Entrepreneur support organization revoked for commercial lead referrals and insider benefits

View official IRS release (PDF)

Plain-English summary

A tax-exempt organization said it would support entrepreneurs through an online community, outreach, education, and grants. The examination found that its major activity was charging prospective business advisers for a three-day training and certification program, then providing business leads and arranging introductory meetings. The IRS also found that the organization paid companies owned by current or former officers and their spouses, treated recurring officer advances as loans even though they lacked ordinary repayment features, and used a credit card for personal expenses. The IRS concluded that the organization operated in a commercial manner, served substantial private interests, and allowed earnings to benefit insiders. It revoked the organization’s section 501(c)(3) status, made contributions nondeductible under section 170, and required corporate income tax returns.

Ruling snapshot

• Question: Did an entrepreneur-support organization remain qualified under section 501(c)(3) when it sold training and business leads, paid insider-owned companies, and made personal credit-card purchases?
• Outcome: Revocation
• Key authorities: IRC §§ 162, 274, and 501(c)(3); Treas. Reg. §§ 1.162-1 and 1.501(c)(3)-1; Rev. Rul. 67-5

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Appeals Office

Employer Identification Number:
Release Number: 201511023
Release Date: 3/13/2015 Person to Contact:

Date: December 17, 2014
Employee ID Number:

Tel:
Fax:
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”). It is determined that you do not qualify as exempt from Federal income tax
under section 501(c)(3) of the Code effective xxxxxx.

Our revocation was made for the following reason(s):

You are not operated exclusively for exempt purposes as specified in section 501(c)(3) of the
Code because you are not engaged primarily in activities which accomplish an exempt purpose.
A substantial part of your activities serve commercial and private interests. Private interests
served include direct benefits to the Trustees and their for-profit companies.

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,

[illegible]

Appeals Team Manager

Enclosure: Publication 892 and/or 556

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

Date:

Taxpayer Identification Number:

Form:
990 EZ Return
Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:
Manager’s name/ID number:

Manager’s contact number:

Response due date:

Certified Mail - Return Receipt Requested

Dear ;

Why you are receiving this letter

We propose to revoke your status as an organization described in section 501(c)(3) of the

Internal Revenue Code (Code). Enclosed is our report of examination explaining the
proposed action.

What you need to do if you agree

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

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

If we don't hear from you

If you don’t respond to this Proposal within 30 calendar days from the date of this letter,
we'll issue a final revocation letter. Failing to respond to this proposal will adversely impact

your legal standing to seek a declaratory judgment because you failed to exhaust your
administrative remedies.

Effect of revocation status

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

What you need to do if you disagree with the proposed revocation

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

If you disagree with our proposed revocation, you may request a meeting or telephone
“conference with the supervisor of the IRS contact identified in the heading of this letter. You
also may file a protest with the IRS Appeals office by submitting a written request to the
contact person at the address listed above within 30 calendar days from the date of this
letter.

The Appeals office is independent of the Exempt Organizations division and resolves most
disputes informally.

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

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

Contacting the Taxpayer Advocate Office is a taxpayer right

You have the right to contact the office of the Taxpayer Advocate. Their assistance isn’t a
substitute for established IRS procedures, such as the formal appeals process. The Taxpayer
Advocate can't reverse a legally correct tax determination or extend the time you have
(fixed by law) to file a petition in a United States court. They can, however, see that a tax
matter that hasn't been resolved through normal channels gets prompt and proper

handling. You may call toll-free 1-877-777-4778 and ask for Taxpayer Advocate assistance.
If you prefer, you may contact your local Taxpayer Advocate at:

Internal Revenue Service
Office of the Taxpayer Advocate

For additional information

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

Thank you for your cooperation.

Sincerely,

Director, EO Examinations

Enclosures:
Report of Examination

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

Form 6018
Publication 892
Publication 3498

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

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX
Year/Period Ended
XXXXXXXXXXXX
XXXXXXXXXXXK

Name of Taxpayer
XXXXXXXXXXXXXXXKAXXXXKKKKXXXXXXKKXXXXXXXKKKKAXXXXXKKKK

Revised November 14, xx

ISSUES

1. Is money given to the XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX by its officers loans or gross
   income?

2. Do contracts between *« and its officers constitute substantial private benefit?

3. Do purchases made with the organization’s Credit card and payments to xxxxxx constitute
   inurement?

4. Should the tax-exempt status, under Internal Revenue Code section 501(c)(3), of XXXXXXXXXXXX

XXXXXXXXXXXXXXXXXXXXXXXX be revoked for failing to operate as an organization exempt under the
aforementioned code section?

FACTS

I Organizational Structure

A. Articles of Incorporation

e Item 1 of the articles of Incorporations for the XxXXxXXXXXXXXXXXXXXXXXXXXX
XXXXXX states its purpose as organized exclusively for charitable and educational
purposes within the meaning of Section 501(c)(3) of the Internal Revenue code.

e Item 3 of the articles state “No part of the net earnings of the corporation shall inure to
the benefit of, or be distributable to its members, trustees, officers or other private
persons, except the corporation shall be authorized and empowered to pay reasonable
compensation for services rendered and to make payments and distributions in
furtherance of the purposes set forth in Item 3 (and Article 1) of this filing.”

e Item 3 also states “Notwithstanding any other provision in this filing, the corporation
shall not carry on any other activities not permitted to be carried on (a) by a corporation
exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code,
or the corresponding section of any future federal tax code, or (b) by a corporation,
contributions to which are deductible under section 170(c)(2) of the Internal Revenue
Code, or the corresponding section of any future federal tax code.

B. By Laws
e The organization provided the lasted revision to its by laws dated xxxxXXXXXXXX
(previous revisions were dated XXxXxxXXXXXXXXX _, and XXXXXX ).

e Article 2, Section 2 lists specific objectives and purposes as:

1. To identify entrepreneurial companies and bring them aid and support that they
   need, targeted to their businesses.

2. To solicit the help and support of the large business community.

3. To assist entrepreneurial businesses in obtaining financial aid.

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

Page: -1-

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX
Year/Period Ended
XXXXXXXXXXKXK
XXXXXXXKXXXXXK

Name of Taxpayer
XXXXXXAXXXXXXXXXXXXXXXXXXXXXXXXXXXKXXKKXXXXXXKKXKXXXAXKK

4. To offer educational and training programs that aid the entrepreneurial community
   as well as those servicing them.

5. To partner with educators and educational institutions for the improvement of
   entrepreneurial skills and knowledge.

6. To partner with business executives and advisors to bring their business skills and
   acumen to the entrepreneurial community for the betterment of all.

Article 4, Section 1 states “the officers of the corporation shall be a president, vice-
president, a secretary, and a treasurer. The corporation may also have a chairperson of
the board, one or more vice-presidents, assistant secretaries, assistant treasurers, and
other such officers with such titles as may be determined from time to time by the
board.”

II Projected Operations

Form 1023
e On Part V of form 1023, ~~ lists the officers of the organization as:

XXXXXXXXXXXX -President, Trustee
XXXXXXXXXXXXXXXXXX- Secretary, Trustee
XXXXXXXXXXXX - Treasurer, Trustee
XXXXXXXXXXXX - Trustee

XXXXXXXXXXXX - Trustee

e In response to question 3b, Part V of Form 1023, »«« states, “The five trustees jointly
own and operate several other companies. Each of the jointly owned companies are
supporters of «x, which mean a portion of their fees earned are donated on behalf of
their individual customers to »~ in support of x mission and programs.”

e In response to Part IV of Form 1023, ~~ lists its purpose as the following:

1. To identify entrepreneurial companies and bring them the aid and support that
   they need, targeted to their businesses.

2. To solicit the help and support of the large business community (e.g. Fortune
   500) in supporting the entrepreneurial community.

3. To assist entrepreneurial businesses in obtaining financial aid.

4. To offer educational and training programs that aid the entrepreneurial
   community as well as those servicing them.

5. To partner with educators and educational institutions for the improvement of
   entrepreneurial skills and knowledge.

6. To partner with business executives and advisors to bring their business skills
   and acumen to the entrepreneurial community for the betterment of all.

e Also in response to Part IV of Form 1023, »~« lists its specific activities as follows:

1. xxxxCommunity (40% time and effort)
   “xooox provides an online community for entrepreneurs and professionals who
   specialize in helping entrepreneurs. The community provides a welcoming and
   collegial environment wherein entrepreneurs can find information, guidance,
   advice, tools and access to financing and support services.”

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

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX

Year/Period Ended
XXXXXXXXXKKX
XXXXXXXXXXXX

Name of Taxpayer
XXXXXXXXXXXXKXXXXXXXKKXKXXXXXXXKKXKXXXXXKXXXXXXXXXXXXKKKK

2. Outreach Programs (45% of time and effort)
   A program where «« coordinates and sponsors outreach programs to enable
   such things as networking. “« seeks out local co-sponsors and experts, who
   are willing to lead programs, make presentations, provide meeting facilities,
   supply resource material and contribute time to assist in making the outreach
   programs a success.

3. Recognition and Grant Programs (15% time and effort)
   A program that gives grants and awards to qualified entrepreneurs and
   entrepreneurial organizations.

