Inactive gift-annuity charity loses exemption after payments stop

Plain-English summary

A charity originally formed to support cancer patients later shifted to marketing charitable gift annuities. Many annuities were unsecured or uninsured, and funds from new investors were used to make payments on earlier annuities before the organization entered bankruptcy. After bankruptcy, its only activity was collecting payments on a note receivable and using the money to pay annuitants. When those payments stopped, the organization ceased making annuity payments and conducted no charitable programs or other activities. The organization agreed to revocation, and the IRS revoked its section 501(c)(3) status effective January 1, 2009. The examination report also proposed private-foundation treatment and section 4942 taxes because reported public support was insufficient and required distributions had not been made.

Ruling snapshot

• Question: Did the inactive organization continue to qualify under section 501(c)(3) after its only activity became collecting a note and paying annuitants?
• Outcome: Revocation effective January 1, 2009.
• Key authorities: IRC §§ 501(c)(3), 509(a), and 4942; Treas. Reg. §§ 1.501(c)(3)-1 and 1.509(a)-3.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Appeals Office

4330 Watt Ave SA 7890 Taxpayer Identification Number:
Sacramento CA 95821-7012
Date: FEB 02 2015 Person to Contact:
Number: 201518021 Tel:

Release Date: 5/1/2015 Fax:

A Tax Period(s) Ended:
B

Form Number

UIL: 501.03-00

Certified Mail

Dear

This is a final adverse determination regarding your exempt status under section
501(c)(3) of the Internal Revenue Code (the “Code”). It is determined that you do not
qualify as exempt from Federal income tax under section 501(c)(3) of the Code effective
January 1, 2009.

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

Treas. Reg. section 1.501(c)(3)-1(a)(1) provides that in order to be exempt as an
organization described in IRC section 501(c)(3), an organization must be both
organized and operated exclusively for one or more exempt purposes. Your
organization ceased operations in 2010, and your sole previous activity was the non-
exempt activity of collecting on a note receivable and making payments to annuitants.
You therefore failed to establish that you were engaged primarily in activities that
accomplish one or more exempt purposes, and that you were not operated primarily for
the benefit of private rather than public interests. Furthermore, you have agreed to
revocation of your exempt status under section 501(c)(3).

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

You are required to file Federal income tax returns on Form 1120 for the tax periods
stated in the heading of this letter and for all tax years thereafter. File your return with
the appropriate Internal Revenue Service Center per the instructions of the return. For
further instructions, forms, and information please visit www.irs.gov.

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

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

proposed deletions. If you disagree with our proposed deletions, follow the instructions
in Notice 437.

You have waived your right to contest this determination under the declaratory judgment
provisions of Section 7428 of the Code by your execution of Form 906, Closing
Agreement Concerning Specific Matters, an executed copy of which is being sent to you
under separate cover.

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

Sincerely Yours,

Appeals Team Manager
Nan Shimizu

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

UIL: 501.03.31

Date: July 12, 2013

Certified Mail – Return Receipt Requested

Dear

Department of the Treasury

Taxpayer Identification Number:

Form:
Tax Year(s) Ended:
Person to Contact/ID Number:
Contact Numbers:
Telephone:
Fax:
Manager’s Name/ID Number:

Manager’s Contact Number:

Response Due Date:

We've proposed adjustments to the amount of tax you owe for the tax year or years listed
above. The enclosed report of examination explains the proposed adjustments as well as any

required correction.

If you agree, you should:

1. Sign and date the enclosed Form 870-E, Waiver of Restrictions on Assessment and
   Collection of Deficiency and Acceptance of Overassessment, and return it to the contact
   person at the address listed above within 30 calendar days from the date of this letter.

2. Provide proof that you’ve made any required corrections.

3. Enclose payment of the tax, interest, and penalties. If you owe additional tax, it’s to your
   advantage to pay the full amount. Please make your check or money order payable to the
   United States Treasury. The enclosed Publication 3498, The Examination Process,

provides additional payment information.

Letter 3614 (Rev. 6-2012)
Catalog Number 34805N

If you can’t pay the full amount, please call the contact person at the telephone number shown
in the heading of this letter to discuss different methods of paying, such as in installments. If
you don't enclose payment, we'll bill you for any unpaid amounts. Publication 594, The IRS
Collection Process, is enclosed.

