intermediary used to funnel the funds from the organization to the insiders. In Church of Scientology
of California v. Commissioner, 823 F.2d 1310, 1315 (9th Cir. 1987), the organization transferred in
excess of $ 3.5 million to a for-profit corporation incorporated by the organization’s founder and his
wife. The directors of the corporation were high-ranking members of the Church of Scientology. At
the time of the transfer, the founder and his wife were not directors, officers or employees of the
corporation. The founder was no longer serving as the head of the church but continued to exert
significant control over the church by making policy statements, directives and orders. 823 F.2d at
1314. In particular, his approval was required for all financial planning. Id. The directors of the
corporation approved the founder’s decision to transfer $ 2 million from the corporation’s account to
the ship Apollo aboard which the founder and his family lived. The Ninth Circuit held that the
organization’s funds funneled through the corporation constituted inurement to the founder and his
family. 823 F.2d at 1318.

The prohibition on inurement in the Code §501(c)(3) is absolute. The Service has the authority
to revoke an organization’s exempt status for inurement regardless of the amount of inurement. See
Spokane Motorcycle Club v. U.S., 222 F.Supp. 151 (E.D. Wash. 1963); The Founding Church of
Scientology, 412 F.2d 1197, 1202; Airlie Foundation, 283 F. Supp. 2d 58. Moreover, for purposes of
establishing that inurement occurred, it is not necessary to calculate the precise amount of inurement
as long as it is shown that the value of the transfer giving rise to inurement is not within a reasonable
range of what could be considered fair market value. See Anclote Psychiatric Ctr. v. Commissioner,
T.C. Memo 1998-273.

Record Keeping Requirement

The Code § 6001 states, “Every person liable for any tax imposed by this title, or for the
collection thereof, shall keep such records, render such statements, make such returns, and comply
with such rules and regulations as the Secretary may from time to time prescribe. Whenever in the

Form 886-A (1-1994) Page 15 of 19 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)
Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

12/31/20XX, 20XX and 20XX

judgment of the Secretary it is necessary, he may require any person, by notice served upon such
person or by regulations, to make such returns, render such statements, or keep such records, as the
Secretary deems sufficient to show whether or not such person is liable for tax under this title.”

The Code §6033(a)(1) states, “In general. ... every organization exempt from taxation under
section 501(a) shall file an annual return, stating specifically the items of gross income, receipts, and
disbursements, and such other information for the purpose of carrying out the internal revenue laws
as the Secretary may by forms or regulations prescribe, and shall keep such records, render under
oath such statements, make such other returns, and comply with such rules and regulations as the
Secretary may from time to time prescribe...”

The Regulation §1.6001-1(a) states, “In general. ... any person required to file a return of
information with respect to income, shall keep such permanent books of account or records, including
inventories, as are sufficient to establish the amount of gross income, deductions, credits, or other
matters required to be shown by such person in any return of such tax or information.”

The Regulation §1.6001-1(c) states, “Exempt organizations. —In addition to such permanent
books and records as are required by paragraph (a) of this section with respect to the tax imposed by
section 511 on unrelated business income of certain exempt organizations, every organization
exempt from tax under section 501(a) shall keep such permanent books of account or records,
including inventories, as are sufficient to show specifically the items of gross income, receipts and
disbursements. Such organizations shall also keep such books and records as are required to
substantiate the information required by section 6033.”

The Regulations §1.6001-1(e) states, “Retention of records. —The books or records required
by this section shall be kept at all times available for inspection by authorized internal revenue officers
or employees, and shall be retained so long as the contents thereof may become material in the
administration of any internal revenue law.”

The Revenue Ruling 59-95, 1959-1 CB 627, (Jan. 01, 1959) states, “An organization
previously held exempt from Federal income tax was requested to produce a financial statement as of
the end of the year and a statement of its operations during such year. However, its records were so
incomplete that it was unable to furnish such statements. ... Held, failure or inability to file the
required information return or otherwise to comply with the provision of section 6033 of the Code and
the regulations which implement it, may result in the termination of the exempt status of an
organization previously held exempt, on the grounds that the organization has not established that it
is observing the conditions required for the continuation of an exempt status.”

Effective date of revocation
The Regulation §1.501(a)-1(a)(2) states “Subject only to the Commissioner's inherent power to

revoke rulings because of a change in the law or regulations or for other good cause... an
organization that has been determined by the Commissioner or the district director to be exempt

Form 886-A (1-1994) Page 16 of 19 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)

Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

12/31/20XX, 20XX and 20XX

under section 501(a) or the corresponding provision of prior law may rely upon such determination so
long as there are no substantial changes in the organization's character, purposes, or methods of
operation.”

The Regulation §601.201(n)(3)(ii) states a “ruling or determination letter recognizing exemption
may not be relied upon if there is a material change inconsistent with exemption in the character, the
purpose, or the method of operation of the organization.”

The Regulation §601.201(n)(6)(i) states “[a]n exemption ruling or determination letter may be
revoked or modified by a ruling or determination letter addressed to the organization... The revocation
or modification may be retroactive if the organization omitted or misstated a material fact, operated in
a manner materially different from that originally represented...”

