Healing institute loses exemption over private benefit

View official IRS release (PDF)

Plain-English summary

A nonprofit institute offered alternative-health treatments, classes, certifications, books, and other products based on a method created by its founder. Its returns reported unrelated business income as its only source of income for the examined years, while the examination traced organization funds to personal expenses and found that insiders received royalties, wages, additional compensation, and personal use of a bank account. The IRS concluded that the institute primarily furthered nonexempt purposes and failed to show that it served public rather than private interests under IRC § 501(c)(3). Its exemption was revoked effective January 1 of the redacted year, and it was directed to file corporate income tax returns.

Ruling snapshot

• Question: Did the institute continue to qualify under section 501(c)(3) while conducting commercial activities and benefiting insiders?
• Outcome: Revocation
• Key authorities: IRC §§ 501(c)(3), 511, 6001, 6033; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, 1.6033-1

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TE/GE: EO Examinations
1100 Commerce Street, MC 4920 DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION June 16, 2015
Number: 201538026 Taxpayer Identification Number:

Release Date: 9/18/2015
Person to Contact:

UIL Code: 501.03-00 Identification Number:

Contact Telephone Number:

CERTIFIED MAIL — RETURN RECEIPT REQUESTED
Dear

This is a final adverse determination regarding your exempt status under section
501(c)(3) of the Internal Revenue Code (the Code). Our favorable determination letter
to you dated December 31, 19XX is hereby revoked and you are no longer exempt
under section 501(a) of the Code effective January 1, 20XX.

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

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

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

You are required to file Form 1120 U. S. Corporation Income Tax Return. These
returns should be filed with the appropriate Service Center for tax years ended
December 31, 20XX, December 31, 20XX, December 31, 20XX and for all years
thereafter in accordance with the instructions of the return.

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

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

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

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

The Taxpayer Advocate Service (TSA) is an independent organization within the
IRS that can help protect your taxpayer rights. We can offer you help if your tax
problem is causing a hardship, or you've tried but haven’t been able to resolve
your problem with the IRS. If you qualify for our assistance, which is always free,
we will do everything possible to help you. Visit taxpayeradvocate.irs.gov or call
1-877-777-4778.

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

Sincerely,
Margaret Von Lienen
Director, EO Examinations

Enclosure:
Publication 892

Department of the Treasury Date:

Internal Revenue Service May 12, 2015

IRS Tax Exempt and Government Entities Division Taxpayer Identification Number:
1100 Commerce Street, MC 4957 DAL
Dallas, Texas 75242-1100

Form:
Tax year(s) ended:

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:

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

Phone Number:

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,

Margaret Von Lienen
Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

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

Schedule number or exhibit
Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number Years/Period ended
20XX, 20XX, 20XX
ISSUE:
Whether continues to qualify for exemption under Section 501(c)(3) of the Internal Revenue
Code?
FACTS:
was granted tax-exempt status as a Section 501(c)(3) organization December 31, 19XX.
The organization conducts its operations in and the Articles of Incorporation were filed with the
Secretary of State for the State of on October 22, 19XX. An attachment to Form 1023 stated that the
Institute’s purposes are as follows:
• To spread the knowledge and availability of the in countries not presently being
served;
• To provide routine therapy to the public;
• To lead and promote the continuing study and development of the ;
• To document research case studies involving the ;
• To formulate a booklet of progress testimonies;
• To develop an awareness of the and collaborate with the medical community
using lectures and educational seminar/workshops; and,
• To involve third-world countries in the understanding of the through education
and healthcare aid.
The attachment also stated that the institute is involved in the practice of the , created by its
founder, . The is described as a gentle Eastern medicine healing method that

brings balance to the body’s own subtle energies. It allows the body to function and feel better as well as
heal itself more rapidly. The attachment goes on to state that the body’s ability to naturally heal itself is
becoming more recognized and accepted by Western medicine. The does not involve
massage, manipulation of bones, muscle, or tissues, or the use of drugs or other external substances. It is
practiced by holding designated “subtle energy points” with the fingers or the palm of hands along the
body’s subtle energy pathways. The is derived from the physics science of .