In response to a letter from Xxxxxx of IRS Determinations requesting

. more information, **« states, “As the recognition and grant programs grow,
x0xoxx will add a part-time administrator to manage the application and
reporting processes, and to coordinate award events.”

e In reference to Part V, line 2b, x«oxstates “KXXXXXXXXXXXXXXXXXXXXXXXXXXXXK
XXXXXX has business relationships with its officers/trustees in that each trustee
(XXXXXXXXXXXXXXXXXXXXXXXXXKXKXXKKXAKXKXXXKXKXKXKXKX , and XXXXXX ) has made a
$Xxxxxx loan to xo (at 0% interest) to help fund» startup and development costs,
as identified in Part IXB, page 10 of Form 1023, line 14.”

e Enclosure C provided by «x in response to a letter dated xXXXXXXXXXXX__ from XXXXXX
XXxxxx, provided five promissory notes for $xxxxxx each. All were dated XxxXXXXXXXXXX
and signed by each officer (XxXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXAKX
XXXXXX and XXXXXXXXXXXX_ _ )

¢ In response to inquiry from xxxxxx —_, dated XXxxXXXXXXXxx requesting additional
information for Part V, line 8e, ~~ stated the following, “For agreement with any
contractor, vendor or supplier, project cost quotes and/or hourly rates are submitted in
advance, so that rates and costs can be checked against alternate quotes and market
rate surveys to confirm that fair prices are being paid by ox,”

e In response to inquiry from xxxxxx dated XXXXXXXXXXXX , x states “The revenue
listed in line 7 is for membership and access fees to the »»«« Community. These fees are
listed in Line 7 rather than line 2 because membership is for the »« community and
not for «x, itself. Each person will contribute $9% for community membership and for
access to the community services, tools and information.” They list projected revenues

as follows:
Year XXXXXX XXXXXK XXXXXX Total
Number of Members R88 Peres Booox ooo
Fee/Member $ wer 1S per $ ocd ORG
Total, Line 7 $ XXXXXX_| $ XXXXXX | $ XXXXXX_ | $ _XXXXXX
e In response to inquiry from xxxxxx dated XxxXXXXXXXXX , x provides a

breakdown for Part IX, line 15 of Form 1023 as follows:

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

Page: -3-

Form 886A Department of the Treasury - Internal Revenue Service EIN:

Explanation of Items XXXXXX
Name of Taxpayer Year/Period Ended
XXXXXXXXXXXXXXXXXXXXKKKKKKKKKKKKKKKKKKAKKAKKKKKKKKKKKKKK XXXXXXXXXKAK
XXXXXXXXXXXX
Year XXXXXX XXXXXX XXXXXX
Application Grants $ XXXXXX $ XXXXXX $ XXXXXX
Non-Profit Organization Grants $ XXXXXX $ XXXXXX $ _XXXXXX
Total] $ XXXXXX $ XXXXXX $ XXXXXX

III Actual Operations

A. Revenues

@ XXXXXX Operations are inconsistent with the information provided on Form 1023, »«««
does not get income from the community as it stated in its application. Based on
interview with xxxxxx treasurer, XXXXXXXXXXXX, and the examination findings, the agent
learned xxxxxx major operation is what they call an « certification and training
program. As part of this program, *~« charges prospective business advisors or
consultants $xxxxxx for what they call “certification by the organization.” “«« states this
certification is important to ensure their “advisors” administer help to entrepreneurs in a
manner consistent with their teachings. However, the agent learned this statement is
false. The advisors are paying for business leads.

e In xox, x0 received the following payments for participants in the *«%« program:

Name Payment
XXXXXX__XXXXXX $ XXXXXX
XXXXXX $ XXXXXX
XXXXXXXXXXXX $ XXXXXX
XXXXXX $ XXXXXX
XXXXXXXXXXXX $ XXXXXX
XXXXXX $ XXXXXX
XXXXXXXXXXXX $ XXXXXX
XXXXXXXXXXXX $ XXXXXX
IXXXXXXXXXXXX $ _XXXXXX

Total $ XxXxxxx

xxxxxx is not receiving revenue from fees charged to the *~« community as stated in Form
1023, but instead is receiving 73% of its revenue from this «xxx program.

B. Expenses
xxxxxx contracted with businesses owned by current and former trustees or their spouses

(XXXXXX is the wife of xxxxxx , President of ox), xxxxxx is a trustee of
vox in CHK). The agent submitted IDR #6 and IDR #7 to *~« specifically asking for

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

Page: -4-

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX
Name of Taxpayer Year/Period Ended
XXXXXXXXXXXXXXXKXXKKXKKKKKKKKKKKKKKKKKKKKKKKKKKKKKAKKAK XXXXXXXXXXXK
| XXXXXXXXXXXX

their association with these businesses to which they refused to respond. The agent
secured documents from the Secretary of State proving the following ownership:

Business Type Principal
Domestic Limited Liability Company XXxXxXxx

Business Name
XOXXKXXXXXXKXKKK Xx

XXXXXX XXXXXX Foreign Profit Corporations XXXXXX

XXXXXX Foreign Profit Corporations XXXXXX
XXXXXXXXXXXXXXXXXX Domestic Limited Liability Company XXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXKXXXX Domestic Limited Liability Company XXXXXXXXXXXXXXXXXX

XXXXKXKXXXXKXKXXKXXXXXXXXKXXKXKKXKXKKK Foreign Profit Corporations XXXXXXXXXXXXXXXXXK

xox paid the following to the above businesses in xox and ~coox respectively:

Payee Amount Date Check Number
XXXXXXXXXXXXXXXXKX O00 XXXXXX - XXXXXX XXXXKX
XXXXXXXXXXXXXXXXKX OO XXXXXX - XXXXXX YOOX
XXXXXXXXXXXXXXXXKX 000% XXXXXX - XXXXXX 2000
XXXXXXXXXXXXXXXAXXX 19000% XXXXXX - XXXXXX 20000
XXXXXXXXXXXXXXXKXX 000% XXXXXX - XXXXXX XXHKKK
XXXXXXXXXXXXXXXXXX 000% XXXXXX - XXXXXX 20000
XXXXXXXXXXXXXXXXXX WOOK XXXXKX -- XXXAXXX HXXAK
XXXXXXXXXXXXXXXXKX 000K XXXXXX XXXXXX YOOX
XXXXXXXXAXXXXXXXXX 000% XXXXXX - XXXXXX 10000
XXXXXXXAXXXXXXXXKKX 000% XXXXXX - XXXXXX XX00OXK
XXXXXXXXXXXXXXXXXX 000K XXXXXX XXXXXX OOK
XXXXXXXXXXXXXXXKKX 000% XXXXXX - XXXXXX HOOK
XXXXXXAXXXXXXXXAXKX 000% XXXXXX - XXXXXX XIOOKK
XXXXXXXXXXXXXXAXXK 10000 XXXXXX — XXXXXX HXKXKK
XXXXXXXXXXXXXXXXXX 000K XXXXXX - XXXXXX 220000
XXXXXXXXXXXXXAXKXX 000% XXXXXX XXXXXX 20000
XXXXXXXXXXXXXXXXXK 000% XXXXXX _ XXXXXX 200K
XXXXXXXXXXXXAXXXXX HOH XXXXXX - XXXXXX 200000
XXXXXXXXXXXXXXXXAXX 000% XXXXXX _ XXXXXX “x00
XXXXXXXXXXXXXXXKXX 000% XXXXXX XXXXXX X00
XXXXXXKXXXXXXAXXXX 900% XXXXXX _ XXXXXX 220000
XXXXXXXXXXXXXXKKXX 000% XXXXXX__ XXXXXX 200000
OOK
Payee Amount Date Check Number
XXXXXX Beek XXXXXX — XXXXXX HOOK
XXXXXX Soak XXXXXX — XXXXXX XXXXKX
XXXXXX Box XXXXXX —- XXXXXX YXXKKX
XXXXXX Bo XXXXXX —- XXXXXX HOOK
XXXXXX 808k XXXXXX — XXXXXX YXXXXX
XXXXXX Beeee_XXXXXX__ XXXXXX YOOX

WoovarXXXXX

Form 886-A(Rev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -5-

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX
Name of Taxpayer / Year/Period Ended
XXXXXXXXXXXXXXKKKKKKKKKXXXXXKKKKKKKKXXXKXKKKAKKXXXXKAKKKKXXK XXXXXXXXXXAK
XXXXXXXXXXXX
Payee Amount Date Check Number
XXXXXXXXXXXXXXXXXX SEX XXXXX XXXXXX XXXXXX
bis), 0. 0.0.0.0.
Payee Amount Date Check Number
XXXXXXXXXKXXXXKXXKXX HOOK XXXXXK XXXXXX 2000
XXXXXXXXXXXXXXXXXX YOOOKKX XXXXXKK XXXXXXK XOX
XXXXXXXXKXXXXXKXXAXX HOOOKX XX XXXX XXXXXX HOOK
XXXXXXXXXXXXXXXKXXXK YROKKX KKXXXXK XXXXXX POOOKKK
XXKXXXXKXXXAXKXAXKKXKK YRKXXX — XXXXXX XXXXXX XOOOOK
XXXXXXXXXXXXXKXXKAXX YHOKK XXXXXX XXXXXX XOX
XXXXXXXXXXXKXXXXXXX YHOOOK KX XXKXXK XXXXXX OOO
XXXXXXXXXXXKKXXKKKK YOOKK KXXKXK XXXXXX OOOKK
XXXXXXXXXXXXXKXXKXXK XOOKK — KXXXXX XXXXXX OOK
XXXXXXXXXXXXXXXXXX OOKK XXXXXK XXXXXX OOK
XXXXXXXXXXXXXXXXKX HOOK KXXXXX XXXXXX XXOKXK
XXXXXXXXXXXKXXXKXXKXX WOOK XXXXXK XXXXXX 2OOOKK
XXXXXKXXXXXXKXXKXAXXK HOOK XXXXXXK XXXXXXK XOOKKKK
XXXXXXXXXXKXKXXXXKXXX XXX XXXXXX XXXXXX XO00K
XXXXXXXXXXXXXXXKXX HOHKKK KXXXXK XXXXXX XOOOKK
XXXXXXXXXXXXXXXKXK YORK XXXXXK XXXXXX OOK
XXXXXXXXXXXXXXXXXX WOORKKK — XXXXXXK XXXXXX OOO
XXXXXXXXXKXXXKXXXXXX s000KK XXXXXX XXXXXX XROOOK
XXXXXXXXXXXKXXXKXXKX XXOOKK XXXXXXK XXXXXX XXXXXK
XXXXXXXXXXXXXXXXKX XOOKX — XXXXXX XXXXXX XOX
XXXXXXXXXXXXXXXXXX YOOX KXXXKX XXXXXXK XOOKXX
XXXXXXXXXXXXXXXXXX YOWKK _ KXXXXXK XXXXXXK XXKXXK
XXXXXXXXXXXKXXKKXXK XOOKK KX XKXKK XXXXXX XOX
XXXXXXXXXXXXXXXXXXK XOX XXXXXXK XXXXXX XOOOK
XXXXXXKXXXXXXXXXXXXK 20000 XXXXXX XXXXKXX XOOKKXK
XXXXXKXXXXXXXXXKAXKK YOK XXXXXK XXXXXX OOK
XXXXXXXKXXXRXXXKX KKK YOOX XXXXXXK XXXXXX HOOK
XXXXXXXXXXAXKXKXKXKKK YOK XXXXXX XXXXXX OCOOXK
XXXXXXXXXXXKXXKAXXKK YOOX XXXXXX XXXXXX POOXKKK
XXXXXXXXXXXXXXKXXKK YRKOK XX XXXK XXXXXX WOOK
XXXXXKKXXXXKKXXXKX KKK HHOAK XXXXKX XXXXXX OOKKK
XXXXXXXKXXXXKXXXXXAXK XOX XXXXXX XXXXXX YOOOOK
XXKKXKKXXXXXKXXKXK KKK HOAX KXKXXXK XXXXXX NOOK
XXXXXXXXXXXKXKXAXAXAXX 200K XXXXXXK XXXXXXK OOOO
XXXXXXXKXXXXKAXKKKAK OW0OK XXXXXX XXXXXX YOOKKX
XXXXXXXKXXKXKKXKKK KKK HOOK XXXKKK XXXXXX OOK
XXXXXXXKXXXXXAKXXXAXKX YOOOKX -XXXXXK XXXXXX ROOK
XOOOXK XX KKK

