Environmental T-shirt seller loses exemption over commercial activity and private inurement

View official IRS release (PDF)

Plain-English summary

A section 501(c)(3) organization said it educated the public about environmental issues through public booths, pamphlets, cleanup programs, and message-bearing T-shirts. The IRS examination found that its receipts came from T-shirt sales and that its spending largely supported those sales, while the organization did not provide adequate records showing the extent of its educational or cleanup activities. Its records also did not reliably track sales, inventory, cash receipts, or disbursements. The organization's secretary controlled its bank and card accounts and admitted that some debit card charges were personal expenses, leaving other spending impossible to distinguish from personal use. The IRS concluded that the organization had a substantial commercial purpose and that part of its net earnings inured to the secretary. It revoked the exemption effective on a redacted date and required the organization to file corporate income tax returns.

Ruling snapshot

• Question: Did the organization's T-shirt sales and recordkeeping show that it operated exclusively for exempt purposes without private inurement?
• Outcome: Revocation.
• Key authorities: IRC §§ 501(c)(3), 502(a), 6001, and 6033; Treas. Reg. §§ 1.501(c)(3)-1, 1.501(a)-1(c), 1.6001-1, and 1.6033-1; Better Business Bureau of Washington, D.C. v. United States, 326 U.S. 279 (1945); Airlie Foundation, Inc. v. United States, 826 F. Supp. 537 (D.D.C. 1993).

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities Division
1100 Commerce Street MC 4900 DAL
Dallas, TX 75242

Release Number: 201517015
Release Date: 4/24/2015
ORG
UIL Code: 501.03-00

Date:
November 25, 2013

Taxpayer Identification Number:

Form:
990

Tax year(s) ended:
12/31/20XX & 12/31/20XX

Person to contact / ID number:

Contact numbers:
Phone Number:
Fax Number:

Manager's name / ID number:

Manager's contact number:
Phone Number:

Response due date:
December 26, 2013

Certified Mail - Return Receipt Requested

Dear

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

What you need to do if you agree

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

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

If we don't hear from you

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

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

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

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

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

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

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

Contacting the Taxpayer Advocate Office is a taxpayer right

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

Internal Revenue Service
Office of the Taxpayer Advocate

For additional information

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

Thank you for your cooperation.

Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

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

Form number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS 990

Name of taxpayer Tax Identification Number Years/Periods ended

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

LEGEND

ORG ~ Organization name XX - Date address - Address city - City state

• State secretary - Secretary individual-1 to 9 - Individual-1 to 9

student-1 to 26 - Student-1 to 26 CO-1 to 5 - CO-1 to 5

ISSUES

(1) Does ORG, a nonprofit organization, that operates booths at public parks and recreation areas
that sell t-shirts in the manner described below qualify for exemption under section 501(c)(3) of the
Internal Revenue Code (IRC)?

(2) Does ORG's records keeping practices constitute a part of its net earnings inures to its
Secretary, Secretary, that violates requirements described in IRC section 501(c)(3)?

FACTS

ORG was formed as a nonprofit public benefit corporation in State. According to its Articles of
Incorporation dated March 3, 20XX, the purposes of ORG are:

To educate the public about the importance of preserving our natural environment, maintaining
our cultural values and protecting our social fabric through such means as establishing
environmental education stations, conducting nature clean-up programs, and distributing fliers,
pamphlet and message-bearing items (such as T-shirts).

It filed Form 1023, Application for Recognition of Exemption under Internal Revenue Code under
Section 501(c)(3) of the Internal Revenue Code, on September 17, 20XX. It was granted the
exemption status on April 22, 20XX. On Part II of the Form, ORG provided its activities and
operational information:

To accomplish its exempt-purpose goals, our organization will engage in the following
activities:

• Maintain environmental education stations in public places, at which members of the
public are informed about crucial environmental issues facing all of us, and are provided
with a range of actions they can take (such as recycling, etc.) to help improve the
situation

• This will include the free distribution of educational fliers and pamphlets on
environmental issues [0%]

• Conduct environmental clean-up programs in our local area, manned by volunteers from
the community [0%]

• Engage in other activities, from time to time, to educate the public on important
environmental concerns [0%]

Report issued on November 25, 20XX
Form 886-A (1-1994) Catalog Number 20810W Page _1 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS 990

_ Name of taxpayer Tax Identification Number Years/Periods ended
ORG 12/31/20XX
12/31/20XX

We will be distributing printed materials and message-bearing items such as T-shirts.
However, our activities will be clearly distinguished from those of a commercial enterprise
because:

• All published materials will be educational in nature, clearly supporting our
organization’s goals, and will be distributed free of charge, and

• Sales of message-bearing items (such as T-shirts) will clearly support our educational
goals as well, since these items will carry prominently displayed messages regarding
the environment

ORG filed Form 990, Return of Organization Exempt From Income Tax, for the year ended
December 31, 20XX, on November 14, 20XX. The Form 990 shows the following:

Part | Revenue, Expenses, and Changes in Net Assets or Fund Balances

Income

Gross sales of inventory, less returns and allowances $ 0
Less: cost of goods sold $ 0
Total revenue $ 0
Expenses

Total Expenses $ 0
Excess for the year $ 0
Net assets or fund balances at end of year $ 0

Part II Balance Sheets
Beginning of year End of year
Cash, savings, and investments $ 0 $ 0

Net assets or fund balances at end of year $ 0 $ 0
ORG filed Form 990, Return of Organization Exempt From Income Tax, for the year ended

December 31, 20XX, on August 15, 20XX. The Form 990 shows the following:
Part | Revenue, Expenses, and Changes in Net Assets or Fund Balances

Income

Gross sales of inventory, less returns and allowances $ 0
Less: cost of goods sold $ 0
Total revenue $ 0
Expenses

Total Expenses $ 0
Excess for the year $ 0

Report issued on November 25, 20XX
Form 886-A (1-1994) Catalog Number 20810W Page_ 2 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS 990

Name of taxpayer Tax Identification Number Years/Periods ended
ORG 12/31/20XX
12/31/20XX
Net assets or fund balances at end of year $ 0

Part ll Balance Sheets
Beginning of year End of year
Cash, savings, and investments $ 0 $ 0

Net assets or fund balances at end of year $ 0 $ 0

The examiner (referred to as examiner in the chronological summary) began the examination on
February 7, 20XX. Following is a chronological summary of completed actions throughout this
examination process:

2/7/XX Examiner sent ORG Letter 3611 and its attachments to the address listed on Form 990
to schedule an audit on March 6, 20XX at 10 A.M at Address, City, State Zip Code.

