Condominium fundraising foundation loses exemption for serving residents' private interests

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Plain-English summary

A foundation was formed so condominium owners could make deductible contributions for projects outside their homeowners association's operating budget. Its money paid for improvements and services benefiting the privately owned complex, including pool solar heating, auditorium dividers, an automatic door opener, and tuition reimbursement for association employees. The foundation had no separate location, its board consisted of owners and residents, and access to the complex was restricted to residents and their guests. The IRS concluded that the foundation primarily benefited the homeowners association and its residents rather than the public. Because raising money and funding the association's capital improvements were its main activities, the foundation did not operate exclusively for charitable purposes. The taxpayer agreed with the IRS, and the exemption was revoked effective on a redacted date.

Ruling snapshot

• Question: Did a foundation serving one private condominium community operate for public charitable purposes or for the residents' private benefit?
• Outcome: Revocation.
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1; Rev. Rul. 75-286; Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945); American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989).

Full text (IRS public release)

Internal Revenue Service
Tax Exempt and Government Entities Division
Exempt Organizations: Examinations

Department of the Treasury

Release Number: 201517012
Release Date: 4/24/2015
UIL Code: 501.03-30

Date:
05/16/2013

Taxpayer Identification Number:

Form:

Tax Year(s) Ended:
December 31, 20XX
December 31, 20XX

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

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

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

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

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

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

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

Thank you for your cooperation.

Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosures:
Report of Examination
Form 6018
Publication 892
Publication 3498

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

Form 886-A Schedule number or
(Rev. January 1994) EXPLANATIONS OF ITEMS exhibit
Name of taxpayer Tax Identification Years/Periods ended
ORG Number 12/31/20XX
12/31/20XX
Issues

Issue 1. Whether the ORG operated primarily for private benefit during the years
under examination, thus failing the operational test of Treas. Reg. 1-501(c)(3)-

1(c)(1).
Issue 2. Whether the ORG failed to operate exclusively for exempt purposes as

required by Internal Revenue Code §501(c)(3) during the years under examination,
thus failing the operational test of Treas. Reg. 1-501(c)(3)-1(c)(1).

Facts

Background Information

According to the Corporation Commission’s website, the ORG was incorporated in
the state State on October 16, 20XX.

On July 18, 20XX, the Internal Revenue Service issued Letter 1045 notifying the
ORG of its exempt status under I.R.C. § 501(c)(3). Per the current Internal Revenue
Service records, the ORG is recognized as tax exempt under IRC § 501(c)(3) and its
foundation status is IRC § 509(a)(2). The effective date of the exempt status is
October 12, 20XX.

Beginning December 4, 20XX, an examination was conducted on the

books, records, and activities for the tax year ending December
31, 20XX. On December 20, 20XX the examination was expanded to included tax
year ending December 31, 20XX.

Condominium Complex is a condominium complex with 219 condominiums.
Condominium Complex is managed by a Home Owners Association with the same
name. This entity will be referred to as the Home Owners Association. The Home
Owners Association manages the property. The residents own their individual
condominiums and a proportionate share of the common areas of the complex. The
Home Owners Association, in addition to managing the property, provides senior
services for the residents. Each resident pays a monthly fee to the Home Owners
Association for the services they provide. However, the monthly fee does not include
money for capital improvements to the condominium complex. To resolve this problem
the Home Owners Association has a fund called the “ Fund”. Residents can
make contributions to Fund for capital improvements, these contributions
are not tax deductible. This makes raising money for capital improvements difficult.

In 20XX, Individual-1, a resident of the Home Owners Association came up with the
idea to create an exempt organization so residents could contribute to the projects of

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

Form 886-A Schedule number or

(Rev. January 1994) EXPLANATIONS OF ITEMS exhibit

Name of taxpayer Tax Identification Years/Periods ended

ORG Number 12/31/20XX
12/31/20XX

the Home Owners Association and receive a tax deduction. Thus, the ORG (the
Organization) was formed and received its tax exempt status effective October 12,
20XX.