Form 886-A(Rev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -6-

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX
Name of Taxpayer Year/Period Ended
XXXXXXXXXXXXXXXXKXKXKXXKXXXKKKXKKAKKAXXXXXKAKAKXAXXXXXKKAKKXKX XXXXKKXXXAAK
XXXXXXXXXXXX
Payee Amount Date Check Number
XXXXXXXXXXXXXXXXXX Bee XXXXXX XXXXXX XOOK
XXXXXXXXXXXXXXXXXX woo XXXXXX XXXXXX XXXXXX
XXXXXXXXXXXXXXXXXX wer = XXXXXX XXXXXX XXXXXX
XXXXXXXXXXXXXXXXXX weet, = XXXXXX XXXXXX XOOOKK
XXXXXXXXXXXXXXXXKX wees XXXXXX XXXXXX HOOK
XXXXXXXXXXXXXXXXXX S388. XXXXXX XXXXXX XXXXXX
XXXXXXXXXXXXXXXXXX poor = XXXXXX XXXXXX XXXXXX
XXXXXXXXXXXXXXXXXX Box = XXXXXX XXXXXX XXOOK
XXXXXXXXXXXXXXXXXX woe = XXXXXX —- XXXXXX XXXOK
XXXXXXXXXXXXXXXXXX eoex. = XXXXXX —- XXXXXX XXXXXX
XXXXXXXXXXXXXXXXXX 88% XXXXXX XXXXXX XXXXXX
XXXXXXXXXXXXXXXXXX Boe XXXXXX XXXXXX XXXKKX
XXXXXXXXXXXXXXXXXX Bo XXXXXX XXXXXX XXXAXK
pea XXXXXX
Payee Amount Date Check Number
XXXXXXXXXXXX woomx — XXXXXX XXXXXX YOOX
XXXXXXXXXXXX wooo XXXXXX XXXXXX XXX
XXXXXXXXXXXX SBR XXXXXX XXXXXX XXXXXX
XXXXXXXXXXXX woo XXXXXX XXXXXX XXXXXX
XXXXXXXXXXXX wooex — XXXXXX XXXXXX YOOX
XXXXXXXXXXXX wore XXXXXX XXXXXX X00
XXXXXXXXXXXX Boek = XXXXXX XXXXXX XOOKX
XXXXXXXXXXXX BIRR XXXXXX XXXXXX YOOKKAX
XXXXXXXXXXXX poor XXXXXKX —- XXXXXX XXXXXX
XXXXXXXXXXXX Seppo XXXXXX XXXXXX XXXXXX
Soe XXXXXX
Payee Amount Date Check Number
XXXXXXXXXXXXXXXXXX BEG XXXXXX XXXXXX XXXXXX
BBE XXXXXX
Payee Amount Date Check Number
XXXXXKXXXXXXKX Smo, | XKXXXK XXXXXX XXXKKX
XXXXXKXKXXKXK Sook = XXXXXX XXXXXX XXXXXK
XXXXXXXXXXXX ORR XXXXXX XXXXXX XXKXXX
XXXXXXXXXXXX SORE XXXXXX XXXXXX XXXXXX
XXXXXXXXXXXX Seon «= XXXXXX XXXXXX XXXXXK
XXXXXXXXXXXX wom XXXXXX XXXXXX XXX
XXXXXXXXXXXX woe XXXXXX XXXXXX XXXXXX
ooo XXXXXXK
Payee Amount Date Check Number
XXXXXX OK XXXXXX XXXXXX XXXXXX
XXXXXX S808 «= XXXXXX XXXXXX XOQOOK
XXXXXX Sooo XXXXXX XXXXXX XXXXXK
S00 XXXXXX

The percentage of xxxxxx expenses and revenues paid to these businesses are as follows:

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

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX
Name of Taxpayer Year/Period Ended
XXXXXXXXXXXXXXXXKKKKXXXXXXXXXKKAKKKXKKXXKKKKKKKXXXKXKKKKAK XXXXXXXXAKAX
XXXXXXXXXKXK
Yo ot Total Yo of Total
XXXXXX XXXXXX % of Total Expense- % of Total Expense- Revenues- Revenues-
Payee Payments Payments XXXXXK XXXXXX XXXXXK XOX
XXXKXAXXXXXXXXXXXXX XXOOK XXXXXX XOX XXXXXX 200K 200K YOOX OOK
XXXXXXXXXXXXXXXXXXXXXX XX OOKK — XXXXXX 200K — XXXXXX YOOX XXX 200000 Eo
XXXXXX HOOKX XXXXXX XOOKX - XXXXXX XOOKKX XXXXXX 000K KOON
XXXXXXXXXXXX, YOK —XXXXXX —« HHWHK_—XXXXXX 200K 20000 700000 Tx
XXXXXXXXXXKX WOOOKK YOOKK OOK XXXXXX XOXKKX, KKK XXOOOKK Wisin
XXXXXXXXXXXXXXXXKX XXXXKX YXXKKX 100000K XXXXXX OOK YOOX OOK Sox
XXXXXKXXXXXXXKXXXKXXX YOOKX HOOK HOOOKK XX XKXK YOOX YOOX YKXXKX WTKKX
XXXXXKX— AKAKKK KKXKXKK XOOKX KXKXKXXKK XXOOK OOK XXXXXX XO
C. Loans
¢ The treasurer of ox states, the organization received loans from its officers in the
following amounts:
ACCUrET TNtETEST TNVEFEST
xooux Loan Value- Additional Interest Value-xoox Additional Accrued Value-End Interest Accured Interest Value-End
Name Amount End xxxxxx Loans XXXXKX 2008 Loans xxxxxx XXXKXXX XXKAKX Rate XOX Donated XXKKKX
IXXXXXXXXXXXX XXRORKXXXX XXXOOKIOK XXXIOKK OK KROKK XOOOKK XOUCOOX WOKKK OOK XXOOKKXXXK —- WOCOOOK IKK YOOXKKK OOO XXXXK XXOOOOKKKXAK
XXXXAXXXAXKKAK OOOORKXKKX MOOOCORIXK KOO IKK KOO YOOKXKK YOOXKX OOKKK YOOXXK KOOOKKKAKK — POOOOOKXIOXXX XKOOK — OOOOXOXXAXK — OOOUK XXX — WOOHKXXXXKK
IXXXXXXXXXXXX POQOORKXXXX XOOOOORK NOOO ODOR KKK NOOKK XXXKKK OOK OOKKX OOOKK OOK XXAXK —- WOOOOKXXAKX, OOK O0COOQOOOXX XOOOXKKKKXK
XXXXXXXXXXXK XQOORK XXX XQOOOOOOK OOOOH KK KK OOK XXXXXX YOOKXKXX OOK WOOK 000090X0XOOX XXXOOKKKKKK OOK WOOKKX KKK XHOOOKXKXXHKXX
DXXXXXAXXXKKX KOOOMKXKXK YOOQOORIAKKK WORK XX XK XOOKX OOK KXOOKK OOOK OOK KOKKKXXAXKK — WOCOOKX XXX XOOOK —— KOOOKXXXXX XKKAKAK KAKA
XXXXXXXXAXXXX OODIIOOXK OOOOKX XXX — OOTROOKXK XXOXOSROOX, KOOHKWKXXKKK KIO XXXKKK WOOKK —— XXXXXK OCOOOOKXKK
IXXXXXAXXXAXXXX OOF KX, WOOCOKXXXXX — HOD XX XOCOMXXXXX XROOOKAXAXXK — AKXXKKK XXXXXK XOX — XXXXXX XXXXXX NOCOOIXXKX,
IXXXXXXXXXXXX XODRKKKK, XOOOOXKKKK OI XOOROOOKX, XKOOKKKAKK OOOO XOXKKXK OOOKX — XXXXXX OOCOPOOXKXK
PXXXXXXXXXXXK ZOOTRIXX ——Q0OIOOXOXXOOPRIOXXX OOO XXOOKAKKAX_ XO XXX XXXXXX XQOOMOAKXX |
XXX _OOGORIKKX JOODRKAXK —XXXXXX _OIRKXAX XOQRKXXX XXXXXX __ORIKKXX XXXXXX _XXKXKX—__0OIKXXX

e%xxxx filed 1099 INT for interest that was not paid. *«« refused to provide additional
documents about these loans as requested in IDR #6 and IDR # 7.

D. Third Party Contacts

@ ON XXXXXXXXXXXX_ _, the agent mailed “third party contact” letters to the ooox
participants of the 3% program asking the following questions:

1. How did you hear about this organization and what did they offer you
   upon the first solicitation?

2. What services did the organization provide you? Did the organization
   provide you with the names of businesses to offer your consultation
   services to? If so, did these businesses pay you? Please provide the
   names and addresses of the business they provided you with.

3. How much did you pay the organization?

e The agent received the following responses:

1. OM XXXXXXXXXXXX _, the agent received an e-mailed letter from xxxxxx
   XXXXXX stating the following: she received marketing literature from
   XXX | XXXXXX OK asks applicants to take a test to make it look like they
   are selective but she later found out everyone is selected. She stated

Form 886-A(Rev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -8-

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX

Year/Period Ended
XXXXXXXKXKXK
XXXXXXXXXXXX

Name of Taxpayer
XXXXXXXXXXXXXXXXXXXKXKKKKKXKKKKXAKAXXKKKKKXKKAKKKKKAKKKK

xooox held seminars representing how they help consultants get work and
showed her examples of such. »« had consulting positions open and
stated applicants can earn from $000 to $xooox annually but her focus
was on the lead sourcing. She participated in a three-day training
program where they provided her a binder with materials they went
through. After the course, she was to receive 120 letters sent on her
behalf, as an entrepreneur, to targeted organizations and 10 meetings
were set up with business owners in her area who they described as
having a need for business consulting. After attending at least three
meetings, which resulted in no business, the businesses made it clear
that they had no understanding for the reason of the meeting. In
addition, when attending some meetings, the companies told her that
they never agreed to an appointment with an» advisor. Lastly, she
states the funds spent were a waste of money and the program should
be investigated for its validity. She paid *°%™ $xxxxxx.

