Dental organization loses exemption for commercial operation and inurement

Plain-English summary

The IRS revoked a dental organization's section 501(c)(3) status after concluding that it operated like a commercial dental practice and allowed its earnings and assets to benefit private individuals. The examination found that the organization generally billed insurance or required patients to pay, did not document free care for a charitable class, and did not substantiate the educational and outreach activities described in its exemption application. It also identified personal credit-card use, payments and loans involving related parties, direct employee payments, missing employment tax filings, and other expenses without adequate business records. The IRS determined that these facts showed substantial nonexempt commercial purposes and private inurement, even though some excess-benefit amounts had been partially corrected. The organization was required to file Form 1120 as a personal service corporation, and contributions were no longer deductible under section 170.

Ruling snapshot

• Question: Did the dental organization continue to satisfy the section 501(c)(3) operational test despite its fee-based practice and related-party payments?
• Outcome: revocation
• Key authorities: IRC §§ 170, 4958, 501(c)(3), 6001; Treas. Reg. § 1.501(c)(3)-1

Full text (IRS public release)

Transcriber's note: this 31-page document is a scan. Obvious OCR errors in form numbers, broken words, bullet symbols, repeated headers, and signature marks were corrected by comparison with every page image. Redacted fields remain blank, and grammatical or citation errors visible in the scan are preserved. The wording is otherwise reproduced verbatim.

Department of the Treasury

Internal Revenue Service
Appeals Office

4330 Watt Avenue SA7890
Sacramento CA 95821-7012

Employer Identification Number:

Person to Contact:
Release Number: 201734010

Release Date: 8/25/2017 Name
Release Date: June 2, 2017 Employee ID Number:
UIL Code: 501.03-30 Tel:

Fax:

Certified Mail

Dear

This is a final adverse determination that you do not qualify for exemption from Federal income tax under
Internal Revenue Code (the “Code”) section 501(a) as an organization described in section 501(c)(3).

The favorable determination letter to you dated is hereby revoked and you are no longer exempt
under section 501(a) of the Code effective

The adverse determination was made for the following reason(s):

You are not operated exclusively for charitable or other exempt purposes, as required under section
501(c)(3) of the Code. Your net earnings inured to the benefit of private shareholders or individuals. In
addition, you operated for substantial non-exempt commercial purposes of operating a dental practice,
and for substantial benefit of private individuals rather than public interests.

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

You are required to file Federal income tax returns on Forms 1120. File your return with the appropriate
Internal Revenue Service Center per the instructions of the return. For further instructions, forms, and
information please visit www.irs.gov.

You have agreed to waive your right to contest this determination under the declaratory judgment
provisions of Section 7428 of the Code.

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

documents attached that show our proposed deletions. If you disagree with our proposed deletions, follow
the instructions in Notice 437.

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

Sincerely Yours,

Joseph K. Phegley
Appeals Team Manager

Enclosure: Publication 892

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

1555 Poydras Street, Stop 17

New Orleans, LA 70112

Date:
April 15, 2015
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:

Certified Mail — Return Receipt Requested

Dear

Why you are receiving this letter
We propose to revoke your status as an organization described in section 501(c)(3) of the

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

What you need to do if you agree
If you agree with our proposal, please sign the enclosed Form 6018, Consent to Proposed

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

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

If we don't hear from you ;
If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll

issue a final revocation letter. Failing to respond to this proposal will adversely impact your legal

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

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

Effect of revocation status: .
If you receive a final revocation letter, you'll be required to file federal income tax returns for the

tax year(s) shown above as well as for subsequent tax years.

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

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

disputes informally.

For your protest to be valid, it must contain certain specific information including a statement of
the facts, the applicable law, and arguments in support of your position. For specific information
needed for a valid protest, please refer to page one of the enclosed Publication 892, How to
Appeal an IRS Decision on Tax-Exempt Status, and page six of the enclosed Publication 3498,
The Examination Process. Publication 3498 also includes information on your rights as a ;
taxpayer and the IRS collection process. Please note that Fast Track Mediation referred to in

Publication 3498 generally doesn't apply after we issue this letter.