2/20/XX Examiner called ORG ‘s phone number listed on Form 990 and spoke to Secretary,
Secretary of ORG. Examiner informed her that ORG had been selected for
examination. ORG Secretary said she got flu and had not picked up mails for a while.
She needed to pick up mails before she could discuss further.

2/25/XX Examiner spoke to ORG Secretary and explained to her audit process. ORG was not
able to get documents ready by March 6, 20XX. The appointment was rescheduled to
April 2, 20XX. ORG did not have office in a public place and was not willing to hire a
representative. Examiner told Secretary a meeting room for examination can be
arranged in IRS office

3/1/XX Examiner sent ORG Letter 3613 and its attachments to the address listed on the
Form 990, to schedule an audit on April 2, 20XX at 10 A.M in IRS office located at
Address, City.

3/20/XX Secretary called examiner to reschedule the appointment again because the accountant
of ORG was not available in April. Secretary could not provide a specific date for the
appointment. Secretary stated that she would call examiner soon to provide her
availability.

3/22/XX Examiner left a voice message at to ORG that another appointment needs to be set up
if the previous appointment on April 2, 20XX was not able to keep.

4/2/XX Examiner wrote to the organization to schedule another appointment for the audit of
the above tax period on May 1, 20XX in IRS office at Address, City, State Zip Code after
the organization was not able to keep the previous appointments scheduled on March 6,
20XX and April 2, 20XX.

Report issued on November 25, 20XX
Form 886-A (1-1994) Catalog Number 20810W Page 3 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form number or exhibit

Form 886-A EXPLANATIONS OF ITEMS 990

(Rev. January 1994)

Name of taxpayer Tax Identification Number Years/Periods ended
ORG 12/31/20XX
12/31/20XX
4/8/XX Secretary left a voice message to examiner’s voice message system and requested the

4/10/XX

5/20/XX

5/22/XX

appointment rescheduled to May 23, 20XX, at 11A.M. at a residential house address at

Address, City, State Zip Code. Examiner left a voice message at ORG’s phone number
to explain that the audit is to be at a public place. Examiner requested ORG return call

to discuss the location of audit.

ORG did not respond to the voice message. Examiner mailed a letter to ORG for a
meeting on May 23, 20XX in IRS office in City.

Examiner received a Form 2848, Power of Attorney and Declaration of Representative,
from Attorney. Attorney requested the meeting to be held in his office since he had
ORG books and records in his office. Attorney agreed examiner going to his office on
May 22 and May 23, 20XX because May 24 would be a furlough day for examiner.

Attorney presented two boxes of records that ORG brought in few days ago. He told
examiner that he did not have a chance to go over the records, so he could not answer
examiner's any question. Examiner reviewed the records in the boxes, which include:
• Determination letter received from the IRS dated April 22, 20XX granting
exemption from Federal income tax
Articles of Incorporation
By-laws adopted on July 1, 20XX
Minutes for Board meeting on February 15, 20XX
Minutes for Board meeting on March 3, 20XX
Minutes for Board meeting on February 1, 20XX
Business Insurance Invoices from
Auto Insurance Invoices from
A double-sided pamphlet about ORG, “Stop Global Warming” and
“Environmental Awareness”
A double-sided pamphlet about ORG, “50 Ways to help our Planet”
Summary of Merchant Service Fees for 20XX
Receipts for gas expenses in 20XX
Receipts for office expenses and supplies in 20XX
Receipts for auto maintenance and repair
Quarterly Electronic Filing of Sales and Use Tax to Board of Equalization,
State in 20XX
• Acknowledgement or thank you letters from other. public charities for
donations received

• Monthly Bank Statements at (Account Number 00) for year 20XX
• Monthly Journals (12 sheets) with Revenue and Expenses transactions for
year 20XX

Report issued on November 25, 20XX

Form 886-A (1-1994) Catalog Number 20810W Page_4 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS 990

Name of taxpayer Tax Identification Number Years/Periods ended
ORG 12/31/20XX
12/31/20XX

The summary of deposits, withdrawals, and checks paid on bank statements and the
debit, credit, and cash transactions recorded on the monthly journals are listed in the

following:
Bank Statements Monthly Journals (General Ledger)
Street Sales
Withdrawals & Checks Cash Cash Not
20XX Deposits Debit Paid Balance Debit ' Credit ” Expenses® Deposited *
Beginning
Balance 0.00
January 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
February 0.00 0.00 0.00 0.00 0.00 0.00 0.00
March 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
April 0.00 0.00 0.00 0.00 0.00 0.00 0.00
May 0.00 0.00 0.00 0.00 0.00 0.00 0.00
June 0.00 0.00 0.00 0.00 0.00 0.00 0.00
July 0.00 0.00 0.00 0.00 0.00 0.00 0.00
August_ 0.00 0.00 0.00 0.00 0.00 0.00 0.00
September 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
October 0.00 0.00 0.00 0.00 0.00 0.00 0.00
November 0.00 0.00 0.00 0.00 0.00 0.00 0.00
December 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Total 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Ending
Balance 0.00

‘ Checks paid plus withdrawals & debit on bank statements ($0) almost equal to the debit on monthly
journals.

• The variance between deposits and credit was caused by the discrepancies in October and December.
  3 ORG kept receipts of gas expenses and a portion of office expenses paid by cash. The records of
  vehicles usage or mileage logs were not maintained.

“ ORG did not provide records or information how to track of the cash received or disbursed.