The ORG (the Organization) has two paragraphs explaining its exempt purpose in its
Articles of Incorporation, Bylaws, and its Application for Recognition of Exemption
(Form 1023), the paragraphs follow:

“Said corporation is organized exclusively for charitable, religious, educational
and scientific purposes, including, for such purposes, the making of distributions
to organizations that qualify as exempt organizations under section 501(c)(3) of
the Internal Revenue Code, or corresponding sections of any future federal tax
code.”

“The ORG shall accept and hold all kinds of property received as gifts, bequests,
legacies, donations or otherwise to be beneficiary, or trustees under
testamentary or inter vivos trusts, to manage and invest, accumulate such
property or the income there from for the benefit of all resident owners of
Condominium Complex Condominiums other than current operating expenses.”

The mission statement on the Form 990 for the year ending December 31, 20XX,
confirms the second of the two paragraphs and states the Organization’s mission is “to
benefit all resident owners of Condominium Complex condominiums, for projects
outside their operating budget, related to health, wellness, safety, and education.”

Initial Interview

An initial interview was conducted with the Organization’s President, a Board Member,
and the Organization’s Accountant on December 4, 20XX. The following discussion is a
summary of some of the questions and answers that were exchanged by the parties
during the initial interview:

1. Tell me about your organization's history and its activities?

The purpose is to provide health, safety, and education for the senior residents of
Condominium Complex.

The Organization was formed so the residents could contribute to the projects of
the Home Owners Association (HOA), and receive a tax deduction. The founder
was Individual-1. He pushed very hard to achieve this. The projects are
available only to residents and their guests.

The HOA is an State Non-profit association.

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

Form 886-A Schedule number or

(Rev. January 1994) EXPLANATIONS OF ITEMS exhibit

Name of taxpayer Tax Identification Years/Periods ended

ORG Number 12/31/20XX
12/31/20XX

The property is owned by the residents and each owner also owns their
proportionate share of the common areas.

The money raised or contributed to the Organization goes for projects needed by
the HOA. The HOA board is composed of residents of Condominium Complex.
That is, money is paid to the HOA (not a 501(c)(3)) for the improvements or
projects.

2. Who opens and/or reviews the mail?

Administrative Assistant (administrative assistant to Employee-1 and an
employee of the HOA) opens and reviews the mail.

Mostly residents donate to the Organization and sometimes a family member will
donate in memory of a past resident.

The residents have been informed when making donations to put them in the
mail slot. The mail slot is in the door that leads to HOA’s administrative offices.
This is just inside the front entrance.

Tour of Facility

The Organization has no independent location. The President of the Organization works
from her condominium, and Board meetings are conducted in common areas at the
condominium complex, i.e. the Home Owners Association.

On December 7, 20XX the Agent toured the condominium complex with the general
manager of the Home Owners Association (she is also a Board Member of the
Organization). The Agent saw several of the item purchase by the Home Owners
Association with the Organization funds, including the auditorium partitions, a flat screen
television in the gym, and the pool which was converted to solar heating with the
Organization’s grant/donation to the Home Owners Association.

Additionally, the complex has security staff. There are only two vehicle entrances from
public streets. Entry is limited to the residents and their guests. There is fence around
the entire community including the side of the property that borders the lake.

The Board, Board Meetings, and Minutes

The Board meets monthly (the first Thursday of every month), and is composed of nine
directors plus the General Manager of Condominium Complex (i.e. the Home Owners
Association). Article 3, Section 2 of the Organization’s Bylaws states, “All members (of
the board of directors) shall be owner/residents of the Condominium Complex.” (i.e.

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

Form 886-A Schedule number or

(Rev. January 1994) EXPLANATIONS OF ITEMS exhibit

Name of taxpayer Tax Identification Years/Periods ended

ORG Number 12/31/20XX
12/31/20XX

owner/residents of the Home Owners Association). Also, the Board of Directors
replaces vacancies on the Board. The following is a summary of some Board Meeting
minutes.

1. February 4, 20XX — President, President of the Home Owners Association
   spoke at the Board Meeting. The minutes reflect he emphasized the
   Foundation’s (i.e. the Organization) priority must be funding (i.e. raising
   money), and without funding in hand or en-route, the Home Owners
   Association is unable to move ahead with plans for projects for the
   community (i.e. Home Owners Association).