You also may request that we refer this matter for technical advice as explained in Publication

892. Please contact the individual identified on the first page of this letter if you are considering
requesting technical advice. If we issue a determination letter to you based on a technical
advice memorandum issued by the Exempt Organizations Rulings and Agreements office, no

further IRS administrative appeal will be available to you.

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

contact your local Taxpayer Advocate at:

Internal Revenue Service

Office of the Taxpayer Advocate
401-W. Peachtree St., NW, Stop 202-D,

Room 510
Atlanta, GA 30308-8099

Phone: (404) 338-8099

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.

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

Thank you for your cooperation.
Sincerely,

/for/
Margaret Von Lienen

Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

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

Form 886-A
(Rev. January 1994)
EXPLANATIONS OF ITEMS
Schedule number or exhibit
Name of taxpayer Tax Identification Number | Year/Period ended
December 31, 20XX
December 31, 20XX
December 31, 20XX
Issue:
Whether qualifies for exemption under Section 501(c)(3) of the Internal Revenue
Code.
Whether operates in a substantially commercial manner which would preclude
exemption.
Whether payments to credit cards in the amount of $ 0 for

20XX; $ 0 for 20XX; and $ 0 for 20XX constitutes inurement within the meaning of I.R.C.
section 501(c)(3).

Whether payments to credit cards without business
substantiation in the amount of $ 0 for 20XX; $ 0 for 20XX; and $ 0 for 20XX that appear
personal in nature constitutes inurement within the meaning of I.R.C. section 501(c)(3).

Whether payments to with no business
substantiation in the amount of $ 0 for 20XX; $ 0 for 20XX; and $ 0 for 20XX
constitutes inurement within the meaning of I.R.C. section 501(c)(3).

Whether purchases on credit cards in the amount of
$ 0 for 20XX; $ 0 for 20XX; and $ 0 for 20XX that appear personal in nature constitutes
inurement within the meaning of I.R.C. section 501(c)(3).

Whether payments to other financial institutions with no business substantiation in the
amount of $ 0 for 20XX; $ 0 for 20XX; and $ 0 for 20XX constitutes inurement within the
meaning of I.R.C. section 501(c)(3).

Whether payment to of in the amount of $ 0 for 20XX and $ 0 for 20XX
that appear personal in nature constitutes inurement within the meaning of I.R.C.
section 501(c)(3).

Whether direct payments to in the amount of $ 0 for 20XX; $ 0 for 20XX; and
$ 0 for 20XX were unreported compensation and constitutes inurement within the
meaning of I.R.C. section 501(c)(3).

Whether direct payments to in the amount of $ 0 for 20XX; $ 0 for 20XX; and $ 0
for 20XX were unreported compensation and constitutes inurement within the meaning
of I.R.C. section 501(c)(3).

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended
December 31, 20XX
December 31, 20XX
December 31, 20XX
Whether directs payments to / in the amount of $ 0 for 20XX; and $ 0 for

20XX were unreported compensation that constitutes inurement within the meaning of
I.R.C. section 501(c)(3).

Whether payments to in the amount of $ 0 for 20XX; $ 0 for 20XX; and $ 0 for
20XX were unreported compensation that constitutes inurement within the meaning of
I.R.C. section 501(c)(3).

Whether payments to in the amount of $ 0 for 20XX; $ 0 for 20XX; and $ 0 for
20XX were unreported compensation that constitutes inurement within the meaning of
I.R.C. section 501(c)(3).

Whether purchases by check or debit card in the amount of $ 0 for 20XX; $ 0 for 20XX;
and $ 0 for 20XX were personal in nature and constitutes inurement within the meaning
of I.R.C. section 501(c)(3).

Facts:

was duly incorporated under the laws of the State of pursuant to the
Nonprofit Corporation Code on July 19, 20XX.

On August 14, 20XX applied for exemption with the Internal Revenue Service.
On October 1, 20XX was granted exemption by the Internal Revenue Service.

According to the Articles of Incorporation, the name and address of the incorporator
is

owned and operated and until it was sold to
in March 15, 20XX with the sale being final as of April 2, 20XX.