Report issued on November 25, 20XX
Form 886-A (1-1994) Catalog Number 20810W Page 5 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form number or exhibit
Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS 990
Name of taxpayer Tax Identification Number Years/Periods ended
ORG 12/31/20XX
12/31/20XX
The distribution of expenses of each month in 20XX is in the table below:
Art work,
special list Gas, auto
Business heat press insurance, Office
insurance bank, equipment, repair, expense, Clothing & Donations &
20XX01 / Permit & credit card domain name | maintenance & supplies & cash publications
20XX12 sales tax service fees & ads tickets boxes withdrawal purchased
January 0.00 0.00 0.00 0.00 0.00
February 0.00 0.00 0.00 0.00
March 0.00 0.00 0.00 0.00 0.00 0.00
April 0.00 0.00
May 0.00 0.00 0.00 0.00 0.00
June 0.00 0.00 0.00 0.00 0.00 0.00
July 0.00 0.00 0.00 0.00 0.00
August 0.00 0.00 0.00 0.00 0.00 0.00
September 0.00 0.00 0.00 0.00 0.00
October 0.00 0.00 0.00 0.00 0.00
November 0.00 0.00 0.00 0.00 0.00
December 0.00 0.00 0.00 0.00 0.00
Totals 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Percentage 0% 0% 0% 0% 0% 0% 0%

• $0 out of $0 donations was paid to City Zoo/Zoological Society in 20XX. The cancelled checks of 20XX indicated
  that substantial amount of payments made to City Zoo was not donations, but rental fees of a space for ORG’s sales

booth

5/23/XX

5/31/XX

Examiner conducted interview with Secretary over the phone because Attorney was not
able to answer examiner's questions as to operations, books and records of ORG.
Secretary stated that the figures reported on Form 990 were estimates because she
rushed to file the return to avoid it past due. Examiner asked Secretary if a tour can be
arranged for the location where ORG sells and stores t-shirts. Secretary responded that
it would not be convenient because the inventory is stored in her residence and the
sales booths are not at fixed locations. She would provide photos to illustrate ORG’s
exempt activities. Secretary stated that she usually maintains cash around $0 on hands
for inventory purchase and other expense. T-shirts inventory purchased (cost of goods
sold) was not indicated on bank statements or monthly journals. No records are
maintained to keep track of daily sales, balance of inventory, and petty cash, except the
original receipts for gas and some office expenses. Examiner provided Memorandum of
Interview and information document request (IDR2) to clarify information provided and
specify items that still remained outstanding. The IDR was given to Attorney to be
forwarded to ORG.

Examiner called Attorney and left a voice message to Attorney whether ORG has any
questions as to IDR2.

Report issued on November 25, 20XX

Form 886-A

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

Form number or exhibit

Form 886-A EXPLANATIONS OF ITEMS 990

(Rev. January 1994)

Name of taxpayer Tax Identification Number Years/Periods ended
ORG 12/31/20XX
12/31/20XX

6/XX/XX Examiner call Attorney to follow up IDR2 and was told by his office assistant that

6/18/XX

6/20/XX

6/26/XX

7/10/XX

7/12/XX

Attorney was on vacation and not available until June 26, 20XX. Examiner left a voice
message to Secretary that examiner had not received document in response to IDR2
from ORG or Attorney.

Examiner left another voice message to Secretary.

Examiner mailed a letter to ORG, copy to Attorney, advised ORG provide documents
requested by July 8, 20XX, keep examiner informed of unavoidable delays and discuss
any potential issues. Secretary called examiner after examiner mailed out the letter.
She stated that Attorney did not forward IDR2 to her after the field exam on May 23,
20XX. Examiner replied to her that a letter with a copy of IDR2 have been sent to her.
She told examiner that she would try to provide the requested items as requested.

Examiner received PS Form 3811 for the letter mailed on June 20, 20XX. It indicated
that the letter was delivered to ORG Secretary on June 22, 20XX.

Considering information provided for 20XX was insufficient to determine ORG’s exempt
status, examiner mailed another letter and IDR3 by certified mail to ORG, copy to
Attorney, to expand the examination to the subsequent year (20XX) and schedule a
meeting in person on August XX, 20XX.

Secretary called examiner after the letter and IDR3 were mailed. Examiner informed
her that examination had been expanded to 20XX. Examiner explained to her in
addition to non response of ORG and Attorney, examiner did not have enough
information or supporting documents from ORG to conclude the examination for 20XX.
Secretary engaged her friend, who has working experiences with IRS, in the phone
conversation. Her friend questioned examiner the reason of expending audit to 20XX,
and what is examiner targeting at? Examiner repeated that information or supporting
documents were insufficient to make a determination. Her friend responded: “Is selling
t-shirts bearing environmental protection message not enough?” Examiner replied more
information and supporting documents are needed to determine whether or not selling t-
shirts is not profit oriented. Her friend replied, “I had known her for a long time, she is
nice and kind to people around. IRS picked the wrong one to go after. Some
transactions might be a problem, but overall her organization has been doing a good job
helping people and society.” Examiner asked what transactions she referred to could
be a problem? Her friend did not respond. Secretary said she would send all the items
requested on IDR2 to examiner this week.

Examiner received a box from ORG, which contained the following items:
• A letter dated on July 10, 20XX written by Secretary to IRS
• Hand writing response to Item 2a and 2g on IDR3
• Ten t-shirts, art-work of environmental messages, and stickers from ORG -
the messages ORG printed on t-shirts for sale (see Exhibit #1). The

Report issued on November 25, 20XX

Form 886-A (1-1994) Catalog Number 20810W Page_7 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form number or exhibit

Form 886-A EXPLANATIONS OF ITEMS 990

(Rev. January 1994)

Name of taxpayer Tax Identification Number Years/Periods ended
ORG 12/31/20XX
12/31/20XX

7/15/XX

7/27/XX

8/2/XX

8/5/XX

8/6/XX

8/12/XX

8/XX/XX

messages are: Slogan-1, Slogan-2, Slogan-3, Slogan-4, Slogan-5, Slogan-6,
and Slogan-7
Examiner called ORG and left a voice message to confirm the receipt of these items.

Examiner received photos (see Exhibit #2) from ORG with a letter dated July 11, 20XX
written by Secretary to show ORG’s booths display. Several photos indicated that color
t-shirts are sold for $0 a piece and tie dye t-shirts $0 a piece. Examiner called Attorney
and Secretary to confirm receipt of these photos. Examiner asked her whether she has
questions about the letter and IDR3 sent on July 10, 20XX. She stated that she has not
received it yet and Attorney did not get a chance to respond to her message. She
asked examiner what would be the worst scenario of the examination. Examiner replied
the purpose of F990 examination is to determine if ORG conducts activities to fulfill its
exempt purpose and whether there is tax consequence for transactions under
examination. Examiner explained to Secretary that a meeting in person is necessary to
clarify information provided. Examiner advised Secretary pick up the letter and IDR3
and sit down with Attorney for meeting with examiner. The meeting was scheduled on
August XX, 20XX.