2. ON XXXXXXXXXXXX _, the agent received the following response mailed
   from XXXXXXXXXXXX 1 She signed up in XXXXXXXXXXXX and participated
   in a three-day training course. The organization developed a mailing list
   of additional client prospects and sent introductory letters to them over
   several months. The * protocol begins with a pro-bono introductory
   meeting. She paid the organization xxxxxx , continues to be an active
   member of xxx and continues to have interaction with the leadership
   certified business advisors of the organization. xxxxxx provided the list
   of businesses that *« set up appointments with and the list of
   business contacts provided to her by cox

3. ON XXXXXXXXXXXX _, the agent received the following mailed response
   from XXXXXXXXXXXX : He came across the organization on the
   internet while looking for a job. They offered training and business
   leads that would facilitate starting. a small business-consulting firm.
   They provided him with a three-day training course and at least six
   business leads with face-to-face meetings with potential clients. He paid
   XXXXXX $XXXXXX

4. ON XXXXXX XXXXXX , the agent received the following mailed response
   from XXXXXX : She answered online to become a small business
   consultant and was invited to attend an informational session about the
   program. She attended a three-day training program where they
   provided her with the names of small business owners that would meet
   with her for a free consultation. *«« mailed out letters under her
   name to potential clients for follow up. She paid the organization
   $XXXXXX .

5. OM XXXXXXXXXXXX _, the agent received the following mailed response
   from XXXXXXXXXXXX : He heard about the organization from the
   employment section of Craig’s List describing an opportunity to
   leverage extensive business experience with small companies into a
   consulting business. He attended a three-day training session and,
   received a binder to review during training. ~~ sent solicitation

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

Page: -9-

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX

Name of Taxpayer Year/Period Ended

XXXXXXXXXXXXXXXXXXXXKXXKXXKXXKXKXKXKXXKKKKXKKKXAXKXKKKXKKKXKKK XXXXXXXXXXAX
XXXXXXXXXXXKX

letters to entrepreneurs and made six appointments with businesses
looking for help. He paid the organization $xxxxxx

6. On XXXXXXXXXXXX , the agent received a mailed response from
   XXXXXXXXXXXX stating the following: He is unsure of how he found out
   about *« but initially they led him to believe they had clients. He
   stated »«« did not present things in a clear manner. Finally, he figured
   it out and felt scammed. « provided him with a training course to
   teach him how to “present himself” to prospective clients. He
   states «x had no clients and provided him a database for potential
   clients. They also provided a marketing campaign where »~« sent
   letters and made calls on his behalf to arrange appointments with
   potential clients. The clients were not aware that the consulting had a
   cost as they were told it was a pro bono consultation from a not for
   profit organization. He paid the organization $xxxxxx,

7. OM XXXXXXXXXXXX , the agent received the following mailed
   response from XxXxXxxx : He found »« on Monster.com. He had a
   phone interview where they offered him training in starting a consulting
   business. They also scheduled his initial appointments. The calls were
   worthless and did not result in any income to him. The leads were
   unqualified and did not meet the company profile requirement of
   having at least three employees. The prospective clients had no
   business interest. He feels ~~ preys on unemployed businesspersons
   trying to generate income. He never understood how they achieved
   approval as a non-profit corporation. He paid *%« $xXXXxx.

8. OM XXXXXXXXXXXX , the agent received an e-mailed letter from
   XXXXXX stating the following: He heard about *~« through a
   posting on LinkedIn. He participated in a three-day training program
   designed to teach him how to become a consultant. «x set up eight
   meetings under their local Business Assistance Program. He paid »«
   $XXXXXX ,

E. Credit Card Purchases
@ OM XXXXXXXXXXXX , the agent received xxxxxx 000x and 000m credit card statements,

the signature card, and credit application summoned from TD Bank. Review of the
statements revealed the organization made purchases that constitute inurement:

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

Form 886A

Department of the Treasury - Internal Revenue Service

EIN:

XXXXXX

Name of Taxpayer

Explanation of Items

XXXXXXXXXXXXXXXKKXXKKKKAKAKAKKKK KKK AKKKKKXKKKKKXKKXAKXXXKK XXXXXXXXKKAK
XXXXXXXXXXXX

TD Bank Credit Card Statements

Ir i Amount
XXXXXXAXXXXXX XXXXXX ROOK XXXKKX
XXXXXXXXXXXX XXXXXXXXXXXXXXXXXX HK XXKXKX
XXXXXXXXXXXX XXXXXXXXXXXXXXXXXX YHOOOKK XXXXXX
XXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXXXXX OOK XXXXXX
XXXXXX XXXXXXXXAXXXXXXXXXX YOOOOK — XXXXXX
XXXXXX XXXXXXXXXXXXXXXXXXXXXXXX HOOK XXXXXX
XXXXXX XXXXXXXXXXXXAXXXXXK PORK XXHKKX
XXXXXX XXXXXXXXXXXXXXXXXX YOK XXXKKX
XXXXXXXAXXXXX XXAXXXXXXXXXXXXXXXXXXXXXXXXXKK YOOX XXXXXX
XXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXK YOOOKK — XXXXXX
XXXXXXXXXXXX XXXXXXXXXXXXXXXXXX YOOX XXXXXX
XXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXX XROKX — XXXXXX
XKXXXXXXXKKX 777 XXXXXXXXXXXXXXXXXX MOOK XXKXKX
XXXXXXXXXKKX” 777 XXXXXXXXXXXXXXXXXX YOO KXKXXX
XXXXKKKARAKRK "7 XXXXXXXXXXXXXXXXXXXXXXXX YOOX XXKXXX
XXKXKOOKRAR 7 XXXXXXXXXXXXXXXXXXXKXXXXXXXXXK MOOK XXKXKK
XXKKXKKKRXRK “7 XXXXXXXXXXXXXXXXXX 2H00KK—_XXXKK
XXKOQOOOOKKOXK “7 XXXXXXXXXXXXAXXXXX WOOK AXXXKK
RKXKIOT 777 XXXXXXXXXXXXXXXXKX WOOK XXKXKK
XXXKXX 777 XXXXXX YHOO XKXXKK
XXXIOKX 7749 XXXXXXXXXXXX WOOO XXXXKX
XIOOKK 777 XXXXXXXXXXXXXXXXXX YOOX XXKAXK
KXXXKK 777 XXXXXXXXXXXAXXXXXKK YOK XXXXXXK
XXXXXX 7757 XXXXXXXXXXXXXXXXXK WHOOOK—XXKXKK
XOOKK 777 XXXXXXXXXXXXXXXXXX MIO0OKXXKXKK
XXXXXK7 7757 XXXXXXXXXXXXXXXXXX OOK — KKK
YORKKXXKX RK T XXXXXXXXXXXXXXXXXXXAXXXXXKKKKX Woda —_X000KX
KKXXKXXKKXKK "7 XXXXXXXXXXXXXXXXXXXXXXXXXXAXXX YHOO XXXXXX
XOOOOKKKXXXX XXXXXXXXXXXXXXXXXX 2000020000
XXXXXXXXXXKK XXXXXXXXXXKXXXXXXXXXXXXKKXXXKKK POOOK XXKXKK

LAW:

KXKKKK "YOVOIRK KKK
SS

Year/Period Ended

Treasury Regulation 1.501(c)(3)-1 describes the requirements to be exempt under IRC § 501(c)(3).

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

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

Treasury Regulation 1.501(c)(3)-1(d)(1) Exempt purposes-- In general. (i) An organization may
be exempt as an organization described in section 501(c)(3) if it is organized and operated exclusively

for one or more of the following purposes:

(a) Religious,

(b) Charitable,

Form 886-A(Rev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -11-

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX

Year/Period Ended
XXXXXXXXXKXXXK
XXXXXXXXXXKK

Name of Taxpayer
XXXXXXXXXXXXXXXXXXKKXXXXXXXXXXKXXXXXXXKXXXXXXXXXXXXKKX

(c) Scientific,

(d) Testing for public safety,

(e) Literary,

(f) Educational, or

(g) Prevention of cruelty to children or animals.

Treasury Regulation 1.501(c)(3)-1(d)(1)(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 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.

In the court case Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279 (1945), the
Supreme Court held that the presence of a single non-exempt purpose, if substantial in nature, will
destroy the exemption regardless of the number or importance of truly exempt purposes. The Court
found that the trade association had an "underlying commercial motive" that distinguished its
educational program from that carried out by a university.

In American Institute for Economic Research v. United States, 302 F. 2d 934 (Ct. Cl. 1962),
Although the court noted that education is a broad concept, and assumed for the sake of argument
that the organization had an educational purpose, it held that the organization had a significant non-
exempt commercial purpose that was not incidental to the educational purpose and was not entitled to

be regarded as exempt.

In Todd v. Commissioner, T.C. Memo. 2011-123, aff'd, 2012 WL 3530259 (5th Cir.
2012).(Appeals) The U.S. Court of Appeals for the Fifth Circuit has held that whether a transaction
constitutes a loan for income tax purposes is a factual question involving several considerations, and a
distinguishing characteristic of a loan is the intention of the parties that the money advanced be
repaid. Important factors considered by courts in finding a bona fide debt are whether: (1) The
promise to repay was evidenced by a note or other instrument; (2) interest was charged; (3) a fixed
schedule for repayments was established; (4) collateral was given to secure payment; (5) repayments
were made; (6) the borrower had a reasonable prospect of repaying the loan, and whether the lender
had sufficient funds to advance the loan; and (7) the parties conducted themselves as if the
transaction was a loan.

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 further held that,the foundation was
operated for a substantial non-exempt purpose and served the private interests of the creator and his
family. Therefore, the foundation was not entitled to exemption from Federal income tax under section
501(c)(3).

In United Cancer Council, Inc. v. Comm'r., 165 F.3d 1173 (7th Cir. 1999), holds that the

inurement prohibition requires an organization not to siphon its earnings to its founder, or the
members of its board or their families, or anyone else fairly to be described as an insider, that is, as

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -12-

Form 886A Department of the Treasury - Internal Revenue Service _ EIN x33%
Explanation of Items XXXXXX

Year/Period Ended
XXXXXXXXXKXXKX
XXXXXXXXKXXXXX

Name of Taxpayer
XXXXXXXXXXXXXXXXXXKXXXXXXXKKKXXXXKXXXKKAKXXXXXXKKKKKKXK

the equivalent of an owner or manager. The test is functional. It looks to the reality of control rather
than to the insider's place in a formal organizational chart of an organization. The insider could be a
mere employee or even a nominal outsider, such as a physician with hospital privileges in a charitable
hospital.

In People of God Community v. Comm'r., 75 T.C. 127 (1980)The prohibition on inurement denies

exempt status to an organization whose founders or controlling members have a personal stake in that
organization's receipts.