When was asked for a fee schedule, provided “FEE SCHEDULE ”
received on August 21, 20XX and “Attachment C-1 Schedule of Allowable Fees
STATE HEALTH PLAN’ received on August 23, 20XX by Agent

filed the Form 990 for 20XX, 20XX, and 20XX.
• Form 990 for year ending December 31, 20XX:
• Part IV Checklist of Required Schedules.
• Line 25a (Section 501(c)(3) and 501(c)(4) organizations.
• Did the organization engage in an excess benefit transaction with a
disqualified person during the year?
• stated “No”.

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

• Line 25b (Is the organization aware that it engaged in an excess benefit
transaction.....).

• stated “No”.

• Line 26 (Was a loan to or by a current or former officer, director, trustee,
key employee, highly compensated employee, or disqualified person
outstanding as of the end of the organization’s tax year? /f “Yes,” complete
Schedule L’ Part II).

• stated “No”.

7 didn’t file a Schedule L.

• Part VI Section A (Governing Body and Management)

• Line 1A (Enter the number of voting members of the governing body at the
end of the tax year), stated “1”.

• Part VII Section A (Officers, Directors, Trustees, Key Employees, and Highest

Compensated Employees.

. included ( ) as an Officer and Key Employee,
but reported zero ($0) compensation.

7 didn’t report or her compensation.

. didn’t include compensation from related organizations.

• Part IIIV Statement of Revenue.
• Line 1a— 1f (Contributions, gifts, grants, and similar amounts) is blank.

8 reported zero ($0) donations.

• Part IX Statement of Functional Expenses.
• Line 2 (Grants and other assistance to individuals in the US) is blank.
• Line 5 (Compensation of current officers, directors, trustees, and key
employees) is blank.
• Schedule A Public Charity Status and Public Support.
• Part | Reason for Public Charity Status.

• Line 3 (A hospital or a cooperative hospital service organization
described in section 170(b)(1)(A)(iii)) was unchecked.

• Line 7 (An organization that normally receives a substantial part of its
support from a governmental unit or from the general public described
in section 170(b)(1)(A)(vi) (Complete Part Il)) was checked.

• Part Il Support Schedule for Organizations Described in Sections
170(b)(1)(A)(iv) and 170(b)(1)(A)(vi).

• didn’t complete Part Il.
• Line 18 (Private Foundation) was the only line completed and checked.
• didn’t file the Form 990-PF.

• Schedule D Supplemental Financial Statements.
• Part VI Investments — Land, Buildings, and Equipment.
• Line 1c (Leasehold improvements) was filed in.
• Line 1d (Equipment) was filed in.

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

• Schedule H Hospitals.

" didn’t file Schedule H.
• Form 4562 Depreciation and Amortization
7 filed Form 4562, but didn’t include a list of assets that were being

depreciated.
• Form 990 for the year ending December 31, 20XX.
• filed the Form 990 and two amended Form 990.
• The last amended return received is considered the return of record.
• The same fact that apply to the 20XX Form 990 also apply to the 20XX Form
990 except for the following:
" Part IV Line 26 was reported as “Yes”.

7 filed the Schedule L disclosing the “Loan” to and
" Form 4562 Depreciation and Amortization.
• provided a list of assets, but no vehicles were reported.

• Form 990 for the year ending December 31, 20XX.
• The same facts that apply to the 20XX Form 990 also apply to the 20XX Form
990 except for the following:
• Part VI Section A.

• Line 1a (number of board members), stated “5”.
• Line 1b (independent board members), stated “4”.
• didn’t provide a list of the board members.
• Part VII
• stated received $ 0.
• didn’t provide the Form W-2 or Form 1099-misc.

" Schedule N (Liquidation, Termination, Dissolution, or Significant
Disposition of Assets).

• filed the Schedule N stating that the “ building was
abandoned”.
• Form 4562.
" filed the Form 4562 with an attached list of assets.

• This list of assets didn’t include any vehicles.
• This list of assets didn’t include any new computers after June 9, 20XX.

According to the Form 1023 application (see Schedule 1) is an outreach
program dedicated to health and welfare of men and women and children. The
program offers cost free dental and medical services to rural residents of

The Program also offers community prevention services, nutrition, crises intervention
services along with other services that provide holistic approach to health.

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

• However, during the touring of the facility the examiner noticed that the
organization was a office.

• When asked about patients, the office manager explained that the organization
determines what co-pay to charge.