A therapist requires extensive study and training as well as a natural ability to develop and
effectively use intuitive senses. Mastering this complex technical subject requires understanding the subtle
energy circulation patterns of the human body.

The organization has two (2) websites that explain their purpose and activities: and
. A description of the services they offer is provided on their website:

• Therapy Sessions — a 1-hour hands-on approach to health disorders.

• Nutritional Consultation — a test that incorporates the use of dark field microscopy to reveal the
current state of the immune system, possible vitamin deficiencies, toxic effects, pH, mineral
imbalances, fungus and yeast, plus other areas of concern and weakness.

• Zyto Testing — a 2-3 hour non-invasive way to survey your overall health; including allergies and
other causes of symptoms.

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

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Years/Period ended

20XX, 20XX, 20XX

FACTS (continued)

• EVOX Sessions - the EVOX (VOX is Latin for voice), uses your voice (frequencies) to map
perception about specific topics like health, relationships, work or athletic performance.

• Educational Classes - to learn how can be applied to help restore proper bio-
electromagnetic conductivity (circulation/coherence) without any risk or repercussions.
• Lectures - The conducts lectures throughout the year. These average 1-2 hours of
informative health related lectures that have a wide range of subjects available to the public.
The offers a variety of classes ranging from introductory to advanced levels. The costs
range from $ for a lecture to $ for a multi-level course.

The organization sells numerous products on their website.

Essentials

Bookmarks

Lumbar Star and Stratum Chart
Energy Pathways DVD Set
Strategies for Success DVD Set
Levels 3 and 4 DVD Set

Tooth Chart Pad (5-pack)

Tooth Correlations Laminated Chart
Teeth and Body Poster

Energy Sphere Poster

Energy Spheres DVD

Procedures Booklet

Levels 1 and 2 DVD Set
Wonderfully Made Textbook

Volume 1 of 4 Textbook

Self Help Book - 2010 Edition

3” X 5" Self-Help Pocket Booklet
EMT Laminated Cards

3” X 5" Emergency Integrative Medicine Technique
Emergency Integrative Medicine Techniques (EMT
Introduction DVD

Palms, Finger and 24-Hour Chart
Dog and Horse Energy Sphere Chart

are sold in single and multi-packs as Natural Health Essentials.

Natural Health Essentials
(3 Pack) - Fights microbes

Form 886-A (1-1994) Catalog Number 20810W Page _2 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

Form 886-A

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Years/Period ended

20XX, 20XX, 20XX

FACTS (continued)
Water purification systems are advertised through their website and distributed from the manufacturer.

PRODUCTS
Shower Filter
Black Purification Elements
Arsenic and Flouride Protection Elements
Crown - 6.0 Gallon Size
imperial - 4.5 Gallon Size
Travel - 1.5 Gallon Size
Big - 2.25 Gallon Size

is organized exclusively for charitable purposes. It’s articles of incorporation states that
it's operated exclusively for charitable, scientific, literary, and educational purposes within the meaning of
section 501(c)(3). The articles state that no part of the net earnings of the organization will inure to the
benefit of any private shareholder or individual. No substantial part of the activities of the organization will
be the carrying on of propaganda, or otherwise attempting to influence legislation. The organization will not
participate in or intervene in any political campaign on behalf of or in opposition to any candidate for public
office. Upon dissolution, the organization will dispose of all assets exclusively for the purpose of the
organization in such a manner, or to an organization as described in section 501(c)(3).
The questions in the left column were presented to the , to clarify what their current charitable
activities are. The organization’s response is in the right column.

Information Document Request (IDR)

Responses to IDR from

1. For what activities were
   granted exemption?

To enhance the public’s understanding and
availability of therapy.