If you don’t agree, 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 six of the enclosed Publication 3498. It 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.

If you believe your disputed issue hasn’t been addressed in published precedent or has been
treated inconsistently by the IRS, you may request technical advice. If you'd like to know more
about this process, please contact the individual identified on the first page of this letter. If you
disagree with the technical advice decision, you may appeal that decision to the Appeals office,
as explained above.

If we don’t hear from you within 30 calendar days from the date of this letter, we'll issue a
Statutory Notice of Deficiency based on the adjustments shown in the report of examination.

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

Internal Revenue Service
Office of the Taxpayer Advocate

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.

2 Letter 3614 (Rev. 6-2012)
Catalog Number 34805N

Thank you for your cooperation.

Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosures:

Report of Examination
Form 870-E
Publication 3498
Publication 594

3 Letter 3614 (Rev. 6-2012)
Catalog Number 34805N

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or

Explanation of Items Exhibit

Name of Taxpayer TIN Year/Period Ended
12/31/20XX

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

ORG - Organization name XX - Date State - state President -

president Vice President ~ vice president Vice President-2 - Vice

President -2 Secretary/Treasurer - secretary/treasurer Attorney -

attorney Annuitants - annuitants Operator - operator

Issue #1 Revocation:

Whether ORG (ORG), continues to qualify for exemption under Section 501(c)(3) of the
Internal Revenue Code.

Issue #2 Private Foundation Status:

Whether ORG should be reclassified as a private foundation making it liable for tax on
undistributed income under Section 4942 of the Internal Revenue Code.

Facts:

ORG was originally formed as ORG (ORG). Articles of incorporation were filed for
ORG on May 7, 19XX. The Internal Revenue Service issued a determination letter in
October of 19XX recognizing ORG as a 501(c)(3) public charity described in section
509(a)(1) and 170(b)(1)(A)(vi) of the code. Article IV of ORG’s articles of
incorporation listed the following proposed activities:

1. The stimulation, support and development of a better understanding of the
   disease of cancer and its effect on people within the State of State

2. The encouragement and maintenance of exchange of ideas and methods
   of rehabilitation of, and therapy for cancer patients

3. The promotion of effective counseling programs for cancer patients and
   their families

4. The provision of essential transportation for cancer therapy patients and
   their families

5. The provision of necessary equipment aids for cancer patients such as
   beds, wheelchairs, commodes, walkers, etc. whenever available

6. The dissemination of information concerning cancer and rehabilitation of
   cancer patients, not only to cancer patients but also to physicians,
   business and professional people and others who are in a position to
   assist in the rehabilitation of cancer patients, and

7. The function as a source of support and encouragement to those who
   must undergo cancer treatment, both before and during the course of
   rehabilitation.

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -1-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer TIN Year/Period Ended
12/31/20XX
ORG 12/31/20XX
12/31/20XX

The State Corporation Commission received an amendment to the articles of
incorporation on December 10, 19XX. The amendment changed the name of ORG
to ORG and appointed new officers. The new officers were listed as follows:
President — President, Vice President — Vice-President, Vice President-2 — Vice-
President, and Secretary/Treasurer — Secretary/Treasurer. The new officers were
also appointed as directors and Vice President-2 was also designated as the new
statutory agent. Article IV of the articles of incorporation was amended to describe
ORG's activities as follows:

1. The stimulation, support, development and perpetuation of traditional
   American family values.

2. The encouragement, support and maintenance of non-profit organizations
   advancing health and health research related issues, education and the
   arts, relief of suffering, etc.

3. The dissemination of information leading to an increase in the number of
   American families managing their “social capital.”

4. The promulgation of a charitable gift annuity program, allowing families
   and business owners to participate in planned giving.

5. The maintenance of a donor advised account program, allowing families
   the opportunity to establish a “social legacy”, whereby the family can
   support selected charities on a continuing basis.

The new officers began to market charitable gift annuities through ORG. The
annuities promised tax advantages to the purchaser, annuity payments to a lifetime
beneficiary and any residual would go to a public charity. Most of the annuities were
not properly secured or insured and funds raised through them were ultimately used
by the officers for operating costs. ORG relied on new investors to make payments
on the annuities sold to previous investors.