2. July 1, 20XX — The minutes reflect a lengthy discussion was held on replacing
   the doors to the swimming pool area at a cost of $0, and that the Home
   Owners Association has approved the installation of the doors.

3. August 5, 20XX — The minutes reflect:

a. A homeowner (i.e. resident) donated a juke box.

b. A homeowner (i.e. resident) donated an AED defibrillator, and the
Home Owners Association approved its installation.

c. A homeowner (i.e. resident) donated yellow umbrellas for the pool
area. The purchase of up to eight umbrellas was approved by the
Home Owners Association.

4. November 4, 20XX — The minutes reflect, funding for pool loungers was given
   by two residents, however, the Organization wanted approval of the Home
   Owners Association prior to purchasing the pool loungers.

5. February 3, 20XX- The minutes reflect the findings of the Ad Hoc committee.
   The committee estimated the costs associated with accepting a condominium
   as a donation. They found the fees would be approximately $0 to $0 for the
   property transfer, and $0 to $0 per month after the property transfer. The
   Organization set a goal to raise $0 to cover the costs of the condominium
   donation. The $0 was solicited via internal condominium complex advertising.

6. June 2, 20XX — The minutes reflect the Board’s concern with paying the costs
   associated the condominium until it is sold, if the condominium is accepted as
   a donation.

7. July 7, 20XX — The minutes reflect the Organization will ask residents for a
   loan to cover the cost of the expenses of the condominium.

Form 886-A (1-1994) Catalog Number 20810W Page 4 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A Schedule number or

(Rev. January 1994) EXPLANATIONS OF ITEMS exhibit

Name of taxpayer Tax Identification Years/Periods ended

ORG Number 12/31/20XX
12/31/20XX

Publications

In the initial interview it was stated the Organization does no advertising. However the
Organization did post flyers at the condominium complex. The Organization retained
copies of all posted flyers. The Organization provided these flyers to the Agent during
the examination. The flyers would solicit donations by suggesting donations come
directly from Individual Retirement Accounts, or made via will, trust, or beneficiary deed
for condominiums (Exhibit 1). A flyer posted stated total donations from August 28, 20XX
to December 15, 20XX to the Home Owners Association totaled $0, and included “Solar
for Pool & Spa $0, Automatic Doors to Pool Area $0, Room Dividers for Auditorium $0
(Exhibit 2).

Analysis of the Organization’s Expenses

The key year of the examination was 20XX, and during the course of the examination
the Agent tested the expenses for the key year and found they reflect what appears on
the tax return. In response to the Agent request for documentation of Organization’s
expenses for 20XX and 20XX the Organization provided their Purchase Order Log
from 20XX through 20XX, an exact copy follows.

Purchase Order Log 20XX - 20XX

• LOG DELETED -

Purchase Order Log — 20XX

• LOG DELETED -

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

Form 886-A Schedule number or

(Rev. January 1994) EXPLANATIONS OF ITEMS exhibit

Name of taxpayer Tax Identification Years/Periods ended

ORG Number 12/31/20XX
12/31/20XX

From the above copy of the Organization’s purchase order log, $0 was paid directly to
the Home Owners Association, for things like solar heating for the pool ($0), room
dividers for the auditorium ($0), and an automatic door opener ($0). In order to
accomplish these tasks for the Home Owners Association, the Organization spent $0
on administrative expenses such as insurance ($0) and settlement costs for a donated
condominium ($0). Also, $0 was paid directly to employees of the Home Owners
Association for tuition reimbursement.

Law

Tax Exemption

Generally, an organization that is described in I.R.C. § 501(c)(3) is exempt from income
tax. See I.R.C. §§ 501(a). These organizations include corporations, and any
community chest, fund, or foundation, organized and operated exclusively for religious,
charitable, scientific, testing for public safety, literary, or educational purposes, or to
foster national or international amateur sports competition (but only if no

part of its activities involve the provision of athletic facilities or equipment), or for the
prevention of cruelty to children or animals, no part of the net earnings of which inures
to the benefit of any private shareholder or individual, no substantial part of the activities
of which is carrying on propaganda, or otherwise attempting, to influence legislation
(except as otherwise provided in subsection (h)), and which does not participate in, or
intervene in (including the publishing or distributing of statements), any political
campaign on behalf of (or in opposition to) any candidate for public office. See I.R.C. §
501(c)(3).