2. What is the Institute’s “charitable”
   purpose(s)?

The health, education, and treatment of the
general public.

3. What are the organization’s current
   activities and how are those activities in
   accordance with the Institute’s purpose?

The serves its charitable
purpose through education, books, and
treatment.

4. Describe the organization’s day-to-day
   operations.

Providing health, education and treatment,
including _ therapy, to the general public.

5. How does the organization obtain clients or
   customers?

Most clients are obtained through word-of-
mouth referrals.

6. What is the billing procedure for clients that
   visit the office?

Most clients pay at the time of service. For
financially challenged clients there are
adjustable discounts to make the treatment
available; for those who truly cannot pay and
need treatment, the provides
treatment without charge.

7. How do you determine an individual’s cost
   for treatment?

Standard fees are set based on comparable
services provided in the market.

8. What happens when a client is unable to
   pay the stated treatment cost?

If the client is truly unable to pay, the
still provides the services.

9. The website offers various

Most of the products on the website are

Form 886-A (1-1994) Catalog Number 20810W Page 3

publish.no.irs.gov Department of the Treasury-Internal Revenue Service

Schedule number or exhibit
Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)
Name of taxpayer Tax Identification Number Years/Period ended

20XX, 20XX, 20XX

products. How does the Institute obtain these | educational materials developed by
products? and licensed by to the

10. Does the Institute have distributor licenses | No.
    for any products?

11. Are the products shipped directly from the | All products are shipped directly from the

Institute or drop-shipped from the with the exception of the occasional

manufacturer/distributor? water purification system that is drop shipped
from the distributor/manufacturer.

12. Does the Institute have any medical No.

affiliations or work directly with any

physicians?

13. The Institute offers classes and seminars | Most attendees are individuals learning how to
    on their website. Describe the individuals that | help themselves or a family member with a
    typically enroll in these classes. (Is a medical health concern. No medical background is

background required?) required.

14. Are there any prerequisites to enrolling in | No prerequisites are required for these

these classes? classes.

15. What does the individual do with the Most individuals learn to better the health of
    information learned in these classes? themselves or their family members.

16. Your EMT and Self-Help classes offer | The offers how to teach/train others

a “contract to teach class” for $ . What does and allows access to the related materials.
the contract include?

The reported gross receipts of $ from unrelated business income for the year ending
December 31, 20XX. In fact, their only source of income for the prior, current, and subsequent year’s return
was from unrelated business income as shown:

• 20XX-$

• 20XX-$

• 20XX-$
The initial interview was held July 21, 20XX. The organization’s POA, , who was originally
scheduled to represent the organization, was out of the office due to medical reasons. , a

partner in the accounting firm, agreed to represent the organization in his absence.

advised the examiner that he was unable to reconcile the amounts listed on the return to the tax
workpapers provided. Therefore, he requested all of the organization’s bank and credit card
statements, receipts, and tax documents. The following accounts were reviewed:

Interest Checking — A/C ending
Credit Card — A/C ending
Checking — A/C ending
Savings — A/C ending
Free Checking — A/C ending (personal)

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

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer

Tax identification Number

Years/Period ended

20XX, 20XX, 20XX

Each transaction was input into their accounting software, Tax Organizer, and classified as either business
. The following report was provided to the examiner for the tax

or personal with the assistance of
year ending December 31, 20XX.