Attorney left a voice message to examiner on Saturday, July 27, 20XX at 5 pm.

Examiner returned call to Attorney. His office assistant told examiner that Attorney was
on vacation and returning to office on August 5, 20XX.

Examiner called Attorney office again. Examiner was told Attorney was in meeting with
clients. Examiner left a voice message to Attorney for return call.

Examiner called Secretary to confirm the meeting on August XX, 20XX in IRS City
office as well as to review books and records of ORG in 20XX provided on that date.

Attorney called examiner and requested meeting to be held in his office. Examiner told
him that records requested for 20XX exam might be voluminous, examiner plans a two
days audit in City to review records and obtain copies of document if necessary.
Examiner would not have problem to change location if Attorney can provide such
accommodation. Examiner called ORG Secretary and informed her that the location of
field examination changed to Attorney office per their request.

Examiner interviewed Secretary with Attorney at presence. Secretary provided hand
written response on IDR3 and additional five t-shirts (see Exhibit #3) to demonstrate
some other messages and designs on ORG’s t-shirts. The messages are: Slogan-8,
Slogan-9, Slogan-10, and Slogan-11.

Secretary did not provide any documentation of 20XX for examination because she
wanted an end of this examination. Examiner explained to her the purpose of
examination again and if ORG is not willing to provide requested documents for
examination, examiner would have to seek another way to review its books and records,

Report issued on November 25, 20XX

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

Form number or exhibit

Form 886-A EXPLANATIONS OF ITEMS 990

(Rev. January 1994)

Name of taxpayer Tax Identification Number Years/Periods ended
ORG 12/31/20XX
12/31/20XX

8/14/XX

8/30/XX

such issuance of summons. Attorney replied that ORG should be able to obtain bank
statements of 20XX and provide records as requested. Secretary told examiner she
would be on trip to City from August 24 through to September 8. She would not be able
to provide such records. Examiner explained to them that the examination started in
February 20XX, sufficient time had been given to ORG. Secretary does not need to be
present for books and records to be provided. Attorney can forward the records to
examiner by mail or examiner can schedule another trip to Attorney office if records are
too voluminous. Additional two week was granted to ORG to assemble books and
records of 20XX for examination.

Examiner mailed Memo for interview and IDR4 to ORG and Attorney. IDR4 was issued
to request comments and corrections for the information provided on August XX, 20XX,
books and records of 20XX, and the items remain outstanding in IDR3.

Examiner called Attorney to confirm receipt of a package from ORG, but some
requested items were apparently not provided, such as 20XX Monthly Journals (General
Ledger) and bank statements of March, April, and July 20XX. Attorney told examiner
that Secretary was out of country. The package contained the following items:

• A letter dated on August 27, 20XX written by Secretary to IRS

• A letter dated on July 8, 20XX written by City Attorney-1, Deputy City Attorney
of City, to Individual-1

• A report dated on June 5, 20XX written City Attorney-2, City Attorney of City
(Attachment A to the above letter dated on July 8, 20XX)

• A memorandum of law dated November 14, 19XX, from City Attorney-3, City
Attorney of City, to Councilmember Council Member (Attachment B to the
above letter dated on July 8, 20XX)

• A photo showing a man carrying a sign demonstrating “LABEL GMOs”

A photo showing a female carrying signs (words on signs are not readable)

• A photo showing two females and a boy standing behind a table with a sign of
“LABEL GENETICALLY ENGINEERED FOOD”

• A photo showing the three signs of placed on sales table of ORG:

A photo showing a female (with a girl) carrying a trash grabber and trash bag
on beach
A photo showing a plastic bucket with some bottles inside
A photo showing some publications in two cases
A photo showing two female standing in front of a table with books
Six photos showing t-shirts displayed on a table
An USB Flash Drives contains the following electronic files:
o Two photos in an electronic file named “activities_April20XX”", showing

ORG’s posters placed on the ground

o Five photos in an electronic file named “activities_August20XX”
showing a representative of ORG tending sales table

Report issued on November 25, 20XX

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

Form number or exhibit
Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS 990
Name of taxpayer Tax Identification Number Years/Periods ended
ORG 12/31/20XX
12/31/20XX

Two photos in an electronic file named “activities_August20XX”
showing publications from other charities in boxes

Three photos in an electronic file named “activities_February20XX”
showing publications from other charities displayed on a table

An electronic format of the letter, file named “Attorney Letter Non Profit
Court Case”, dated on July 8, 20XX written by City Attorney-1, Deputy
City Attorney of City, to Individual-1 and two attachments

Three photos in an electronic file named “City Food for Life” showing a
female preparing and delivering food for a crowd of people (looked like
somewhere in Country)

An electronic pamphlet file named “ORG_Trifold_FullColor’, that ORG
published during examination

An electronic format of gas receipts file named, “Gas Receipts 20XX —
Part 1” and “Gas Receipts 20XX — Part 2”

An purchase order, file named “ Store_2-10-20XX” (Order #50,
dated February 10, 20XX) to Store:
Shipment Products Price Total
1 $0 $0
30 $0 $0
1 $0 $0
4 $0 $0
An electronic file named, “ newsletter jan.feb20XX Society
newsletters for January/February 20XX
An electronic format of purchase order, file name “p _2-18-
20XX”, (Order #21, dated February 18, 20XX) to
Ordered Description Price Total
20 Animal Liberation Leaflet $0 $0
20 Save 100 Animals Leaflet $0 $0
10 Vegetarian/Vegan Starter Kit $0 $0
20 Feral Cats Brochure $0 $0
15 Christian Vegetarian Booklet $0 $0
An e-mail of shipping notice, file name “Scan 200 Vegetarian Cook
book”, (Tracking #00 & 00 Ground, dated June 20, 20XX) from
email address to Individual-2 at email address with a the following
message:
The total was $0. Thank you for everything. It has been nice to hear from you after
such a long time. | hope all continues to go well in service. | hope to see you
at Festival!