GOVERNMENT POSITION

Issue 1 — Operational Test

In order for an organization to retain its exempt status it must demonstrate to the Service that it
meets both the organizational and the operational tests. The facts stated above indicate that
failed the operational test.

Charitable purposes include relief of the poor and distressed, the Regulation §1.501(c)(3)-
1(d)(2). rental activity and selling of real properties in the manner described above
doesn’t address the needs of low-income people. In fact, the rental activity and the selling of real
properties were operated in a manner no different than other business entities that are engaging in
such activities in a commercial manner.

The rental rate was the same regardless of whether a tenant receives rental assistance from
government agencies. In fact, required the tenant to pay the difference if the rental
assistance amount was less than the rental rate. The government agency did not require the
landlord to be an exempt organization.

In 20XX also sold 2 properties. Fixing and selling properties at market rate
doesn’t constitute assisting low-income families. Therefore, the activities as described above did not
meet the operational test as described under §1.501(c)(3)-1(c) of the Regulation.

has bylaws but chooses not to comply with them. It held the annual board
member meetings in December instead of February. It made no elections during the annual
meetings. It did not discuss and/or approve many of the significant matters that took place during the
years. These actions represent disregarding its own rules and regulations, which in turn
indicates that did not meet the operational test as described under §1.501(c)(3)-1(c) of
the Regulation.

Form 886-A (1-1994) Page 17 of 19 Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)

Name of Organization/Taxpayer Tax Identification Number | Year/Period ended

12/31/20XX, 20XX and 20XX

Issue 2 — Net Earnings Inuring to the Benefit of Officers and Directors

was an Officer of

was the spouse of , the operating director of
. More than insubstantial amount of each of the entities utilizing street and PO
Box addresses are/were owned by and Therefore,

and all entities they own/owned are private shareholders or
individuals within the meaning of the Regulation §1.501(a)-1(c).

Issue 2, Category 1 — Office space and staffs utilized by related entities

allowed , and entities they own/owned to
utilize its staffs, supplies, and office space, without any reimbursements. Such usage was not
approved by the board members. Therefore, such usage inured to the benefit of
; and entities they own/owned, and represented an act prohibited by
the Code §501(c)(3).

Issue 2, Category 2 — Health Insurance for the Family

During the years 20XX and 20XX, paid for the health insurance of
family, which was not approved by the board of directors. Therefore these payments
constituted net earnings inuring to the benefits of , and represented an act
prohibited by the Code §501(c)(3).

Issue 2, Category 3 — Properties transferred out of

Any transactions between an exempt organization and another party should be at market rate
or below market rate to the benefit of the exempt organization. If a transaction is below market rate
but the party being short-changed is the exempt organization, then the transaction constitutes misuse
of exempt organization’s funds.

Since 20XX, transferred several properties to . The monetary
considerations were limited to the amount of outstanding loans. These transfers were not approved
by the board members of . Therefore these transfers constituted net earnings inuring to the
benefits of , and represented an act prohibited by the Code §501(c)(3).

Issue 2, Overall

The records indicate there were substantial net earnings inuring to the benefits of private
shareholders and individuals going as far back as 20XX year. There was no oversight by a

disinterested board. The individuals in charge of utilized as if it was another
for profit business under their control. No segregation of duties, funds, or authorities observed.
Accordingly, the exemption status of should be revoked due to its net earnings inured to

Form 886-A (1-1994) Page 18 of 19 Department of the Treasury-Internal Revenue Service

Form 886-A EXPLANATION OF ITEMS

(Rev. January 1994)
Name of Organization/Taxpayer Tax identification Number | Year/Period ended

12/31/20XX, 20XX and 20XX

the benefit of these private shareholders and individuals within the meaning of the Regulation
§1.501(c)(3)-1(c)(2).

Schedule number or exhibit

Issue 3 — Record Keeping Requirement

Through out the examination, was unwilling or unable to produce the records

necessary to support and substantiate the financial information reported on the annual returns it filed.
The records it managed to provide did not match one another in several instances. Accordingly,
failed to comply with requirements under the Code §§ 6001 and 6033 and the Regulations
thereunder.

TAXPAYER POSITION
agreed and terminated its operation in August 20XX. transferred
the three properties at , and and the cash balance of $0 to an unrelated

organization exempt under IRC § 501(c)(3).

CONCLUSION

Based on the information secured during the examination, we conclude that is not
operated for exempt purposes under §501(c)(3) of the Code. An organization can not be recognized
as exempt under §501(c)(3) unless it shows that it is operated exclusively for charitable, education, or
other exempt purposes and its net earnings does not inure to the benefit of any private shareholder or
individual. Among other things, activities must demonstrate conclusively that it meets the
operational test of §1.501(c)(3)-1(c) of the Regulation. The activities show that the primary purpose is
renting properties out to general public that does not exclusively serve a purpose described in
§501(c)(3) of the Code. It also engaged in many transactions enabling its net revenues to benefit

and , the private shareholders or individuals of . Therefore,
the exempt status granted to should be revoked effective from January 01, 20XX in
accordance with the Regulation §601.201(n)(6)(i).

Form 886-A (1-1994) Page 19 of 19 Department of the Treasury-Internal Revenue Service