• She stated that they check online for insurance the day the appointment is
made or at least the day before the appointment to see what insurance will
cover and for co-pay.

• If no insurance or the patient is out of insurance then the patient has to pay full
price.

• If the patient can’t pay the cost the organization would create a payment plan,
but full payment is required before receiving treatment unless the patient is in
pain.

• If the patient can’t afford the treatment then the organization would “refer” the
patient to agencies so the patients can get insurance or a local organization
provides some free services.

• If a patient should have two different insurances, the dentist office is required
to bill the “primary” insurance first (non-Medicaid) then secondary insurance.

According to the Form 1023 application specifically targets “at risk”
individuals, the indigent, the drop-out, welfare mothers, and those individuals who
have been recently released from incarceration. Clients who are referred to

first undergo an extensive assessment to evaluate their current needs and potential.
The next step, if indicated by the assessment is to offer them access to

extensive prevention services, with an emphasis on heart disease, gum disease, and
nutrition. Recognizing that poor educational skills exist for a variety of factors,

also offers support services, such as social skills, that are designed to help clients
function at their maximum potential; these services include (but are not limited to)
individual and group counseling, daily living skills, classes in positive behavior
modification; recreational therapy and conflict resolution.

• However, when the examiner toured the facility:
• Noclassrooms were viewed

• regularly and routinely provide education to their patients
as did
• provided pamphlets that they didn’t create but pass out to their
patients.
• The pamphlets that they provided were
• “ ” created by the State of

• “Temporary Assistance for Needy Families” created by Department
of Human Services
• “ County Health Department” (2)

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended
December 31, 20XX
December 31, 20XX
December 31, 20XX
• “For Medicaid & for Kids” created by the State of
• “ ”
According to the Form 1023 application the primary goal of is to provide

dental, medical, and prevention services to low-income individuals particularly those
whose economical status prevents them from otherwise receiving adequate and
much needed care to extend their lives. We will provide information and prevention
services to youth, their parents and the public. Other goals of the program include
and educating and training individuals on nutrition, life skills, health, oral hygiene, and
drug abuse prevention.

• When the patients’ insurance was at its limit then makes the patients pay
cash for the services before the services are rendered except in the case that a
patients presents themselves as in pain or on an emergencies basis.

• didn’t provide any documentations showing any medical services were
provided to their patients beyond services.

According to the Form 1023 application the:
Planned Activity:

“Since the best way to aid the community is to be responsive to its changing needs,
we developed an ongoing survey program in place to monitor the success of the
program among its clients and to provide viable feedback with which to institute
changes in the operation of the program—such as the addition or deletion of
particular programs or other modifications in their application. offers
a single point-of-entry to social services. We plan on (as an adjunct to our health
program) developing a program which encourages young parents to become
nutritionally aware and how to prevent disease and health problems related to
hygiene. Since we began this program the regular staff has volunteered time to
assist parents with referral services, tutoring youth, assisting youth and parents on
writing a resume, dressing for success, and how to budget money.

We also plan on developing a program that will assist homeless individuals with
dental/medical care and provide services to women that has been victims of domestic
violence and require care.”

• However, didn’t provide any documentation to show that they provided
any educational or outreach activities other than that a for-profit would
provide.

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

According to the Form 1023 application the primary funding sources will come from
the State of Department of Health, , Human Services, the Medical
and Dental Society, and the United Way of (includes County),
donations and fundraiser, additional funding sources are attached to the two year
proposed budget.

The Form 1023 application also states that plan to pursue several avenues
of fundraising, including seeking grants and obtaining sponsorships from the
community and the state.

The Form 1023 application states that the Revenues-Projected Incomes for the first
year will consist of the following:

• However, according to the statements and general ledger,
the received income from patients and patients’ insurance only.
• No donations were viewed.

According to the statements and general ledger,

made payments to from January 7, 20XX through December 27,

20XX (see Schedule A). provided credit card statements with

the name of and a balance. The statements didn’t show any business
purchases and no substantiation was provide for these payments.

• provided a copy of check stub# dated December 14, 20XX showing
the description for these payment to as COS -— Supplies,
Penalties & Fines, and Interest — Other.