ORG began to have trouble making annuity payments and in 20XX filed for Chapter
11 bankruptcy. In 20XX it emerged from bankruptcy and hired Attorney as general
legal counsel. At that time ORG tried to resume its prior business of offering
charitable gift annuities. This proved to be impossible because of the bankruptcy on
its record. By July of 20XX it was inevitable that ORG would need to be shut down.

Since shutting down ORG would immediately end all annuity payments, Attorney
volunteered to run ORG at no charge so that annuity payments could continue for as
long as possible. On July 7, 20XX Attorney was named ORG's president, CEO,
statutory agent, and chairman of the board as its sole director.

The bankruptcy resulted in a note payable from CO-1 (CO-1) to ORG. At the time of
ORG's bankruptcy, CO-1 was operated by Operator and three ORG officers;

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer TIN Year/Period Ended
12/31/20XX
ORG 12/31/20XX
12/31/20XX

President, Vice President, and Secretary/Treasurer. The principal of the note was $.
Payments were to be made in 60 equal installments of $ which included principal and
interest. Payments were to begin on January 15, 20XX and would occur on the 15th
day of each month thereafter.

ORG has not issued any charitable gift annuities since Attorney took over in 20XX.
Since Attorney’s involvement, ORG’s activity was limited to receiving payments on
the note payable from CO-1. ORG used these funds to pay annuitants. Bank
statements, canceled checks, and electronic withdrawals reviewed for the 20XX year
confirm that substantially all withdrawals went to annuitants. Form 1099R was
issued to all annuitants who received annuity payments in 20XX. ORG was able to
provide an annuity contract for all individuals who received a 1099R.

CO-1 stopped making payments on the note payable in the first half of 20XX. This
was ORG’s only source of income. Once payments on this note stopped, ORG
could no longer make annuity payments. ORG has not made an annuity payment
since June of 20XX. ORG estimates that it is still owed over $ on the note payable.

ORG does not conduct any charitable programs or activities. As stated earlier, the
only activity that has taken place since 20XX is the collecting of payments on the
CO-1 note payable and using the funds to make annuity payments. ORG’s Form
990 return filed for the 20XX year reports grants and other assistance of $ on Line 1
of Part IX. This was supposedly a disbursement to a 501(c)(3) entity. However,
review of canceled checks and electronic withdrawals revealed no such charitable
disbursement.

ORG incorrectly listed publicly traded securities with a year-end value of $ on its
20XX Form 990 return. ORG does not hold any publicly traded securities. The
examination revealed that these are annuity and life insurance policies. These
policies were not reported using their 12/31/20XX cash surrender values and as such
are grossly overstated on the Form 990 return. The value of these policies as of
December 31, 20XX was approximately $.

The majority of these annuities are written on the Annuitants; the largest investor of
ORG charitable gift annuities. They invested about $. Through bankruptcy it was
held that these annuities could only be used to pay the Annuitant family. As such,
ORG cannot use these annuities to pay any other annuitants. Upon the death of the
Annuitants most of the residuum of the policies is set to go to public charities. If
there are any funds left over the residuum amount dedicated to charity, ORG will use
those funds to continue annuity payments.

Form 886-A ~rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -3-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer TIN Year/Period Ended
12/31/20XX
ORG 12/31/20XX
12/31/20XX

A letter and information document request was sent to ORG on January 4, 20XX.
The purpose of this letter was to obtain the value of the annuities and life insurance
policies as of December 31, 20XX. On January 15, 20XX Appointee, appointee of
ORG, called and requested additional time to gather the requested information. She
also explained that the figure would not be much different from the December 31,
20XX value already obtained. An extension was granted until February 13, 20XX.
ORG did provide information to show the value of some of its annuities and life
insurance policies as of December 31, 20XX. However, information for all policies
was not provided.

20XX was the last year that ORG filed a 990 return. This return did not list any
charitable mission or any program service accomplishments. Attorney confirmed
that ORG does not currently conduct any activities. He stated that he has kept ORG
running primarily with the hopes that it may be able to resume making payments to
annuitants at a future date.

Part III of Schedule A of ORG’s 20XX 990 return reports public support of $ which
was received in the 20XX year. No other sources of public support were reported on
the Schedule A. Total support is also reported as $ which was received in the 20XX
year. Section C of Part III reports ORG’s public support as 100%.