An e-mail from Individual-3 to Individual-2 as to an order of books in

value of $0 with tracking number

An electronic format of resume, file name “ Resume”, from an

individual who experienced in sales, assisting customers with

purchases, stocked inventory, and providing customer service

The file named “Scan Donations Part 2” contains three e-mails from
and one employment

offers by ORG as to employments of International Students

Report issued on November 25, 20XX

Form 886-A (1-1994)

Catalog Number 20810W Page 10 publish.no.irs.gov

Department of the Treasury-Internal Revenue Service

Form number or exhibit
Form 886-A EXPLANATIONS OF ITEMS 990
(Rev. January 1994)
Name of taxpayer Tax Identification Number Years/Periods ended
ORG 12/31/20XX
12/31/20XX
The file named “Scan Donations Part 2” contains scanned proof of
donations and publications purchased made by ORG in 20XX and
20XX.
The file named “Scan office 20XX” contains receipts of supplies
purchased at
Nine electronic files with name start with “scan bank statements...”
contains monthly bank statements of nine months in 20XX
The file named “Scan book and flyers purchases to distribute freely to
public” contains copies of flyer about Yoga, receipts of order, and a
cancelled check in amount of $0 issued in 20XX
The file named “Scan Donations ORG 20XX” contains soliciting letters
for donation or memberships from other organizations and a check in
amount of $0 issued to
The file named “Scan girls work travel 20XX” contains e-mails and job
offers in 20XX and 20XX between ORG and Employment Agents for
international students or foreigners:
• A Work & Travel Job Offer prepared by ORG on January 22,
20XX provided the following job information:
Job Start Date: June 25, 20XX
Job End Date: September 16, 20XX
Job Title: Sales Rep
Job Description: Kiosk Sales
Expected hours per Week: 40
Wages: $ Commission Sales
• Individual-4 from email address on April 12, 20XX requested
ORG to confirm a list of 12 International Students for t-shirts
sales provided by
ID Participant Name Country Title Pay Rate Start Date | Sponsor
000000 | Student-1 Country | Sales Rep. Commission Sales 15-Jun | Sponsor
000000 | Student-2 Country | Sales Rep. | Commission Sales 12-Jun | Sponsor
000000 | Student-3 Country | Sales Rep. | Kiosk Sales 20-Jun | Sponsor
000000 | Student-4 Country | Sales Rep. $0 4-Jul | Sponsor
000000 | Student-5 Country | Sales Rep. $0 15-Jun | Sponsor
000000 | Student-6 Country | Sales Rep. $0 15-Jun | Sponsor
000000 | Student-7 Country | Sales Rep. | Commission Sales 25-Jun | Sponsor
000000 | Student-8 Country | Sales Rep. | Commission Sales 10-Jun | Sponsor
000000 | Student-9 Country | Sales Rep. | Commission Sales 27-Jun | Sponsor
000000 | Student-10 Country | Sales Rep. | Commission Sales 28-Jun | Sponsor
000000 | Student-11 Country | Sales Rep. | Commission Sales XxX-Jun | Sponsor
000000 | Student-12 Country | Sales Rep. | Commission Sales XxX-Jun | Sponsor

• A Work & Travel Job Offer prepared by —_on February 22,
20XX provided the following job information:
Job Title: Sales Person
Job Description: Selling City Tee Shirts

Report issued on November 25, 20XX

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

Form number or exhibit

Form 886-A

(Rev. January 1994) EXPLANATIONS OF ITEMS 990

Name of taxpayer Tax Identification Number Years/Periods ended

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

Expected hours per Week: 20
Minimum Hours per Week: 15
Wages: $ 0

• Individual-4 from email address on June 4, 20XX provided ORG
a list of 15 International Students for t-shirts sales:

Name Surname M/F Staff English Level Start Date | Sponsor
Student-13 F Individual-5 | Intermediate 3-Jun | Sponsor
Student-14 F Individual-6 | Upper Intermediate 15-Jul | Sponsor
Student-15 F Individual-5 | Intermediate 10-Jun | Sponsor
Student-16 F Individual-7 | Upper Intermediate 25-May | Sponsor
Student-17 F Individual-7__| Upper Intermediate 25-May | Sponsor
Student-18 F Individual-5 | Upper Intermediate 20-Jun | Sponsor
Student-19 F Individual-8 Intermediate 15-Jun | Sponsor
Student-20 F Individual-8 Intermediate 30-Jun | Sponsor
Student-21 F Individual-6 | Advance 1-Jul | Sponsor
Student-22 F Individual-9 Intermediate 15-Jun | Sponsor
Student-23 F Individual-9 | Pre-Intermediate 15-Jun | Sponsor
Student-24 F Individual-9 | Pre-intermediate 15-Jun | Sponsor
Student-25 F Individual-9 | Upper Intermediate 15-Jun | Sponsor
Student-26 F individual-9 | Intermediate 15-Jun | Sponsor
o The file named “
20XX” contains an e-mail on October 12, 20XX to confirm a
membership order _ for from
Secretary/ORG in amount of $0
o The file named “Scan Purchase of Display
Wagon” contains a letter dated January 31, 20XX from
to confirm purchase of a display wagon
o The file named “Scan Stock Inventory 20XX” contains invoices issued
in 20XX from t-shirts manufacturers/vendors:
Invoice / Unit Shipping /
Vendor Order # Ship date Description Quantity Cost Subtotal Service Total
Sublimation Tops 0 ] 0 0
TD Adult S/S S-XL T-Shirt 0 0 0 0
Vendor 00000 1/31/20XX| TD Youth S/S T-Shirt 0 0 0 0 0
TD Adult S/S S-XL T-Shirt 0 0 0 0
Vendor 00000 3/24/20XX | TD Youth S/S T-Shirt 0 0 0 0 0
TD Adult S/S S-XL T-Shirt 0 0 0 0
Vendor 00000 6/14/20XX_| Sublimation Tops 0 0 0 0 0
Ladies Pasisley V NK 0 0 0
Ladies Pasisley V NK 2XL 0 0 0
Men Basic T-Shirt 0 0 0
Men Basic T-Shirt 2XL 0 0 0
Vendor 00000 7/XX/20XX_| Youth T-Shirt 0 0 0 0 0
TD Adult S/S S-XL T-Shirt 0 0 0 0
CO-1 00000 8/4/20XX | TD Youth S/S T-Shirt 0 0 0 0 0

Report issued on November 25, 20XX

Form 886-A (1-1994)