EXPENSE

INSTITUTE

PERSONAL

TOTAL

Accounting Fees
Advertising
Appraisal

Auto - Fuel*

Auto - Repairs/maintenance”
Bank charge

Car Wash

Charitable contributions
Cleaning

Clothing

Comp to DP
Computer expenses
Dry cleaning
Duplication
Electricity
Entertainment
Flowers for members
Gifts
Groceries/Household
Gym

HOA dues

Insurance

Insurance -

Interest expense
Landscaping

Legal fees

Massage

Meals*

Medical

Merchant card fees
Mortgage - home
Office supplies
Payment processing
Payroll taxes
Penalties

Personal

Pest control
Postage, mailing svc
Printing & copying
Recreation

Rent

Repairs & Maintenance

Form 886-A (1-1994) Catalog Number 20810W

Page 5

publish.no.irs.gov

Department of the Treasury-Internal Revenue Service

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer

Tax Identification Number

Years/Period ended

20XX, 20XX, 20XX

Royalties -

Salaries
Subcontractors
Supplies

Taxes

Taxes - personal
Telephone, telecommunications
Tolls

Training

Travel

Unknown expenses
Water

Website

“These expenses weren't substantiated by adequate recording or contemporaneous documentation as

required by Treas. Reg. 1.274(d).

At a meeting held January 27, 20XX, the Examiner requested and received the general ledger and bank

statements for 20XX and 20XX.

Expenses for year ending December 31, 20XX:

EXPENSE INSTITUTE

PERSONAL

TOTAL

Accounting Fees
Advertising

Auto - Fuel
Auto-Registration

Auto - Repairs/maintenance
Bank charge

Car Wash

Charitable contributions
Cleaning

Clothing

Computer expenses
Dry cleaning

Electricity
Entertainment

Flowers for members
Groceries/Household
Gym

HOA dues
Insurance
Insurance -
Interest expense
Landscaping

Form 886-A (1-1994) Catalog Number 20810W

Page 6

publish.no.irs.gov

Department of the Treasury-internal Revenue Service

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer

Tax Identification Number

Years/Period ended

20XX, 20XX, 20XX

Massage

Meals

Medical

Merchant card fees
Mortgage - home
Office supplies
Payment processing
Payroll taxes
Penalties

Personal

Pest control
Postage, mailing svc
Printing & copying
Property tax
Recreation

Rent

Repairs & Maintenance

Royalties -
Salaries

Salon nails
Security
Subcontractors
Supplies

Taxes - personal

Telephone, telecommunications

Travel
Uniforms
Water
Website

Expenses for year ending December 31, 20XX:

EXPENSE

INSTITUTE

PERSONAL TOTAL

Accounting Fees
Advertising
Auto - Fuel

Auto - Repairs/maintenance

Bank charge
Car Wash

Charitable contributions

Cleaning

Clothing

Computer expenses
Dry cleaning
Electricity
Entertainment

Form 886-A (1-1994)

Catalog Number 20810W

publish.no.irs.gov

Page 7

Department of the Treasury-internal Revenue Service

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer

Tax Identification Number

Years/Period ended

20XX, 20XX, 20XX

Flowers for members
Groceries/Household
Gym

HOA dues
Insurance
Insurance -
Interest expense
Jewelry
Landscaping
Massage

Meals

Medical

Merchant card fees
Mortgage - home
Office supplies
Payment processing
Payroll taxes
Penalties

Personal

Pest control
Postage, mailing svc
Printing & copying
Property tax

Rent

Repairs & Maintenance

Royalties -
Salaries

Salon nails
Security
Subcontractors
Supplies

Taxes - personal

Telephone, telecommunications

Travel
Uniforms
Water
Website

See Exhibit A for a detailed list of each transaction.

LAW:

IRC § 501(c)(3) exempts from Federal income tax corporations, and any community chest, fund, or
foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety,
literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net

Form 886-A (1-1994)

Catalog Number 20810W

Page 8 publish.no.irs.gov

Department of the Treasury-Internal Revenue Service

Schedule number or exhibit
Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)
Name of taxpayer Tax Identification Number Years/Period ended

20XX, 20XX, 20XX

earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the
activities of which is carrying on propaganda, or otherwise attempting to influence legislation and which
does not participate in, or intervene in (including the publishing or distributing of statements), any political
campaign on behalf of any candidate for public office.