In order to be exempt as an organization described in I.R.C. § 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. See Treas. Reg. §
1.501(c)(3)-1(a)(1).

An organization will be regarded as “operated exclusively” for one or more exempt
purposes only if it engages primarily in activities that accomplish one or more of such
exempt purposes specified in I.R.C. § 501(c)(3). See Treas. Reg. §1.501(c)(3)-1(c)(1).
An organization will not be so regarded if more than an insubstantial part of its activities
is not in furtherance of an exempt purpose.

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

Form 886-A Schedule number or

(Rev. January 1994) EXPLANATIONS OF ITEMS exhibit

Name of taxpayer Tax Identification Years/Periods ended

ORG Number 12/31/20XX
12/31/20XX

The existence of a substantial nonexempt purpose, regardless of the number or
importance of exempt purposes, will cause failure of the operational test. See Better
Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945). The
operational test is not satisfied where any part of the organization’s earnings inure to the
benefit of private shareholders or individuals, and where the organization serves a
private benefit rather than public interests. See Treas. Reg. §1.501(c)(3)-1(c)(2).

An organization is not organized or operated exclusively for one or more exempt
purposes unless it serves a public rather than private interest. See Treas. Reg. §
1.501(c)(3)-1(d)(ii). Thus, an organization must establish that it is not organized or
operated for the benefit of private interests such as designated individuals, the creator
or creator’s family, shareholders of the organization, or persons controlled, directly or
indirectly, by such private interests.

The presence of a single substantial non-exempt purpose can destroy the exemption
regardless of the number or importance of exempt purposes. See Better Bus. Bureau v.
United States, 326 U.S. 279.(1945); Am. Campaign Acad. v. Commissioner, 92 T.C.
1053, 1065 (1989). See also, Old Dominion Box Co., Inc. v. United States, 477 F2d.
340 (4th Cir. 1973), cert. denied, 413 US 910 (1973) (operating for the benefit of private
parties who are not members of a charitable class constitutes a substantial nonexempt
purpose). When an organization operates for the benefit of private interests, such as
designated individuals, the creator or his family, or persons directly or indirectly
controlled by such private interests, the organization by definition does not operate
exclusively for exempt purposes. Am .Campaign Acad. v. Commissioner, supra, at 1065
-1066.

A nonprofit organization with membership limited to the residents and business

operators within a city block and formed to preserve and beautify the public areas in the
block, thereby benefiting the community as a whole as well as enhancing the members’
property rights, will not qualify for exemption under section 501(c)(3). Rev. Rul. 75-286.

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

Form 886-A Schedule number or

(Rev. January 1994) EXPLANATIONS OF ITEMS exhibit

Name of taxpayer Tax Identification Years/Periods ended

ORG Number 12/31/20XX
12/31/20XX

Government’s Position

Issue 1. It is the government's position that Organization operated primarily for private
benefit during the years under examination. More specifically, the Home Owners
Association received private benefit.

The operational test is not satisfied where any part of the organization’s earnings inure
to the benefit of private shareholders or individuals, and where the organization serves
a private benefit rather than public interests. See Treas. Reg. §1.501(c)(3)-1(c)(2).

Treas. Reg. § 1.501(c)(3)-1(d)(ii), an organization must establish that it is not organized
or operated for the benefit of private interests such as designated individuals, the
creator, or creator’s family, shareholders of the organization, or persons controlled,
directly or indirectly, by such interests.

Clearly stated on the Organization's Form 990 for the period ending December 31,
20XX, is the Organization’s mission, “to benefit all resident owners of Condominium
Complex condominiums, for projects outside their operating budget, related to health,
wellness, safety, and education.” In the initial interview it was stated the reason for the
creation of the Organization was “so the residents could contribute to the projects of the
Home Owners Association (HOA), and receive a tax deduction.” The private benefit is
two fold, first the tax deduction for the residents of the Home Owners Association for
their contributions and then capital improvements to property of the residents of the
Home Owners Association.