Law:
Issue #1: Revocation

Section 501(c)(3) of the Internal Revenue Code (IRC) exempts from federal income tax
organizations organized and operated exclusively for religious, charitable, scientific,
testing for public safety, literary, educational purposes, to foster national or international
amateur sports competition, or for the prevention of cruelty to children or animals,
provided that no part of the organization’s net earnings inures to the benefit of any
private shareholder or individual.

Section 1.501(c)(3)-1(a)(1) of the Federal Tax Regulations (Regulations) provides that
in order to be exempt as an organization described in section 501(c)(3) of the Code, the
organization must be one that is both organized and operated exclusively for one or
more of the purposes specified in that section.

Section 1.501(c)(3)-1(c)(1) of the Regulations provides that an organization will not be
regarded as operated exclusively for exempt purposes if more than an insubstantial part
of its activities is not in furtherance of exempt purposes.

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

Page: -4-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer TIN Year/Period Ended
12/31/20XX
ORG 12/31/20XX
12/31/20XX

Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations provides that to meet the operational

test, an organization must be engaged in activities furthering “public” purposes rather

than private interests. It must not be operated for the benefit of designated individuals
or the persons who created it.

Issue #2: Private Foundation Status

Section 509(a) of the (IRC) provides that the term “private foundation” means a
domestic or foreign organization described in section 501(c)(3) other than —

1) an organization described in section 170(b)(1)(a) (other than clauses (vii) and
(viii);

2) an organization that normally receives more than one third of its support from
contributions, membership fees, and gross receipts from activities related to
its charitable, etc., functions — subject to certain exceptions, and no more
than one third of its support from gross investment income and unrelated
business taxable income (less section 511 tax) from businesses acquired by
the organization after June 30, 19XX;

3) an organization that is not controlled by any disqualified persons (other than
foundation managers) and supports organizations described in sections
509(a)(1) or (2) or section 501(c)(4), (5), or (6), if they meet the tests of
section 509(a)(2); and

4) an organization organized and operated to test for public safety.

Sections 170(b)(1)(A)(vi) and 509(a)(1) of the IRC describe an organization “...which
normally receives a substantial part of its support from a governmental unit... or from
direct or indirect contributions from the general public.

Section 509(a)(2) of the IRC describes an organization that normally receives no more
than one-third of its support from gross investment income and more than one-third of
its support in each tax year from any combination of the following:

i) gifts, grants, contributions, or membership fees, and

ii) gross receipts from admissions, sales of merchandise, performance of
services, or furnishing of facilities, in an activity which is not an unrelated
trade or business (to the extent that gross receipts from any person, or from
any bureau or similar agency of a governmental unit do not exceed the
greater of $5,000 or 1 percent of the organization's total support in that year).

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -5-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer TIN Year/Period Ended
12/31/20XX
ORG 12/31/20XX
12/31/20XX

Section 1.170A-9(e)(2) of the Regulations states that an organization is publicly
supported if at least 33 1/3 percent of its support is received from governmental units
and direct or indirect contributions from the general public.

Section 1.170A-9(e)(3)(i) of the regulations provides that the percentage of support
“normally” received by an organization from governmental units, from contributions
made directly or indirectly by the general public, or from a combination of these
sources, must be “substantial.” For purposes of this subparagraph, an organization will
not be treated as “normally” receiving a “substantial” amount of governmental or public
support unless the total amount of governmental and public support “normally” received
equals at least 10 percent of the total support “normally” received by such organization.

Section 1.509(a)-3(m) of the regulations provides, “if such organization also furnishes
facilities or loans to persons who are not members of such class and such furnishing
does not contribute importantly to the accomplishment of such organization’s exempt
purposes (aside from the need of such organization for income or funds or the use it
makes of the profits derived), the support received from such furnishing will be
considered ‘rents’ or ‘interest’ and therefore will be treated as ‘gross investment income’
within the meaning of section 509(d)(4), unless such income is included in computing
the tax imposed by section 511.”