Treas. Reg. § 1.501(c)(3)-1(a)(1) of the regulations states that in order to be exempt as an organization
described in Section 501(c)(3) of the Code, an organization must be both organized and operated
exclusively for one or more of the purposes specified in such section. If an organization fails to meet either
the organizational test or the operational test, it is not exempt.

Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii) of the regulations provides that an exempt organization must serve a
public rather than a private interest. The organization must demonstrate that it is not organized or operated
to benefit private interests such as "designated individuals, the creator or his family, shareholders of the
organization, or persons controlled, directly or indirectly, by such private interests." Thus, if an organization
is operated to benefit private interests rather than for public purposes, or is operated so that there is
prohibited inurement of earnings to the benefit of private shareholders or individuals, it may not retain its
exempt status.

IRC § 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.

Treas. Reg. § 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
§§1.6033-1 through -3.

Treas. Reg. § 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.

IRC § 6033(a)(1) provides, except as provided in IRC § 6033(a)(2), every organization exempt from tax
under § 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. § 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 § 6033.

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

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Years/Period ended

20XX, 20XX, 20XX

Treas. Reg. § 1.6033-(2)(i)(2) states “Every organization which is exempt from tax, whether or not it is
required to file an information return shall submit such additional information as may be required by the
Internal Revenue Service for the purpose of inquiring into its exempt status and administering the
provisions of subchapter F, chapter 1 of subtitle A of the Code, §6033 and chapter 42 of subtitle D of the
Code.”

Rev. Rul. 59-95, 1959-1 C.B. 627 held that “failure or inability to file the required information return or
otherwise to comply with the provision of §6033 of the Code and the regulations which implement it, may
result in the termination of the exempt status of an organization previously held exempt, on the grounds
that the organization has not established that it is observing the conditions required for the continuation of
an exempt status.

Revenue Procedure 2012-9, superseding Rev. Proc. 90-27, 1990-1 C.B. 514, Section 4.01, provides
that the Internal Revenue Service will recognize the tax-exempt status of an organization only if its
application and supporting documents establish that it meets the particular requirements of the section
under which exemption from federal income tax is claimed. Section 4.02 states that a determination letter
or ruling on exempt status is issued based solely upon the facts and representations contained in the
administrative record. It further states:

(1) The applicant is responsible for the accuracy of any factual representations contained in the
application.

(2) Any oral representation of additional facts or modification of facts as represented or alleged
in the application must be reduced to writing over the signature of an officer or director of the
taxpayer under a penalty of perjury statement.

(3) The failure to disclose a material fact or misrepresentation of a material fact on the
application may adversely affect the reliance that would otherwise be obtained through
issuance by the Service of a favorable determination letter or ruling.

In PLR 20113041, the IRS revoked the tax exemption of a public charity based on excess

benefit and private inurement issues. The charity’s records demonstrated that the President "consistently
utilized" the charity’s income for private purposes. The President routinely made "loans to officers," but
never fully substantiated the purpose of these loans. Since the charity had no Conflict of Interest Policy,
the President who made these loans in the first place, then approved these "loans" with his wife and father.
All of these amounts went into a "Loans to Officers" account and inadequate records were kept on how this
money was spent to further the charity’s exempt purposes. The IRS noted that the charity’s inurement
issues and excess benefit transactions "resulted from the organization being under the control of one-
person with a family-based governing board." Moreover, the IRS noted that because of the charity’s
structure, "sufficient safeguards had not been put in place to prevent future violations. ..."

In United States v. Wells Fargo Bank, 485 U.S. 351, 108 S. Ct. 1179, 99 L Ed. 2d 368 (1900), the Supreme
Court held that an organization must prove unambiguously that it qualifies for a tax exemption.

In Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 179 (1945), the Supreme
Court held that the presence of a single non-exempt purpose, if substantial in nature, will destroy a claim
for exemption regardless of the number or importance of truly exempt purposes.