In Founding Church of Scientology, supra, 188 Ct. Cl. at 497, 412 F.2d at 1201; Kenner v.
Commissioner, 318 F.2d 632, 634 (7th Cir. 1963); and Labrenz Foundation, Inc. v.

Commissioner, 33 TCM 1374, 1379 (1974). The payment of personal automobile expenses for

private individuals was held to be prohibited inurement of earnings.

In order to take entertainment related expenses such as meals etc, the individual must provide specific
substantiation. IRC 274(d):

No deduction or credit shall be allowed--

(1) under section 162 or 212 for any traveling expense (including meals and lodging while away
from home),

(2) for any item with respect to an activity which is of a type generally considered to constitute
entertainment, amusement, or recreation, or with respect to a facility used in connection with such an
activity,

(3) for any expense for gifts, or

(4) with respect to any listed property (as defined in section 280F(d)(4)),

unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the
taxpayer's own statement (A) the amount of such expense or other item, (B) the time and place of the
travel, entertainment, amusement, recreation, or use of the facility or property, or the date and
description of the gift, (C) the business purpose of the expense or other item, and (D) the business
relationship to the taxpayer of persons entertained, using the facility or property, or receiving the gift.
The Secretary may by regulations provide that some or all of the requirements of the preceding
sentence shall not apply in the case of an expense, which does not exceed an amount prescribed
pursuant to such regulations. This subsection shall not apply to any qualified non-personal use vehicle
(as defined in subsection (i)).

Treasury Regulation 1.162-1 Business expenses: |

(a) In general. Business expenses deductible from gross income include the ordinary and necessary
expenditures directly connected with or pertaining to the taxpayer's trade or business, except items
which are used as the basis for a deduction or a credit under provisions of law other than section 162.

Governments Position

1. Is money given to the xxxxXxXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX by its officers loans or gross
   income?

As stated on the application for exemption, Part V, line 8c, each of the trustees during that year gave a
loan to ox for $xxxxxx at 0% interest. The organization continued to receive loans from current, prior
and prospective officers as follows:

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -13-

Form 886A Department of the Treasury - Internal Revenue Service EIN:

Explanation of Items XXXXXX
Name of Taxpayer Year/Period Ended
XXXXXXXXXXXXAXKXKXXKAKKXHAKAKAKAKKKKKKAKAKAX AX AXKKX KKK XXXXXXXXXXXK
XXXXXXXXXXXX
Value- Aceurea interest Interest
roo Loan End Additional Interest Value-End Additional Accrued Value-End Interest Accured Interest Value-End
Name Amount XXXXXX Loans XXXXXX XOX Loans x00xx XXXXXX XXXXXK Rate OCHO Donated XXX
XXKXKXAXKXXXAKKXX YOOOREKX KKK XXOOCIOOKKK KOOORK KK XK OOOO XXX YOOOKK OOOO XKKAKK AKYOKXKXXK — WOHOOKXXXXK XOX KKOOOKRXKXXXXK XRROKKXXXAX
XXXXXKXXXAXKKX OCHRE K XXX YOOQOCIOUOOK XO KKK KOOKK ROOOKKK YOOOKXK WOOKK XXWONKK KOOOKAXXXXK — HOHOOAKKAXXXK XXX XOOOOXKXXKX — WOOOKXXXXK — WOOK KKAKKK
XXXXXXXXXXXK HRRORKXAXXX XOX OOO KK XK OOO OOK YOOX OVOKK HKKXKX OOOKXXXKK WOOK XKKKK OOK OOORKXXXK XXOOXKXXAXXK
XXXXXXXKKKKK XOOCORIXXXK OOCOIIOOUKK XOOCTRIOOKKK XXOOKK OOK XOX YOCOKK XKXKKK KOK XXXKX — HOOOKK XXXXX WOOKK ORK XAXK OQOOXKKAAKKK
XXXXXXXXXXXX XOOHKX XXX HAXKXMAXAKK MXP KX KK XXXKXK OOOO OOOO 00K OOK KOOOKXXXXX — WOCOOKOOOKK KOK XXOMKXXKK XHOOOKAKKKK
XXXXXXXXXXXX XXXXXX XROOKXXXXK — XXXKXX XXXKXX HOOK KXKKX — XKKKKK XXKXXX XHOOKK — XXXXXX . XXORKKXKK
XXXXXXXXXKKXK XXXXXX XKOOKKXXKK — XXXXXX YOOOORKXXAX XOWOKXKAXK HOKKKK XXXXXK XXXKKK — XXXXXX XXXKXX XXROOOROXOKKKK
XXXXAXXXXKAKK XXXXXX XOOOKKXXAKX — XXXKXX XXX KAK KOOKKXXKXK HK XXXXXX XXXXXX — XXXXXX OOK XK KK
XXXXXXXXAXXK XXXXXX IK AKXKAK_XXXKAK __XXXKKX _OKXXAXK_YAVOOWK XXXAXK HK AXXKXX XXOO$
YXKANX XXXXAXX XXXXXX XXXXXX XXXXXX XXXXXX XXXXXX XOOQRRKXXX, XXXXXX XXXXXX JOOQRIOKOKK
It is the government's contention that these are not bona fide loans. Although there is the existence of
a promissory note, there is no repayment schedule and no evidence that the organization made any
attempts at collection. As stated in Todd v. Commissioner, T.C. Memo. 2011-123, aff'd, 2012 WL
3530259 (5th Cir. 2012), important factors considered by courts in finding a bona fide debt are
whether interest was charged; a fixed schedule for repayments was established; repayments were
made; the borrower had a reasonable prospect of repaying the loan, and whether the parties
conducted themselves as if the transaction was a loan.
Each year, « reports a net loss on Form 990 showing its inability to repay the loans, yet the officers
continue to give the organization money. The promissory note to each lender does not establish
consequences to the borrower for non-payment. In addition, »« is not receiving “donations” from the
businesses owned by its officers as stated on Form 1023. Instead, the officers are “lending” money to
xx00x The officers willingly give «« money each year to funnel back to their respective corporations
and eventually receive interest income. The money given to *~« by its officers is gross income.

2. Whether the contracts between *«« and its officers constitute substantial private benefit?
   x0oxx has contracts with several companies owned by its officers. Based on the canceled checks, x
   paid the following percentages to insider companies:
   “% of Total “% of Total
   % of Total Expense- % of Total Expense- Revenues- Revenues-
   Payee Payments Payments ;
   51%
   5%
   0.44%
   2%
   3%
   2%
   5%
   The above corporations refused to provide price lists (except. i, which is a credit card). In

addition, the officers of »%« did not secure project cost quotes and/or hourly rates as stated in their
application for exemption. Therefore, fair prices for the services rendered could not be ascertained.
xnxx jg serving the private interests of its officers.

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

Page: -14-

Form 886A

Department of the Treasury - Internal Revenue Service

EIN:

Explanation of Items XXXXXX

Name of Taxpayer

XXXXXXXXXXXXXXKXKXXXXXKXKKXXXAXXKXXKKKKXKXAKKKX KK KKXKAKKXKKKKK

XXXXKXXXKXXXXKX
XXXXKKXXKAXXXK

3. Do purchases made with th
   inurement?

On XXXXXXXXXXXX , the agent summoned *~«’s credit card statement from

lists the following expenses that represent inurement:

' Credit Card Statements

e organization’s Credit card and payments to xxx constitute

Year/Period Ended

'. The statement

Transaction Date Payee

XXXXXXXXXXXX XXXXXX

XXXXXXXXXXXX XXXXXXXXXXXXXXXXXX
XXXXXXXXXXXX XXXXXXXXXXXXXXXXXX

XXXXXX XXXXXXXXXXXXKXXXXXXXXXXXXXXKXKX
XXXXXX XXXXXXXXXXXXXXXXXXK

XXXXXX XXXXXXXXXXXXXXXKXXKXXXXXKK
XXXXXX XXXXXXXXXXXXXXXXXK

XXXXXX XXXXXXXXXXXXXXXKXX
XXXXXXXXXXXX XXKXXXXXXXXXXXXXAXXXXKXXXKXXXAKKK
XXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXAKX
XXXXXXXXXXXX XXXXXXXXXXXXXXXXXXK
XXXXXXXXXXXX XXXXXXXXXXXXXXXXXKXXAXXXAKX
XXXXXXXXXXXX XXXXXXXXXXXXKXXXXXK
XXXXXXXXXXXX XXXXXXXXXXXXXXXXKK
XXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXX XXXXXXXXXXXXXXXXXKXXXXXXXXKXXKK
XXXXXXXXXXXX XXXXXXXXXXXXXXXXXX
XXXXXXXXXXXX XXXXXXXXXXXXXXXXXK
XXXXXXXXXXXX XXXXXXXXXXXXXXXXXX
XXXXXXXXXXXX XXXXXX

XXXXXXXXXXXX XXXXXXXXXXXX

XXXXXX XXXXXXXXXXXXXXAXXXX

XXXXXX XXXXXXXXXAXXXXXXXXK
XXXXXXXXXXXX XXXXXXXXXXXXXXXXXX

XXXXXX XXXXXXXXXXXXXXXXXK
XXXXXXXXXXXX XXXXXXXXXXXXXXXXXK
XXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXAXXXXXAXXXXKX
XXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXXXKXKK
XXXXXXXXXXXX XXXXXXXXXXXXXXXXKX
XXXXXXXXXXXX XXXXXXXXXXXXXXXXXXXXXXXXKKXKKK

YOOKK —_- XXXXXX
XK XXXXXX

OOKX KXXXKK
XROKK XXXXXX

ROOOK KXXXXKX
XOOKKKX XXXXXX
OOKK — XXXXXX
10000 XXXXXX
OOKK XXXXXX
XiOOOK XXXXXX
XHOKK XXXXXX

WOOK XXXXXX
300000 XXXXXX
HOOK XXXXXX
XOX XXXXXX
HKXKKX XXXXXK
HOXKKX XXXXXK
X00 XXXXXX
XHOOKK XXXXXX

200K XXXXXX
XK XXXXXX
2000 XXXXXX
HOOK XXXXXX
YOOX XXXXXX

XXXXXX__ POOOKKK XXX

During the initial interview, the treasurer, xxxxxXxxXxXxxxx stated the organization does not own a
vehicle however, credit statements show gas purchases from ExxonMobil and Sunoco. The organization
did not provide any documents to show business use of any vehicle. In IRC 274(d), the organization
must provide business mileage, commuting mileage, and other personal use mileage, as well as the
total mileage for the year. The organization must also specify the percentage of business use; the date
the vehicle was placed in service; the use of other vehicles; and after-work use. The payment of
personal automobile expenses for private individuals was held to be prohibited inurement of earnings

in Founding Church of Scientology, supra, 188 Ct. Cl. at 497, 412 F.2d at 1201; Kenner v.
Commissioner, 318 F.2d 632, 634 (7th Cir. 1963); and Labrenz Foundation, Inc. v.
Commissioner, 33 TCM 1374, 1379 (1974).