Sections 1.170A-9(f)(4)(vii)(B) and 1.509(a)-3(c)(1)(i) of the regulations provide that an
organization that has failed to qualify under 170(b)(1)(A)(vi) or 509(a)(2) for any two
consecutive taxable years will be treated as a private foundation as of the first day of
the second consecutive taxable year only for purposes of sections 507, 4940, and
6033. Such an organization must file a Form 990-PF, “Return of Private Foundation or
Section 4947(a)(1) Nonexempt Charitable Trust Treated as a Private Foundation,” and
will be liable for the net investment tax imposed by section 4940 and, if applicable, the
private foundation termination tax imposed by section 507(c), for that second
consecutive failed year. For the succeeding years, the organization will be treated as a
private foundation for all purposes.

Section 4942(a) of the IRC provides that there is hereby imposed on the undistributed
income of a private foundation for any taxable year, which has not been distributed
before the first day of the second (or any succeeding) taxable year following such
taxable year (if such first day falls within the taxable period), a tax equal to 30 percent of
the amount of such income remaining undistributed at the beginning of such second (or
succeeding) taxable year.

Section 4942(b) of the IRC provides that in any case in which an initial tax is imposed
under subsection (a) on the undistributed income of a private foundation for any taxable
year, if any portion of such income remains undistributed at the close of the taxable

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -6-

Form 886 A. Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer TIN Year/Period Ended
12/31/20XX
ORG 12/31/20XX
12/31/20XX

period, there is hereby imposed a tax equal to 100 percent of the amount remaining
undistributed at such time.

Section 4942(c) of the IRC provides that the term "undistributed income” means, with
respect to any private foundation for any taxable year as of any time, the amount by
which —

1) the distributable amount for such taxable year, exceeds

2) the qualifying distributions made before such time out of such distributable
amount.

Section 4942(d) of the IRC provides that the term "distributable amount" means, with
respect to any foundation for any taxable year, an amount equal to —

1) the sum of the minimum investment return plus the amounts described in
subsection (f)(2)(C), reduced by

2) the sum of the taxes imposed on such private foundation for the taxable year
under subtitle A and section 4940.

Section 4942(e) of the IRC provides that the minimum investment return for any private
foundation for any taxable year is 5 percent of the excess of —

A) the aggregate fair market value of all assets of the foundation other than
those which are used (or held for use)directly in carrying out the foundation's
exempt purpose, over

B) the acquisition indebtedness with respect to such assets (determined under
section 514(c)(1) without regard to the taxable year in which the indebtedness
was incurred).

Section 4942(j)(1) of the IRC provides that the term “taxable period” means, with
respect to the undistributed income for any taxable year, the period beginning with the
first day of the taxable year and ending on the earlier of —

A) the date of mailing of a notice of deficiency with respect to the tax imposed by
subsection (a) under section 6212, or

B) the date on which the tax imposed by subsection (a) is assessed.

Taxpayer’s Position:

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer TIN Year/Period Ended
12/31/20XX
ORG 12/31/20XX
12/31/20XX

Issue #1: Revocation

ORG accepts and does not protest change to the revocation of exemption under IRC
§ 501(c)(3) effective January 1, 20XX.

Issue #2: Private Foundation Status

ORG does not accept the government's position regarding this issue and submitted a
valid protest challenging this issue. ORG’s position is that tax exempt organizations
under IRC section 501(c)(3) may be either a “publicly supported organization” or a
“private foundation” under applicable provisions of IRC sections 509(a)(1) and
170(b). To be either a “publicly supported organization” or a “private foundation”
under applicable provisions of IRC sections 509(a)(1) and 170(b), the organization
must first be a tax exempt organization under IRC section 501(c)(3). Organizations
that do not qualify as tax exempt under IRC section 501(c)(3) also do not qualify as
either public or private charities under IRC sections 509(a)(1) and 170(b). As a
matter of law organizations that are not tax exempt under IRC sections 501(c)(3)
cannot be “private foundations” under IRC sections 509(a)(1) and 170(b).
Organizations that are not “private foundations” are not subject to the private
foundation excise tax under Chapter 42 of the IRC.

Government’s Position:

Issue #1: Revocation

ORG has been inactive since Attorney took over in 20XX. Since then ORG’s sole
activity has been to collect payments on a note payable from CO-1 and use these
funds to pay annuitants. This in and of itself is not a charitable purpose described in
section 501(c)(3) of the Code. CO-1 stopped paying on the note in 20XX and
because of this ORG has not made an annuity payment since June of 20XX. ORG
has not conducted any activities since June of 20XX.