In Bubbling Well Church of Universal Love, Inc. v. Commissioner, 74 T.C. 531 (1980), in an action for
declaratory judgment pursuant to Section 7428(a), the Tax Court considered an adverse ruling by the IRS

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

Schedule number or exhibit
Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)
Name of taxpayer Tax Identification Number Years/Period ended

20XX, 20XX, 20XX

on an application for exempt status as a church. The applicant had declined to furnish some information,
and made answers to other inquiries that were vague and uninformative. On the basis of the record, the
Court held that the applicant had not shown that no part of its net earnings inures to the benefit of the
family or that petitioner was not operated for private benefit.

In Western Catholic Church v. Commissioner, 73 T.C. 196 (1980), the petitioner's only activities were some
individual counseling and distribution of a few grants to needy individuals. The petitioner's failure to keep
adequate records and its manner of operation made it impossible to trace the money completely, but the
court found it clear that money passed back and forth between petitioner and its director and his for-profit
businesses. The Court Held that petitioner had not shown it was operated exclusively for exempt purposes
or the no part of its earnings inured to the benefit of its officer.

In New Dynamics Foundation v. United States, 70 Fed. Cl. 782 (2006), the petitioner brought to challenge
the denial of its application for exempt status. The court found that the administrative record supported the
Service's denial on the basis that the organization operated for the private benefit of its founder, who had a
history of promoting dubious schemes. The organization's petition claimed that the founder had resigned
and it had changed. However, there was little evidence of change other than replacement of the founder
with an acquaintance who had no apparent qualifications. The court resolved these questions against the
petitioner, who had the burden of establishing it was qualified for exemption. If the petitioner had evidence
that contradicted these findings, it should have submitted it as part of the administrative process. "It is well-
accepted that, in initial qualification cases such as this, gaps in the administrative record are resolved
against the applicant".

TAXPAYER'S POSITION:

The taxpayer's position is that the organization still serves its charitable purpose by providing health,
education and treatment, including therapy, to the general public.

GOVERNMENT'S POSITION:

Based on the examination, the does not qualify for exemption as a charitable organization as
described in IRC §501(c)(3) and Treas. Reg. §1.501(c)(3) which provides that “An organization must be
organized exclusively for charitable purposes; it must be operated exclusively for charitable purposes; no
part of the net earnings of which may inure to the benefit of any private shareholder or individual; it may not
conduct more than an insubstantial amount of lobbying activities; and, it may not intervene in a political
campaign.”

An organization is not operated exclusively for one or more exempt purposes if its net earnings inure in
whole or in part to the benefit of private shareholders or individuals. and used the net
earnings from the ., for their personal benefit. received a royalty from the
organization for the use of his material. received wages as well as additional
compensation from the organization. Despite having received compensation, the had personal use
of the funds from the organization’s bank account.

The organization offers certifications to teach . All approved Instructors start at the EMT level and
work up one level at a time with a two year minimum of meeting all annual requirements for each level.
Certification is renewed every year. The instructors pay a fee for the contract to teach a class or train

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

Schedule number or exhibit
Form 886-A EXPLANATIONS OF ITEMS
(Rev. January 1994)
Name of taxpayer Tax Identification Number Years/Period ended
20XX, 20XX, 20XX
others and they’re allowed access to the related materials. receives additional income from the

use of his licensed materials.

To further demonstrate that the organization serves a private interest, one would only need to look at the

manner in which the Institute is operated. As stated in the questionnaire above, the standard
fees are set based on comparable services provided in the market. As such, he has recognized that the
income the organization received for at least the last calendar years wasn’t exempt function income.

The income was reported as unrelated business income on Form 990, yet Form 990-T wasn't filed.

CONCLUSION:

The does not qualify for tax-exempt status under Section 501(c)(3) because their earnings
inured to the benefit of private individuals.

Accordingly, the organization’s exempt status is revoked effective January 1, 20XX.

Form 1120 returns should be filed for the tax periods ending on or after December 31, 20XX.

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