Form 886-A(Rev.4-68)

Department of the Treasury - Internal Revenue Service

Page: -15-

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX
Name of Taxpayer Year/Period Ended
XXXXXXXXXXKKXXXXXXXKKXXKXKKXXXXKXXKKXXAXKKKXXKKKXXXKKKKKK XXXXXXXXXXKK
XXXXXXXXXXXX

The credit card statements also show several entertainment expenses such as meals and hotel stays.
In IRC 274(a), no deduction otherwise allowable is permitted for an item considered to be
"entertainment, amusement, or recreation" unless the taxpayer establishes that the item is “directly
related to, or associated with, the active conduct of the taxpayer's trade or business." Furthermore in
IRC 274(d)(1)-(4), no deduction or credit is allowed for any expense constituting entertainment unless
the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's
own statement (A) the amount of such expense or other item, (B) the time and place of the travel,
entertainment, amusement, recreation, or use of the facility or property, or the date and description of
the gift, (C) the business purpose of the expense or other item, and (D) the business relationship to
the taxpayer of persons entertained, using the facility or property, or receiving the gift.

In John Marshall Law School and John Marshall University v. United States, 228 Ct. Cl. 902
(1981), 81-2 U.S.T.C. 9514, the court sustained the services revocation of the colleges exempt status
based on inurement for such things as payment of non-business entertainment.

XXXXXXXXXXXX , the treasurer, stated the President of 00x xxxxxXx inadvertently made the
purchase from Sears Roebuck using the wrong credit card. He claimed the President reimbursed the
organization. Again, *«« did not provide any documents to substantiate the reimbursement or the
business use required under IRC 162. It too constitutes inurement.

Lastly, XXXxxXx (XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX ») iS a for-profit
organization previously owned by xxxxxx 1 XXXXXXXXXXXK , and XXXXXXXXXXXX (all current,
past or previous officers or trustees of xxxxxx 0x made a payment to Xxxxxx which they would not
verify. As stated previously, In People of God Community v. Comm'r., 75 T.C. 127 (1980) the
prohibition on inurement denies exempt status to an organization whose founders or controlling
members have a personal stake in that organization's receipts.

Payee Amount Date Check Number
XXXXXXXXXXXXXXXXXX_. $ _ XXXXXX__ XXXXXX XXXXXK
Boek = XXXXXX

4. Should the tax-exempt status, under Internal Revenue Code section 501(c)(3), of XXXXXXXXXXXX
   XXXXXXXXXXXXXXXXXXXXXXXX be revoked for failing to operate as an organization exempt under the
   aforementioned code section?

e xoxox is not conducting the activities it stated in its original application for exemption. ~««
solicits prospective customers through advertisements and online forums such as Meetup.com,
LinkedIn and Craig’s list. These individuals pay the organization $xxxxxx (although most
participants claim $xxxxxx) for leads. The members attend a three-day training program to aid
them in their consulting businesses. Members also receive several leads to prospective
businesses. «x makes appointments with businesses for the consultants in hopes that they
will retain the consultant’s services for a fee.

In XXxxxx ~ooxx had the following participants in the program:

1. XXXXXXXXXXXX
2. XXXXXXXXXXXX

Form 886-A(Rev.4-68) ; Department of the Treasury - Internal Revenue Service
Page: -16-

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX

Name of Taxpayer Year/Period Ended

XXXXXXKXXXXKAKAXXXKKKKKXXKXKKK XK KKK KK KKKKXKKKKXKKKKXK KKK XXXKKXXXAKAK
XXXXXXXXXXXX

XXXXXX
XXXXXXXXXXXX
XXXXXXXXXXXX
XXXXXXXXXXXX
XXXXXX
XXXXXX
XXXXXXXXXXXX

WANAUAW

All of xxxxxx participants responded to the third party request except XXXXXXXXXXXX . ~~ provided
each respondent that participated in the training program with leads to obtain prospective business. In
addition as stated previously, »*« lists the following in its Articles of Incorporation:

«Item 1 of the articles of Incorporations for the XXXXXXXAKXXXXXXXXXXXXXXXX
XXXXXX states its purpose as organized exclusively for charitable and educational
purposes within the meaning of Section 501(c)(3) of the Internal Revenue code.

e Item 3 of the articles state “No part of the net earnings of the corporation shall inure to
the benefit of, or be distributable to its members, trustees, officers or other private
persons, except the corporation shall be authorized and empowered to pay reasonable
compensation for services rendered and to make payments and distributions in
furtherance of the purposes set forth in Item 3 (and Article 1) of this filing.”

«Item 3 also states “Notwithstanding any other provision in this filing, the corporation
shall not carry on any other activities not permitted to be carried on (a) by a corporation
exempt from federal income tax under section 501(c)(3) of the Internal Revenue Code,
or the corresponding section of any future federal tax code, or (b) by a corporation,
contributions to which are deductible under section 170(c)(2) of the Internal Revenue
Code, or the corresponding section of any future federal tax code.

The organization does not operate exclusively for charitable purposes but operates in a commercial
manner by conducting business as a referral service where consultants pay for “leads” to potential
clients. The net earning of »« jnure to the officers whose businesses receive payments for services
that were not proven arm’s length transactions. °° does carry on activities not permitted under
section IRC 501(c)(3) and therefore, its exempt status should be revoked.

Taxpayers Position
On XXXXXX , the agent received xxxxxx written response to Form 886-A sent to «x on XXXXXX
XXxxxxx, The following is a rebuttal to xxxxxx response to Form 886-A:

The agent would like to state for the record:

1. *xcox was not cooperative during this examination. During field visits, the treasurer, xxxxxx
   XXXXXX_, initially refused to give the agent copies of invoices and other documents. He
   prolonged the process by repeatedly calling the manager for what the agent feels are frivolous
   reasons. He required the agent to complete and sign an IDR each time she would request copies
   of documents although the agent previously issued these IDR’s.

2. XXXXxx refusal to provide documents prolonged the examination process requiring the agent to
   visit their field location on four different occasions.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service ;
Page: -17-

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX
Year/Period Ended
XXXXXXXXXXXX
XXXXKXXXXXKXXX

Name of Taxpayer
XXXXXXXXXXXXXXXXXXXKKKKKKKKKKKKKKKKKKKKKAKKKKXKKKXXXAX

3. xox did not respond to IDR’s number six and seven nor did they provide price comparisons or
   detailed analysis as they state. xxxxxx refusal to respond to the IDR’s required the agent to
   secure the information from the state of xxxxxx and TD Bank.

4. XXXXXXXXXXXX is a related entity, as the President’s wife, Xxxxxx , owns it.

xxx states, “The 886A inaccurately claims that ~«« loans from trustees should be considered
taxable gross income.”

The agent is not confused about the characterization of loans, revenue and accrued interest as »«~«
states. Perhaps xx is confused.

The agent has always contended that the money given to *~ is not loans but constitutes gross
income in the form of program service revenue, not contributions. In Todd v. Commissioner, T.C.

Memo. 2011-123, aff'd, 2012 WL 3530259 (5th Cir. 2012).(Appeals) The U.S. Court of Appeals

for the Fifth Circuit has held that whether a transaction constitutes a loan for income tax purposes is a
factual question involving several considerations, and a distinguishing characteristic of a loan is the
intention of the parties that the money advanced be repaid. Important factors considered by courts in
finding a bona fide debt are whether: (1) The promise to repay was evidenced by a note or other
instrument; (2) interest was charged; (3) a fixed schedule for repayments was established; (4)
collateral was given to secure payment; (5) repayments were made; (6) the borrower had a
reasonable prospect of repaying the loan, and whether the lender had sufficient funds to advance the
loan; and (7) the parties conducted themselves as if the transaction was a loan. *“« does not satisfy
any of these factors. Once the agent converts xxxxxx return to a for-profit corporation, and files Form
1120, this money becomes taxable revenue and not paid-in-capital.

Furthermore, x was not following the “applicable rules” as they state when they filed Forms 1099
for “accrued” interest. »o«« did not pay this interest to the trustees. Additionally, »« did not provide
an account showing details of payments, canceled checks or wire transfers. »~« is a cash basis
taxpayer and should report interest expense when it is paid, not accrued as they did on their Form

990. The agent believes xxxxxx reference to “a personal detriment” is the language of IRC 7872, which
     refers to “imputed” interest for below market loans, which does not apply in this case.

Conclusion:
@ = Xxxxxx is confused.

e The money given to x from its trustees is not loans but gross income.

xoxoxox States, “The 886A inaccurately claims * officers received substantial private benefit
by using revenue to pay expenses and by funneling loan money back to businesses owned by
its officers” ,

The agent asserts « received substantial private benefit by paying corporations owned by current
and former officers, trustees and their spouses.

Treasury 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

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -18-

Form 886A Department of the Treasury - Internal Revenue Service EIN:

Explanation of Items XXXXXX

Name of Taxpayer Year/Period Ended
XXXXXXXXXXXKKKKKKKAKKKKAKAKKKKKKKKKKKKKKKKKKAKAKAKKKKK KK XXXXXXXXAXAX
XXXXXXXXXXKX

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.