Catalog Number 20810W

Page 12

publish.no.irs.gov

Department of the Treasury-Internal Revenue Service

Form number or exhibit
Form 886-A EXPLANATIONS OF ITEMS 990
(Rev. January 1994)
Name of taxpayer Tax Identification Number Years/Periods ended
ORG 12/31/20XX
12/31/20XX
CO-2 00000 | 8/10/20XX 0
0
CO-2 00000 | 8/11/20XX| Sarong-KD-TDYE 0 0 0
Ladies Pasisley V NK 0 0 0
CO-3 00000 8/12/20XX_ | Ladies Pasisley V NK 2XL 0 0 0 0 0
Sarong-KD-TDYE 0 0 0
CO-2 00000 | 9/30/20XX 0 0 0 0
Girls Royal FQ SS Crew T's 72 pce 0
prepack 0 0
Ladies Royal FQ SS Crew T's 36 0
CO-4 00000 10/21/20XX | pce prepack 0 0 0
Infant pant, creeper, and other 0 0 0
CO-5 00000 12/12/20XX | Infant T-Romper 0 0 0 0
Kd-Sin, Tie Dye Sarong... 0 0 0
CO-2 00000 11/7/20XX_| Celtic Knot Scarf 0 0 0 0
Infant pant, creeper... 0 0 0
infant T-Romper 0 0 0
Infant Softy Snap Shoulder 0 0 0
Infant Mitten Cuff Lap T 0 0 0
Toddler Girls Ruffle Tunic 0 0 0
CO-5 0000000 12/9/20XX | Girls Vintage Longer Length T 0 0 0 0 0
o The file named “Scan Supplies 20XX” contains receipts of storage
boxes and other supplies purchased from
, and other retailers in 20XX and 20XX
o The file named “Scan t-shirts designs 20XX” contains photos of ORG’s
t-shirts for sales
o The file named “Scan vehicle repairs 20XX” contains receipts for
parking and purchased items for vehicles, invoices of towing services,
auto repair orders, and license registration renewal.
o The file named “SCAN-ORG NON-PROFIT AGREEMENT” contains
blank Volunteer Agreement, Non-Competition Agreement, and
Confidentiality Agreement
o The file named “ScreenPrinting_20XX” contains invoices issued in

November and December 20XX from
Ordered Description Price Total
0 Front-9 Swipe Print 8 Color 1 Discharge $0 $0
Base plus sweatshirts and shirt prep
New design and films, youth size

Ordered Description Price Total
0 Map Tee Front and Back hit $0 $0
0 Mission Map Tee Front and Back hit $0 $0
0 SD Poster Tee Front and Back hit $0 $0
0 Tee banks added $0 $0

9/10/XX IDR5 was issued to ORG, copy to Attorney, for documents not provided in the package
received on August 30, 20XX including the monthly bank statement of March, April, and

Report issued on November 25, 20XX

Form 886-A (1

-1994)

Catalog Number 20810W Page 13 publish.no.irs.gov

Department of the Treasury-Internal Revenue Service

Form number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS 990

Name of taxpayer Tax Identification Number Years/Periods ended
ORG 12/31/20XX
12/31/20XX
July 20XX, the credit card statements (Account# ) used for purchasing, cancelled

checks, and sales and inventory records of t-shirts.

9/24/XX Examiner called ORG Secretary and Attorney and left voice message to them for
question they have on IDR5.

10/1/XX —Government shutdown was ordered due to a continued lapse in appropriations.
10/16/XX

10/17/XX Examiner did not receive mail from ORG or Attorney. Secretary of ORG stated that she
mailed a package to examiner. Examiner checked with mails room for the package.

10/23/XX Examiner informed Secretary of ORG the package not found. She stated copies could
be regenerated next day and send to examiner again.

10/29/XX Received a package with response to IDR5 from ORG. The package contained the
following items:
• A cover letter dated on October 27, 20XX written by Secretary to IRS
• Hand writing response to Item 1a through 1f, 2a, 5, 7 and 8 on IDR5
• Cancelled checks of check # 16, 18, 141, 142, 144, 148, 149, 151, 152, 153,
155, 158, 159, 164, 165, 166, 168, 170, 171, 172, 173, 174, 177, 178, 179,
181, 182, 112, 122, 124, 125, 126, 128, 129, 121, 122, 124, 125, 126, 127,
129, 122, 123, 125, 126, 127, and 120
• A double-sided pamphlet about ORG, “Are you eating GMOs?”
• An USB Flash Drives contains the following electronic files:
o Eleven electronic files with name start with “10-1-20XX" contains
monthly credit card statements from February through December 20XX
o Monthly bank statements of March, April, and July 20XX for ORG’s
checking account
o A Word document (Electronic File Name: 20XX Annual Report ORG
cover page) cover page for Annual Report 20XX
o A Word document (Electronic File Name: Annual Report 20XX.docx),

written by , in title of Annual Report 20XX
o A Word document (Electronic File Name: Flyer for Distribution),
published in 20XX Green Issue

o The file named “Certificate for ORG workers comp 20XX” contains
Certificate of Liability Insurance from April 1, 20XX to April 1, 20XX
o A Word document (Electronic File Name: Flyer Info - SEED POLICE),

a article title “Article” published in April 20XX Issue
o The file named “New Artwork Beaches Design” contains an image of
ORG’s t-shirt

o The file named “One Planet Poster Art for Display” contains an image
of ORG’ poster

Report issued on November 25, 20XX
Form 886-A (1-1994) Catalog Number 20810W Page 14 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form number or exhibit
Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS 990
Name of taxpayer Tax Identification Number Years/Periods ended
ORG 12/31/20XX
12/31/20XX

A Word document and a to an article titled “Article” published in
May 20XX Issue

The file named “City poster shirt 2” contains an image of ORG’s t-shirt
The file named “Scan_Doc0001” and “scan doc 2” contains a rental
agreement between ORG and Secretary for garage-parking-storage at
Address, City, State in 20XX

• Office Storage, Garage and Parking 3 spaces

• Monthly Rental: $ 0

• Deposit: $0

• Start Date: 01/01/20XX
The file named “SCAN-ORG NON-PROFIT AGREEMENT” contains
blank Volunteer Agreement, Non-Competition Agreement, and
Confidentiality Agreement
A Word document (Electronic File Name: VOLUNTEER I.D 2) contains
a volunteer badge for Secretary