ORG is inactive and does not conduct any activities and therefore fails the
operational test as required by section 1.501(c)(3)-1(a)(1) of the regulations. ORG
cannot be operating for 501(c)(3) purposes if it has no activities.

ORG reported $ of grants and other assistance on its 20XX Form 990 return.

Review of canceled checks and electronic withdrawals did not reveal payments to
any charities. This $ could not be confirmed to be for charitable purposes. Even if
this could be confirmed to be a charitable disbursement, it is not a substantial
enough activity to prevent revocation of ORG’s tax-exempt status. ORG has not filed

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -8-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer TIN Year/Period Ended
12/31/20XX
ORG 12/31/20XX
12/31/20XX

a Form 990 return for 20XX or 20XX. Because it did not have any income since
early 20XX, there would have been no funds for charitable disbursements since then.
If the $ was for charitable distributions, it would still be the only charitable
disbursements made in a three year period. This further demonstrates the inactivity
of ORG.

Issue #2: Private Foundation Status

ORG is not a publicly supported entity and does not qualify as a publicly supported
entity described in Section 509(a)(2) of the IRC. ORG failed to report all of its
sources of support on Schedule A. Specifically, ORG did not include investment
income as part of its total support. When investment income is included in the
support calculation it is clear that ORG fails the 33 1/3% public support requirement.
See the attachment titled “Private Foundation Status” for an explanation of how
ORG's public support was calculated.

As can be seen from the calculation ORG’s public support is only 17.11% for the
2005-20XX period. The public support calculation is also likely higher than what it
really is. Figures were taken from ORG’s previous 990 returns to calculate public
support. The 20XX Form 990 reported $ of direct public support on Part 1, line 1b.
The 20XX return reports $ of direct public support. It is not known what generated
these figures. Attorney stated that since he took over in 20XX, ORG had no
activities other than collecting payments from CO-1 which were used to make
payments to annuitants. If this statement is correct, it is likely that the direct public
support reported in 20XX and 20XX do not actually constitute a source which would
be classified as direct public support. Payments from CO-1 would not constitute a
source of public support.

ORG fails the public support test and will be treated as a private foundation as
described in Regulations 1.170A-9(f)(4)(vii)(B) and 1.509(a)-3(c)(1)(i).

As a private foundation ORG would be required to make distributions to accomplish
a charitable purpose. In 20XX ORG only had $ of qualifying distributions. However,
ORG was required to make distributions of $. Any undistributed amount would
become taxable at the end of 20XX under section 4942(a) of the IRC. ORG is liable
for $ of tax under section 4942(a) of the IRC for the 20XX year. ORG did not file
Form 990 or 990-PF for the 20XX year and it is assumed there were no qualifying
distributions since they were no longer operational at this point. However ORG still
held largely the same assets as it did for the 20XX year. In 20XX ORG was required
to make distributions of $. ORG is liable for $ of tax under section 4942(a) of the
IRC for the 20XX year. Both the 20XX and 20XX section 4942(a) tax would

Form 886-A (Rev.4-68) Department of the Treasury - Internal Revenue Service
Page: -9-

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer TIN Year/Period Ended
12/31/20XX
ORG 12/31/20XX
12/31/20XX

ultimately be due in 20XX. See the attachments titled “Tax on Undistributed Income”
to see how the tax liability was calculated.

ORG has not distributed all of its required distributions for either the 20XX or 20XX
year. Section 4942(b) of the IRC imposes a tax equal to 100 percent of the amount
of undistributed income remaining undistributed at the close of the taxable period.
Remaining undistributed income is $ for the 20XX year and $ for the 20XX year.
ORG must distribute this income by the end of the taxable period or it will be subject
to the 100 percent tax. The total tax under section 4942(b) is $.

Conclusion:
Issue #1: Revocation

ORG is not organized and operated exclusively for charitable purposes as required by
Section 501(c)(3) of the Internal Revenue Code. ORG’s tax-exempt status should be
revoked.

Issue #2: Private Foundation Status

ORG did not qualify as a publicly supported charity and should be a private
foundation. As a private foundation ORG is liable for $ of tax on undistributed
income under section 4942(a) of the IRC. If ORG does not distribute the remaining
undistributed income from 20XX and 20XX they will be liable for the 100 percent tax
under 4942(b) which is $.

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