~»0xxX Contracted with the following business, owned by current and former officers, trustees and their

spouses:
Business Name Business Type Principal
XXXXXXXXXXXXXXXXXX Domestic Limited Liability Company XXXxXxXxX
XXXXXXXXXXXX Foreign Profit Corporations XXXXXX
XXXXXX Foreign Profit Corporations XXXXXX
XXXXXXXXXXKXXXXXXKK Domestic Limited Liability Company XXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXKXKKK Domestic Limited Liability Company XXXXXXXXXXXXXXXXXX
XXXXXXKXXKXXXXKXKXXXXKXXXKKXXKXKKXXXK Foreign Profit Corporations XXXXXXXXXXXXXXXXXXK

xxx made the following payments to these corporations in xox and coo respectively:

Payee Amount Date Check Number
XXXXXXXXXXXXXXKXXKXK wegen XXXXXX XXXXXX XOAKXX
XXXXXXXXXXXXXXXXKK pogo XXXXXX XXXXXX XOX
XXXXXXXXXXXXXXXXXXK peso, XXXXXX XXXXXX XXXXXK
XXXXXXXXXXXXXKXKXKXX og XXXXXX XXXXXX OOK
XXXXXXXXXXXXXXKXXXXK wooo XXXXXX --s XXXXXK XXOKKK
XXXXXXXXXXXXXXAXXKK MOBS XXXXXX XXXXXX XROONK
XXXXXXXXXXXKXXAXXKAK sgpe XXXXXX XXXXXX XXXKKK
XXXXXXXXAXKXXXXXXKKK spoon, XXXXXXK XXXXXX XAKKKX
XXXXXXXXXKXXXXXAXXXX eggs, XXXXXX XXXXXX KAXKKX
XXXXXXXXXXXXXXKKKK Hepp" XXXXXX XXXXXX XOOKAX
XXXXXXXXXXXXXXXXXX syne" XXXXXX XXXXXX XOOKKKX
XXKXXXXXXKXKXXXXKXKXKK woo XXXXXK XXXXXX XOX
XXXXXXXXXXXXXXXXXK sega XXXXXX XXXXXX KAKKKX
XXXXXXXXXXXXXKXXXXX rege XXXXXX XXXXXX XAXKKX
XXXXXXXXKXXXXXXXXXX peso, XXXXXX XXXXXX XXXXXX
XXXXXXXXXXXXXXXXKX weg, XXXXXX XXXXXX XOX
XXXXXXXXXXXXXXXXXX Sooo, XXXXXX XXXXXX XOX
XXXXXXXXXKXXXXKKXXXX pogo XXXXXX XXXXXX XXXKAX
XXXXXXXXXXXXXXKXXXK eos” XXXXXX XXXXXX XOOKKK
XXXXXXXXXXXXXXXXXX Beeee XXXXXX XXXXXX XXAXXK
XXXXXXXXXXXXXXXXXX oe XXXXXX XXXXXX OOK
XXXXXXXXKXXXXXXXXXX Boo XXXXXX XXXXXX KOOKKX
XXXXXX
Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service

Page: -19-

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX
Name of Taxpayer Year/Period Ended
XXXXXXXXXXXXXKXXXXXKXKKKXXXXXXKXKKX KX XXX KKKKXXXXXXXXXK KK, XXXXXXXXXKKK
XXXXXXXXXXXX
Payee Amount Date Check Number
Payee Amount Date Check Number
Payee Amount Date Check Number

Department of the Treasury - Internal Revenue Service

Form 886-A(Rev.4-68)

Page: -20-

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX
Name of Taxpayer Year/Period Ended
XXXXXXXXXXKXKKKKKKKKXXXKX XKKKKKXXX KX KX KKKKKXAKKXKKKXXXKK, XXXXXXXAKKKK
XXXXXXXXXXXX
Payee Amount Date Check Number
Payee Amount Date Check Number
Payee Amount Date Check Number
Payee Amount Date Check Number
Payee Amount Date Check Number

Department of the Treasury - Internal Revenue Service

Form 886-A(Rev.4-68)

Page: -21-

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX

Year/Period Ended
XXXXXXXKXXKKK
XXXXXXXXXXXX

Name of Taxpayer
XXXXXXXXXXXXXXXXXXXKXKXXXXXXKXAKXXXXKKXXXXXXXXXKKXKKKXK

The fact that xxxxxx officers never jointly owned businesses or received remuneration for services is
irrelevant in this case. The fact remains that »«« paid its trustees corporations 111% of its revenues in
XXXXXx and 68% of its revenues in xxxx«x, In fact, documents secured from the state show that xxxxxx
XXXXXX ‘status was revoked effective XXXXXXXXXXXX for not filing its annual reports for two
consecutive years.

In Rev. Rul. 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 further held that the foundation was
operated for a substantial non-exempt purpose and served the private interests of the creator and his
family. Therefore, the foundation was not entitled to exemption from Federal income tax under section
501(c)(3).

Section 1.501(c)(3)-1(c)(1) of the regulations provides that 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 such exempt purposes specified in section 501(c)(3) of the Code. An
organization will not be so regarded if more than an insubstantial part of its activities is not in
furtherance of an exempt purpose.

Section 1.501(c)(3)-1(d)(1)(ii) of the regulations provides that an organization must be organized
and operated to serve a public rather than a private interest and specifically 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.

Conclusion:

e The officers and related parties who contracted with »« received substantial private benefit
from xox Their personal corporations were able to use Xxxxxx revenue and charge ~~ for
services that were not arms length transactions.

e As stated previously, the insiders give money to ~~ because it will eventually go back to their
organization for “services.” They can also obtain interest income.

xxxxx states, “The 886A inaccurately claims activities are not tax-exempt.”

Although «x received tax-exempt status in xox, Determination’s agent, XXXXXX , based her
decision on forecasted information. *~ reported its exempt activities as follows:

xx0XX Community (40% time and effort)
Outreach Programs (45% of time and effort)
Recognition and Grant Programs (15% time and effort)

Although, * states they described these programs in detail to the IRS during the application
process, they failed to mention their major revenue producing *°« program on its application. Had
they mentioned this program, a for-profit endeavor, the service would not have approved it.

Conclusion:
e Determinations Agent, xxxxxx based her decision on forecasted information provided by

x00xx The agent based her information on facts from a full scope examination of financial data
and activities.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -22-

Form 886A Department of the Treasury - Internal Revenue Service EIN:

Explanation of Items XXXXXX
Name of Taxpayer Year/Period Ended
XXXXXXXKXXXKKKXXKKXKKAXKKAKAKAXKKAKAKKKKAXXAKKXKAXKAKKK KK XXXXXXXXXAXK
XXXXXXXXXXXX
e The agent interviewed the treasurer, XXXXXXXXXXXX , the President, XXXXXX , and read all

documents, brochures and pamphlets related to the organization. Therefore, the agent had a
thorough understanding of xxxxxx operations and based her decision on such.

e The agent has not mistaken “shifts” in available program funding to mean the organization's
tax-exempt status has changed. The agent is asserting xxxxxx activities are not consistent with
the activities they state in their application and are not exempt.

xox states, “The 886A inaccurately claims operations are inconsistent from those presented
in the application for tax exemption, primarily related to xxxxxx oo program.”

As stated previously, the agent conducted a thorough review and examination of »« and its activities
to understand its operations.

xxxxxx reported the following on Form 1023:

4, xox Community (40% time and effort)
“xooox provides an online community for entrepreneurs and professionals who specialize in
helping entrepreneurs. The community provides a welcoming and collegial environment
wherein entrepreneurs can find information, guidance, advice, tools and access to financing
and support services.”

5. Outreach Programs (45% of time and effort)
   A program where ** coordinates and sponsors outreach programs to enable such things as
   networking. **“«« seeks out local co-sponsors and experts, who are willing to lead programs,
   make presentations, provide meeting facilities, supply resource material and contribute time to
   assist in making the outreach programs a success.

6. Recognition and Grant Programs (15% time and effort)
   A program that gives grants and awards to qualified entrepreneurs and entrepreneurial

organizations.

The percentages above are incorrect; »«« spends its time operating their “ox program, which is a
referral service. »o« advertises on LinkedIn, Monster.com, Craig’s list, etc to businesses with the
notion that they will receive help. However, « simply uses them to compile a list of potential
customers to give to consultants in the «x program to use as business leads. »~« uses this same
avenue to lure consultants into its «ox program.

In American Institute for Economic Research v. United States, 302 F. 2d 934 (Ct. Cl. 1962),
Although the court noted that education is a broad concept, and assumed for the sake of argument
that the organization had an educational purpose, it held that the organization had a significant non-
exempt commercial purpose that was not incidental to the educational purpose and was not entitled to
‘be regarded as exempt.

Conclusion:
XXXXxx activities and operations are inconsistent with what they state on their application for

exemption.

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

Page: -23-

XXXXXXXXXXXXXXXXKXXXXXXKKKXXXXKAKXKKK KKK KKK KK AKKXK KKK AKAN

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX
Name of Taxpayer Year/Period Ended
XXXXXXXXXKXX

XXXXXXXXXXXK

»~ooxx states, “The 886A inaccurately claims that «« operates a lead referral service based on
questions she posed to x Advisors.”

xox states the agent posed leading questions to *« certified advisors instead of asking about xxxxxx
purpose, non-profit mission or tax-exempt status. However, the agent had a very clear understanding
of the organization’s operations before contacting the program participants. The treasurer insists the
consultants were “volunteers” however; the consultant never stated they were volunteers for the
organization. Instead, they say they paid the organization approximately $xxxxxx, for business leads.

The participants state the following:

1. ON XXXXXXXXXXXX _, the agent received an e-mailed letter from Xxxxxx

XXXXXX stating the following: she received marketing literature from o> in
XXXXXX XxX asks applicants to take a test to make it look like they are selective but
she later found out everyone is selected. She stated * held seminars
representing how they help consultants get work and showed her examples of
such, x had consulting positions open and stated applicants can earn from
$000xx to XXXXXxX annually but her focus was on the lead sourcing. She participated
in a three-day training program where they provided her a binder with materials
they went through. After the course, she was to receive 120 letters sent on her
behalf, as an entrepreneur, to targeted organizations and 10 meetings were set up
with business owners in her area who they described as having a need for
business consulting. After attending at least three meetings, which resulted in no
business, she learned that target customers had no understanding for the reason
of the meeting. In addition, when attending some meetings, the companies told
her that they never agreed to an appointment with an « advisor. Lastly, she
states the funds spent were a waste of money and the program should be
investigated for its validity. She paid « $xxXxxxx.

. ON XXXXXXXXXXXX _, the agent received the following response mailed from Xxxxxx

XXXXXX : She signed up in XXXXXXXXXXXX and participated in a three-day training
course. The organization developed a mailing list of additional client prospects and
sent introductory letters to them over several months. The x protocol begins
with a pro-bono introductory meeting. She paid the organization xXxxxxx ,
continues to be an active member of »««xx and continues to have interaction with
the leadership certified business advisors of the organization. xxxxxx provided the
list of businesses »*~« set up appointments and the list of business contacts
provided to her by xxx

. ON XXXXXXXXXXXX _, the agent received the following mailed response from

XXXXXXXXXXXX : He came across the organization on the internet while
looking for a job. They offered training and business leads that would facilitate
starting a small business-consulting firm. They provided him with a three-day
training course and at least six business leads with face-to-face meetings with
potential clients. He paid ~~ $xxxxxx.

. ON XXXXXXXXXXXX _, the agent received the following mailed response from

XXXXXX : She answered online to become a small business consultant and
they invited her to attend an informational session about the program. She
attended a three-day training program and provided her with the names of small

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

Page: -24.-

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX

Year/Period Ended
XXXXKXXXXXAXXK
XXXXKXXXKXXKK

Name of Taxpayer
XXXXXXXXXXXXXXXXXXXXXXXXXXXXKXXKXKKXKXKKXXXXAKKXXXKKKXKKXK

business owners that would meet with her for a free consultation. »«« mailed out
letters under her name to potential clients for follow up. She paid the organization
XXXXXX .