The
deposits,
withdrawals,
and checks
paid on
bank
statements
of 20XX are
in the table Withdrawals &
below: 20XX Deposits Debit Checks Balance
Beginning
Balance 0
January 0 0 0 0
February 0 0 0 0
March 0 0 0 0
April 0 0 0 0
May 0 0 0 0
June 0 0 0 0
July 0 0 0 0
August 0 0 0 0
September 0 0 0 0
October 0 0 0 0
November 0 0 0 0
December 0 0 0 0
Totals 0 0 0
Report issued on November 25, 20XX
Form 886-A (1-1994) Catalog Number 20810W Page _15 _ publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS 990

Name of taxpayer Tax Identification Number Years/Periods ended
ORG 12/31/20XX
12/31/20XX
Ending
Balance 0

The distribution of expenses of each month in 20XX is in the table below:

Business
insurance, Display
bank, Gas, auto products,
credit insurance, supplies, Donations
card Cost of repair, boxes & | Grocery, or
20XX01 / Permit & service goods maintenance other clothing, | publications
20XX12 sales tax fees sold & tickets expenses | & airfare | purchased
January 0 0 0 0 0
February 0 0 0 0 0 0
March 0 0 0 0 0 0
April 0 0 0 0 0
May 0 0 0 0 0 0 0
June 0 0 0 0 0 0
July 0 0 0 0 0 0 0
August 0 0 0 0 0 0
September 0 0 0 0 0 0 0
October 0 0 0 0 0 0 0
November 0 0 0 0 0 0
December 0 0 0 0 0 0
Totals 0 0 0 0 0 0 0
Percentage 0% 0% 0% 0% 0% 0% 0%

Note: The above expenses ($0 in total) were the sum of receipts of expenses (gas & office supplies) paid by cash,
checks issued, ATM & debit card withdrawals, electronic withdrawals, fees and other withdrawals from January 1
through December 30, and credit card charges from January 29 through December 03 (credit card charges occurred
in January and December 20XX were not provided). Payments made for rental expenses or compensating
international students not indicated or included in the documents provided.

11/4/XX_ IDR6 was issued to ORG, copy to Attorney, for documents not provided in the package
received on October 29, 20XX. Items on IDR6 include cancelled check (check# 132,
162, 157, 120, and 129), the beginning balance and ending balance of inventory (t-
shirts) for 20XX, the unit selling price of t-shirts, the amount of compensation and/or
commission paid to international students in 20XX and 20XX, the receipt and purpose of
0 purchases on credit card statements, the purchase and usage of ORG’s vehicles, and
information not specified in the previous documents provided.

11/XX/XX Examiner called ORG Secretary and Attorney and left voice message to them for
question they have on IDR6.

Attempts to clarify information and for a conference call had been made on 11/15/XX, 11/18/XX,
and 11/19/XX, however, examiner has not received affirmation from ORG, Secretary or Attorney.
Examiner informed Secretary and Attorney by phone on 11/21/XX that the result of examination
would be determined based on documents and information available.

Report issued on November 25, 20XX
Form 886-A (1-1994) Catalog Number 20810W + Page_16 _publish.no.irs.gov ePartment of the Treasury-Internal Revenue Service

Form number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS 990

Name of taxpayer Tax Identification Number Years/Periods ended
ORG 12/31/20XX
~ | 12/31/20XX

To date, the examiner has not received the response from ORG or its Representative as to the
items requested on IDR6 or conference as to the remaining item for examination.

LAW

IRC section 501(c)(3) provides, in part, for the exemption from federal income tax of corporations
organized and operated exclusively for charitable, scientific, or educational purposes, provided no
part of the organization's net earnings inures to the benefit of any private shareholder or individual.

IRC section 502(a) provides that an organization operated for the primary purpose of carrying on a
trade or business for profit shall not be exempt from taxation under section 501 on the ground that
all of its profits are payable to one or more organizations exempt from taxation under section 501.

Treas. Reg section 1.501(c)(3) -1(c)(2) states that an organization is not operated exclusively for
charitable purposes if its net earnings inure in whole or in part to the benefit of private
shareholders or individuals.

Treas. Reg section 1.501(a)-1(c) defines “private shareholder or individual” as referring to
persons having a personal and private interest in the activities of the organization.

Treas. Reg section 1.501(c)(3) -1(d)(1)(ii) states that an organization is not organized exclusively
for any of the purposes specified in IRC section 501(c)(3) unless it serves public, rather than
private interests. Thus, an organization applying for tax exemption under IRC section 501(c)(3)
must establish that it is not organized or operated for the benefit of private interests.

Treas. Reg section 1.501(c)(3)-1(d)(3)(i) defines “educational” as “ In general... (a) The instruction
or training of the individual for the purpose of improving or developing his capabilities; or (6) The
instruction of the public on subjects useful to the individual and beneficial to the community.

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

In Airlie Foundation, Inc. v. U.S., 826 F. Supp. 537 (D. D.C. 1993), aff.d 55 F.3d 684 (D.C. Cir.
1995) the court acknowledged that Airlie’s activities have some noncommercial characteristics, but
found these outweighed by other factors such as the nature of Airlie’s clients and competition, its
advertising expenditures, and substantial revenues derived from weddings and special events. In
the court’s view, these factors support an adverse conclusion. Finally, citing a distinctive
commercial hue to the way it carries out its business, the court concluded that Airlie does not
qualify under IRC 501(c)(3) because it operates its conference center in a manner consistent with
that of a commercial business.

Report issued on November 25, 20XX
Form 886-A (1-1994) Catalog Number 20810W Page 17 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS 990

Name of taxpayer Tax identification Number Years/Periods ended

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

IRC section 6001 provides that every person liable for any tax imposed by the IRC, or for the
collection thereof, shall keep adequate records as the Secretary of the Treasury or his delegate
may from time to time prescribe.

IRC section 6033(a)(1) provides, except as provided in IRC section 6033(a)(2), every organization
exempt from tax under section 501(a) shall file an annual return, stating specifically the items of
gross income, receipts and disbursements, and such other information for the purposes of
carrying out the internal revenue laws. The Secretary may also prescribe by forms or regulations
the requirement of every organization to keep such records, render under oath such statements,
make such other returns, and comply with such rules and regulations as the Secretary may from
time to time prescribe.