From the Organization’s Purchase Order Log, expenses of $0 have been paid. The
Home Owners Association directly received $0. $0 went for administrative expenses in
support of the Organization non-exempt purposes. Employees of the Home Owners
Association received $0. All expenses paid were for the Home Owners Association,
either directly or indirectly.

In Rev. Rul. 75-286 advice was requested as to whether a nonprofit organization
qualified for exemption from Federal income tax under IRC § 501(c)(3).. Membership
was limited to the residents and business operators within a city block and was formed to

preserve and beautify the public areas of the block, thus benefiting the community as a
whole as well as enhancing the members’ property rights

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

Form 886-A Schedule number or

(Rev. January 1994) EXPLANATIONS OF ITEMS exhibit

Name of taxpayer Tax Identification Years/Periods ended

ORG Number 12/31/20XX
12/31/20XX

The activities of the organization in Rev. Rul. 75-286 were to pay the city government to
plant trees on public property within the block, organize residents to pick-up litter and
refuse in the public streets and on public sidewalks within the block, and encouraging
residents to take an active part in beautifying the block by placing shrubbery in the
public area within the block.

Much of the public area improved by the organization in Rev. Rul. 75-286 is the public
roadway lying between the sidewalk and the street in front of private property owned by
members of the organization. Also, membership was restricted to residents of the block
and those owning property or businesses in the block. The organization’s support was
derived from receipts from block parties and voluntary contributions from members.

In Rev. Rul. 75-286 it was determined the organization did not qualify for exemption
from Federal income tax under section 501(c)(3) for the following reasons:

1. By enhancing the value of the roadway sections abutted by property of the
   members, the organization enhanced the value of its members property
   rights.

2. The restricted nature of membership.

3. The limited area for improvements (i.e. a block)

Rev. Rul. 75-286 found these factors, indicate that the organization is organized and
operated to serve the private interests of its members within the meaning of section
1.501(c)(3)-1(d)(ii) of the regulations.” The Revenue Ruling further states the
organization, “is not organized and operated exclusively for charitable purposes.
Therefore, it does not qualify for exemption from Federal income tax under section
501(c)(3) of the Code.”

Rev. Rul. 75-286 is on point with the Organization under examination. The following are
similarities of the Organization under exam and the organization in Rev. Rul. 75-286.

1. In the Revenue Ruling the members of the organization wanted to
   improve/beautify the roadway abutting their property. It was determined this
   enhanced the organization’s members property rights. The Organization
   under examination raises money to fund projects (mostly capital
   improvements) of the Home Owners Association thus improving residents
   property rights.

Also, as a note the Revenue Ruling organization was improving public
property and giving up ownership to the improvements. The Organization
under exam has given money to the Home Owners Association, the Home

Form 886-A (1-1994) Catalog Number 20810W Page 9 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A Schedule number or

(Rev. January 1994) EXPLANATIONS OF ITEMS exhibit

Name of taxpayer Tax Identification Years/Periods ended

ORG Number 12/31/20XX
12/31/20XX

Owners Association makes capital improvements to private property, and
these improvements are still owned by the Home Owners Association.

2. Membership in the Revenue Ruling organization was limited to residents and
   businesses within the block, for the Organization under exam, a requirement
   to be a board member is ownership/residency in the Home Owners
   Association. These are the only members of the Organization, and the
   Organization’s board is self perpetuating, they fill all vacancies on the Board.
   So, membership in the Organization under exam is even more limited than
   the organization in the Revenue Ruling.

3. In the Revenue Ruling the organization made block improvement, these
   would be accessible to the public on public roads going though the block, and
   this area (a block) was considered limited. The Organization under exam is
   fully fenced in and has no public roads within the Home Owners Association.
   So, here the area for the Organization under exam is even more limited than
   the organization in the Revenue Ruling.

4. The Organization under exam receives most of its funding from the residents
   of the Home Owners Association. This is similar to the Revenue Ruling
   organization receiving funds from its members and block parties.

So, it is for the above reasons, the Organization was organized and operates to serve
the private benefit and fails the operational test.