5. On XXXXXXXXXXXX _, the agent received the following mailed response from
   XXXXXXXXXXXX : He heard about the organization from Craig’s List in the
   employment offering section describing an opportunity to leverage extensive
   business experience with small companies into consulting business. He attended a
   three-day training session and, received a binder to review during training.

xxx sent solicitation letters to entrepreneurs and made six appointments with
businesses looking for help. He paid the organization XxXxxx.

6. ON XXXXXXXXXXXX , the agent received the following mailed response from
   XXXXXXXXXXXX stating the following: He is unsure of how he found out about
   »~oxx but initially they led him to believe they had clients because they did not
   present things in a clear manner. Finally, he figured it out and felt scammed.
   00x provided him with a training course to teach him how to “present himself” to
   prospective clients. He states *~« had no clients and provided him a database for
   potential clients. They also provided a marketing campaign where the sent letters
   and calls made on his behalf to arrange appointments with potential clients.

The clients were not aware that the consulting had a cost as they were told it
was a pro bono consultation from a not for profit organization. He paid the
organization XXXxxx.

7. OM XXXXXXXXXXXX , the agent received the following mailed response from
   XXXXXX : He found «x on Monster.com. He had a phone interview where
   they offered him training in starting a consulting business and scheduling of his
   initial appointments by «x, The calls were worthless and did not result in
   any income to him. The leads were unqualified and did not meet the company
   profile requirement of having at least 3 employees. The prospective clients had
   no business interest. He feels *«« preys on unemployed businesspersons trying
   to generate income. He never understood how they achieved approval as a
   non-profit corporation. He paid x xxXxXxXx .

8. On XXXXXXXXXXXX , the agent received an e-mailed letter from Xxxxxx
   stating the following: He heard about *« through a posting on LinkedIn. He
   participated in a three-day training program designed to teach him how to
   become a consultant. “«« set up eight meetings under their local Business
   Assistance Program. He paid x xxxxxx.

xxx uses the guise that because the consultants offer a free consultation, they are providing charitable
services to businesses. Instead, the consultants provide “free consultations” in hopes to gain the
organizations business as stated by the above participants.

In Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279 (1945), the Supreme Court

held that the presence of a single non-exempt purpose, if substantial in nature, will destroy the
exemption regardless of the number or importance of truly exempt purposes. *« has an “underlying
commercial motive".

Conclusion:

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -25-

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX

Year/Period Ended
XXXXXXXXXXXX
XXXXXXXXXXXX

Name of Taxpayer
XXXXXKXXXXKXXXXXXKXKKXXXXXXKKXXXXXKXXXXXKXKKXKKKKXXXXXXXKXKK,

e The agent asked the program participants pertinent questions to ascertain the reason for the
payment to *«« and to determine their dealings with the organization. The agent never asked if
x0XX gave the consultants business leads to prospective clients. The participants freely provided
this information.

eXxxxx Operates a lead referral service.

xox states, “The 886A inaccurately claims *« has provided less support to businesses than
projected.”

xxxxx Clearly states in its application that they will dedicate 100% of its activities to help businesses.
Including 15% “time and effort” to Recognition and grants.

Form 1023 states, “Recognition and Grant Programs (15% time and effort).” They list grant projections
as follows:

Year

Application Grants $

Non-Profit Organization Grants $
Total] $

4A I A
4A tA A

xox Continues to reiterate that providing grants to businesses helps the entrepreneurial community.
The agent agrees that giving money to newly started or struggling businesses is a charitable endeavor.
However, in x000x, xxx gave a $xxxxxx grant to XXXXXXXXXXXX . and in 0oox, gave xxx each to
XXXXXX and XXXXXXXXXXXXXXXXXXXXXXKX . %*K did not give out the 15% grant projections
because it was giving the money to the officer’s related organizations. These payouts are insignificant
compared to the revenue earned.

In relation to the “pro-bono” advice given to businesses by professionals, it is merely incidental to the
professional's real cause. “x connected the consultants with the businesses as part of their referral
service program.

Conclusion:
XXXxxx business support is insignificant compared to its for profit activity as a referral service selling

leads,

xox. states, “The 886A inaccurately claims revenue and expenses are not as projected on
Form 1023”

Form 1023 is an “application” for exemption, a projection of operations, activities and their associated
costs. Therefore, being over zealous in your predictions is understandable. However, the agent
contends it was never xxxxxx intention to give grants to businesses but to use »« as a conduit to
divert funds back to the related parties (corporations owned by officers, their wives and former
trustees).

Although *«« states they hold online forums, seminars and meetings, they did not provide any
evidence to substantiate their claims. If »o« does conduct such activities, it is insubstantial compared

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -26-

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX
Name of Taxpayer Year/Period Ended
XXXXXXXXXXKXXXXXXKXKKXKXXXKKXXKKKRKXKXKKKXXKKKXXKKXXKKKKXXKX XXXXXXXXXXAKK
XXXXXXXXXXXX

to their major activity of conducting a lead referral service. xxxxxx main reason for luring new
businesses to their forum is to add these businesses to their list of potential leads.

Conclusion:
~vwxx jf NOt conducting the activities consistent with its statements on Form 1023

wx states, “The 886A inaccurately claims « has been adversarial and that «« refused to
provide requested information”

xxx has been adversarial and uncooperative beginning with the first telephone call to the
Organization. When the agent called 00x xxxxxXXXxXXXxx stating he was the treasurer greeted her.
Sek XXXXXX was belligerent and combative. He made statements such as “why was the organization
being audited, he thought not for profit organizations could not be audited, was this really the IRS,
what was I looking for.”

Subsequently during the field examination, 39%% xxxxxx refused to give the agent documents she
requested and would not accept the agent’s explanation for its need. Consequently, the agent would
direct 28% XXXxxx to the manager who would assure him of the need for these items. 28% XXXXXX
would continually go back and forth with refusal to provide documents and calling the manager, hence,
prolonging the exam. If 33% Xxxxxx feels the agent was “running behind” clearly this was because of
his behavior. #8 Xxxxxx actions caused the agent to visit the organization a fourth time to complete
the exam. Ultimately, 23% xxxxxx provided the agent with the documents requested only if the agent
created an IDR and signed for them although the agent previously issued these IDR’s.

During the xxxxxx exam, the agent requested the organization's credit card statement from XXxxxx .
xX Gave the agent a one-page sheet that was incomplete. In addition, “~~ crossed out some of the
purchases. When the agent asked for a better copy, x replied, “this is all I have and all you will
get” Because of x refusal to provide the statements, the agent had to summons these statements
from XXxxxx . Review of these statements revealed inurement by ~~,

»ooox made the following purchases constituting inurement using their xxxxxx credit card:

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -27-

Form 886A Department of the Treasury - Internal Revenue Service EIN:
-Explanation of Items XXXXXX

Name of Taxpayer Year/Period Ended

XXXXXXXXXXKXKXXXXXKXXKXXXKXXKXKKXKXKKXKKXXXKXXKXXXXKAXKXKKK XXXXXXXXXKAK
XXXXXXXXXXXX
TD Bank Credit Card Statements
Transaction Date Payee Amount
=

On XXXXXXXXXXXX , the agent mailed IDR #3, to »»« requesting explanation and source documents to
verify the xxxxxx reported as “paid to xxxxxx” and xxxxxx reported as “Paid for xxxxxx ,” scx refused to
provide any information about these payments. Subsequently, after review of the canceled checks, the

agent learned “ox paid the xxxxxx to XXXXXXXXXXXX . Currently, «x has not accounted for the
XXXXXX ,

Payee Amount Date Check Number
i: re

On XXXXXXXXXXXX , the agent mailed IDR number 6 requesting “ association with the
businesses they contract with and their corresponding Articles of Incorporation. The agent also
requested canceled checks verifying loan payments. »~« refused. The agent secured status reports
from the State of xxxxxx to verify the relationship between « officers and these businesses.

On XXXXXXXXXXXX , the agent mailed IDR number 7, requesting the same information above but
also the person who signed the xxxxxxxxxXXxX contract. «x refused.

Form 886-A(Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -28-

Form 886A Department of the Treasury - Internal Revenue Service EIN:
Explanation of Items XXXXXX
Name of Taxpayer Year/Period Ended
XXXXXXXKXAXKKXKKKKKKKKKKKKKAKRKK AK AK AK XKXXX KKK KX XX XXXKKKKK XXXXXXXXXXXX
XXXXXXXXXXXX

During the organization's xox examination, »« refused to provide a list of « program participants
and payments.

The agent was never “running behind” as »™ stated. In fact, 388% XXXxxx_ /homemade spreadsheets
were insufficient to conduct the examination because they did not cross-reference checks, invoices and
payments. Rather than have 2x%xxxxxx recreate his spreadsheet, to facilitate the exam and ease xexx
XXXXXX burden, the agent chose samples for 2% xxxxxx to provide check numbers and invoices
that the agent could verify. The agent understands that »™ feels personal attacks will bolster their
cause however; the agent would like to stick to the relevant facts of the case.

Finally, the agent has never nor will ever make bullying remarks to any taxpayer.

Conclusion

exxxxx substantially serves the private interest of its officers.

e x00xx is not a charitable organization under IRC § 501(c)(3) because it conducts its activities as a
trade or business under IRC § 162.

XXxxxx use of its credit card for personal purchases constitutes inurement and is prohibited by an
organization exempt under IRC 501(c)(3).

@ XXXXxX exempt status should be revoked and the monies received from the officers should be
added to revenue as gross income.

@xxxxx Owes the following taxable income for the xox and com tax years respectively. The agent
disallowed all expenses paid to the corporations owned by the officers because they are not
ordinary and necessary expenses under IRC 162.

From 1120-Tax Year xxxxxx

Gross Receipts $ XXXXXX
Interest $ XXXXXX

Total Income $ XXXXXX
Charitable Contributions $ XXXXXX
Other Deductions $ _XXXXXX
Total Expenses $ _XXXXXX
Taxable Income $ XXXXXX
From 1120-Tax Year xxxxxx,
Gross Receipts $ XXXXXX
Interest $ XXXXXX
Total Income $ XXXXXX
Charitable Contributions $ XXXXXX
Other Deductions $ XXXXXX
Total Expenses $ XXXXXX
Taxable Income $ XXXXXX

Form 886-A(Rev.4-68)

Department of the Treasury - Internal Revenue Service

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