Treas. Reg. section 1.6001-1(c) states that in addition to such permanent books and records as
are required by paragraph(a) of this section with respect to the tax imposed by section 511 on
unrelated business income of certain exempt organizations, every organization exempt from tax
under section 501(a) shall keep such permanent books of account or records, including
inventories, as are sufficient to show specifically the items of gross income, receipts and
disbursements. Such organizations shall also keep such books and records as are required to
substantiate the information required by section 6033. See section 6033 and sections 1.6033-1
through -3.

Treas. Reg. section 1.6001-1(e) states that the books or records required by this section shall be
kept at all times available for inspection by authorized Internal Revenue Service officers or
employees, and shall be retained as long as the contents thereof may be material in the
administration of any Internal Revenue law.

Treas. Reg. section 1.6033-1(h)(2) provides that every organization that has established its right
to exemption from tax, whether or not it is required to file an annual return of information, shall
submit such additional information as may be required by the District Director for the purpose of
enabling him to inquire further into its exempt status and to administer the provisions of
subchapter F (section 501 and the following), chapter 1 of the Code and IRC section 6033.

In accordance with the above cited provisions of the Code and Regulations under IRC sections
6001 and 6033, organizations recognized as exempt from federal income tax must meet certain
reporting requirements. These requirements relate to the filing of a complete and accurate annual
information (and other required federal tax forms) and the retention of records sufficient to
determine whether such entity is operated for the purposes for which it was granted tax-exempt
status.

GOVERNMENT'S POSITION

We are proposing revocation based on ORG’s failure to operate exclusively for charitable
purposes and a part of its net earnings inures to the benefit of individual prohibited by law, as
discussed below.

Report issued on November 25, 20XX

Form 886-A (1-1994) Catalog Number 20810W Page 18 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS 990

Name of taxpayer Tax Identification Number Years/Periods ended
ORG 12/31/20XX
12/31/20XX

Bank statements reveal that the receipts of ORG are from sales of t-shirts. Disbursements are for
administrative, vehicles, inventory storage, the cost of goods sold, and other office expenses.
ORG does not budget or disburse its available funds for beach cleaning activities or educational
materials. Expenditures focus on, if not all, selling t-shirts.

The environmental messages printed on t-shirts for sales are to protect oceans, to save the sea
creatures, or messages alike. The profits from sales are to order more t-shirts for sales — with
different patterns, but the similar messages printed. No records, information, or studies are
provided how these messages printed t-shirt are educational or charitable to the public, except a
small portion of receipts are used for environmental DVD rentals, donations to other organizations,
or purchase of publications from other organizations.

ORG provides a couple of pamphlets and some publications created by other organizations, which
is claimed to be educational and free to public. However, no records or information illustrates
when and how, the number of pamphlets printed and distributed to the public.

Treas. Reg. section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or
operated for exempt purposes unless it serves a public rather than a private interest. The term
“educational” is used in IRC section 501(c)(3) in its general legal sense in the law of charities and
does not have a separate and distinct meaning from the term “charitable.” In construing the
meaning of the phrase “exclusively for educational purposes” in Better Business Bureau v. United
States, 326 U.S. 279 (1945), the Supreme Court of the United States said, “This plainly means
that the presence of a single noneducational purpose, if substantial in nature, will destroy the
exemption regardless of the number or importance of truly educational purposes.”

ORG does not maintain a web site where it can advocate, educate, or exchange environmental
beliefs or ideas with the public, which may be more efficiently, effectively and environmental
friendly. Instead ORG’s substantial activity was to set up booths in public places and to sell t-
shirts, which is not different from other t-shirts retailers. ORG's purposes, as evidenced by its
revenues, expenses and incentives provided to its sales staff, are commercial in nature. This
situation is similar to the case in Airlie Foundation, Inc. v. U.S. |n that case, tax-exempt status is
revoked because the organization operates its conference center in a manner consistent with that
of a commercial business. ORG operates in a similar manner to other for-profit retailers and
should likewise have their exempt status revoked.

Another primary focus of the issue is on the question whether any of ORG's net earnings inured to
the benefit of private individuals.

The term ‘net earnings’ as used in section IRC section 501(c)(3) includes more than the net
profits as reflected on the organization's books. Net earnings may inure to the benefit of an
individual in a variety of ways, and not merely through the distribution of dividends.

Report issued on November 25, 20XX
Form 886-A (1-1994) Catalog Number 20810W = Page_19 _publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Form number or exhibit

Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS 990

Name of taxpayer Tax Identification Number Years/Periods ended
ORG 12/31/20XX
12/31/20XX

ORG does not correctly report its revenue and expenses on Form 990. The figures reported on
Form 990 for 20XX are estimates. ORG does not rely on records for reporting purpose. The total
bank deposits in 20XX are $0 more than the gross revenue reported on Form 990 for 20XX.

ORG did not have a system or procedure to keep its sales, inventory, cash receipts and
disbursements accountable. Secretary, Secretary of ORG, is the only individual who has the
access to ORG’s bank account, signs checks, purchases using ORG’s credit card and debit card,
makes deposits or withdrawals, and carries a substantial amount of cash ($0) for ORG’s
operation. Secretary has already admitted some debit card charges are for her personal
expenses. A substantial amount of expenses, such as gas, clothing, books, and unexplained
withdrawals, are not distinguishable whether they were for ORG operations or Secretary's
personal use. Without reliable records, we cannot verify that these expenditures are exclusively
for ORG’s exempt purpose. Our position is that a portion of ORG's net earnings inured to the
benefit of Secretary and ORG has thereby violates the requirements for tax exemption under IRC
section 501(c)(3).

TAXPAYER'S POSITION

The taxpayer's position is unknown at this time.

CONCLUSION

As a result of the examination, we have determined that ORG is not operating for exempt
purposes as a IRC section 501(c)(3) organization. ORG fails the operational test prescribed in
Treas. Reg. 1.501(c)(3)-1. Since ORG is not organized and operated exclusively for one or more
exempt purposes under IRC section 501(c)(3), its Federal tax exempt status under such section is
revoked effective on January 1, 20XX. ORG is required to file Form 1120, U.S. Corporation
Income Tax Return, for the tax year ending December 31, 20XX and all years there after.

Report issued on November 25, 20XX
Form 886-A (1-1994) Catalog Number 20810W Page 20 publish.no.irs.gov Department of the Treasury-Internal Revenue Service