Issue 2. It is the government's position that the Organization failed to operate
exclusively for exempt purposes during the years under examination. In particular, the
Organization is not operated for a charitable purpose under IRC § 501(c)(3).

Per Treas. Reg. § 1.501(c)(3)-1(d)(ii), an organization is not organized or operated
exclusively for one or more exempt purposes unless it serves a public rather than
private interest, and per Issue 1 above it was established the Organization was
operating for a private interest and not for the public.

The existence of a substantial nonexempt purpose, regardless of the number or
importance of exempt purposes, will cause failure of the operational test. See Better
Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945).

Here there is no evidence the Organization was conducting a charitable activity listed
under IRC § 501(c)(3), some examples are; religious, charitable, scientific, testing for
public safety, literary, educational, or prevention of cruelty to children or animals. Treas.
Reg. § 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 primary in activities that
accomplish one or more exempt purposes.

Form 886-A (1-1994) Catalog Number 20810W Page 10 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A Schedule number or

(Rev. January 1994) EXPLANATIONS OF ITEMS exhibit

Name of taxpayer Tax Identification Years/Periods ended

ORG Number 12/31/20XX
12/31/20XX

Essentially, the Organization has two activities, one is to raise money and the second is
to spend the money raised on capital improvements for the Home Owners Association.

As was stated in the initial interview, the reason for forming the Organization was, “so
the residents could contribute to the projects of the Home Owners Association (HOA),
and receive a tax deduction.” This statement was confirmed on the Organization Form
990, for the period ending December 31, 20XX, in the Organization's mission statement.
The Organization’s mission is “to benefit all resident owners of Condominium Complex
condominiums, for projects outside their operating budget, related to health, wellness,
safety, and education.”

The Board Minutes document the Board’s focus on raising money for capital
improvements for the Home Owners Association. The President of the Home Owners
Association spoke at a board meeting saying the primary concern of the Organization
should be raising money, so capital improvement for the Home Owners Association can
be accomplished. The Board Minutes show the Board’s focus on setting goals to raise
money from the residents to pay for costs to maintain a donated condominium and
replace the doors to the pool area.

Further supporting this position, are the flyers posted by the Organization, requesting
donations from Individual Retirement Accounts, trusts, and wills. Flyers were also
posted detailing $ of funds going to the Home Owners Association for various
projects, like solar heating for the pool and the replacement of the doors to the pool
area.

In support of this position is the Organization’s Purchase Order Log which shows since
20XX expenses of $0 have been paid and of that $0 has gone directly to the Home
Owners Association, $0 has been paid for administrative expenses in support of the
Organization non-exempt purposes, and $0 has gone to the employees of the Home
Owners Association.

The Organization has two activities, one is to raise money and the second is to spend
the money raised on capital improvements for the Home Owners Association. These
activities are the primary activities of the Organization, they do not meet the
requirements of exempt purpose under IRC § 501(c)(3), and because of these two
primary activities the Organization is operated only for a non-exempt purpose, and fails
the operational test.

Form 886-A (1-1994) Catalog Number 20810W Page 11 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form 886-A Schedule number or

(Rev. January 1994) EXPLANATIONS OF ITEMS exhibit

Name of taxpayer Tax Identification Years/Periods ended

ORG Number 12/31/20XX
12/31/20XX

Taxpayer's Position

The Taxpayer has indicated agreement with the government's position as stated in this
report.

Conclusion

The Organization does not qualify for exemption under IRC § 501(c)(3), and therefore
its tax exempt status should be revoked for failing the operational test of Treas. Reg. 1-
501(c)(3)-1(c)(1) for the following reasons:

1. The Organization operated for private benefit rather than public interest
   during all years under examination

2. The Organization does not operate exclusively for exempt purposes as
   required by I.R.C. § 501(c)(3).

The revocation should be effective January 1, 20XX. Form 1120, U.S. Corporation
Income Tax Return should be filed for 20XX and each year thereafter as long as it
remains subject to Federal Income Tax. If the proposed revocation becomes final,
appropriate State officials will be notified of such actions in accordance with IRC §
6104(c).

Form 886-A (1-1994) Catalog Number 20810W Page 12 publish.no.irs.gov Department of the Treasury-Internal Revenue Service