According to statements and general ledger, made

payments to from January 18, 20XX through December 27, 20XX, but

didn’t provide any substantiation showing business purpose for these payments or

that these payments were to a business credit card (see Schedule B).

• provided statements for three (3) different credit cards
accounts from 20XX to 20XX in the name of the organization but none of these
payments are represented on those credit card statements that they presented.

• When the checks were summons and viewed some of them had the memo line
included. The checks that were written to that didn’t appear on the

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

credit card statements had other credit card account numbers on them (see
Schedule B memo column).

According to the statements and general ledger,
made payments to credit card from January 11, 20XX through
December 6, 20XX (see Schedule C).
• provided one (1) page of one (1) statement for the
credit card in the name of that stated the account was closed but didn't
provide substantiation that the rest of the payments were to this
credit card.
• The have stated that they used the organization’s credit
cards for personal use (see Schedule D1).
• didn’t provide supporting documentation showing that the purchases on
the credit card had a business purpose.

According to statements; credit card statements; and
general ledger,
and made purchases on three (3) credit

cards from January 10, 20XX through December 28, 20XX (see Schedule D).

• provided some receipts or documentation but the still lacked a business
purpose for these purchases.

• provided receipts for , (0 miles from , and
0 miles from , ) purchased on November 23, 20XX at 9:44 am (Black
Friday) for an and December 15, 20XX at 3:58 pm for an . However,
when the examiner toured the facility no or were viewed.

• These purchases appear personal in nature due to the fact that was
using take
different software and licensing agreements to run with none being viewed.

• No assets were added to the organization’s depreciation schedule after
December 31, 20XX to include these computers.

. provided emails as business substantiation for travel to
where (the company that purchased and ) is located.
• These emails were to
• No receipts were provided.

• These purchases appear for the benefit of and not a business
purpose of
• provided an email for a flight to asa“ -
• didn’t provide any other documentation showing the business purpose
of the trip.
• didn’t show that this trip wasn’t a personal trip like the trips to:

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended
December 31, 20XX
December 31, 20XX
December 31, 20XX
• ’
a
• provided an email from for travel to :
• These purchases appear personal as the travel wasn't for business.
But
• Travel for business.
• stated that some of the purchases on the credit

card were personal purchases in their response to Information Documentation
Request # 27 and # 28 dated February 25, 20XX (see Schedule D1) with these
purchases being included in Schedule D.

• The trips to ; and , were part of those that they
stated were personal.
• provided an email as receipt for the expenses of
• The email was to ;
• There is no business substantiation that these expenses were for
• made payments to
• In 20XX, made two (2) payments to each month.
• Only provided one (1) receipt showing one (1) payment was made.
• Provided a copy of website as a receipt as well.
• owned and operated two (2) offices that could

have used this service.

• Didn't provide documentation to show that the second monthly payment had a
business purpose (see Schedule D2);

• Is included in Schedule D.

• Payments were made to credit cards that didn't

originate from the accounts that were viewed.

• and made partial correction to under I.R.C. section
4958 by making payments to credit card (see
Schedule D3).

According to statements and general ledger,
made payments to additional financial institutions. Those institutions were ,
; ; , , , and (see
Schedule E).
• However, provided a receipt showing payment for ;
, and but didn’t provide the contracts or leases to show what
was purchased or where the purchased materials were used.
• These material could have been used by or and considered
dual usage.

• provided credit card statements.

• They show the amount owed.

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

• Didn't provide any receipts showing:
• What was purchased.
• How these purchases were used.
• provided a statement for
• The name on the bill was to ;
• Didn't provide any other documentation showing that these payments had a
business purpose.

According to statements and general ledger, made

payments to from May 10, 20XX through December 2, 20XX (see Schedule F).

• hasn't provided receipts for payments to

• hasn’t provided documentation showing a business purpose of these
payments.

• didn’t provide lease documents or proof of registration showing that the

vehicle was purchases by

According to statements and general ledger, the
made direct payments to from January 15, 20XX through December 31, 20XX
(see Schedule G).

• According to the general ledger check # was written to , but was in
fact it was written to

• Check# was deposited into the personal account (see
Schedule L5).

• stated that they leased employees from
• Didn’t provide documentation showing the payments to were for

business purposes.

• Provided a leasing contract that had “ ” name strikethrough and “

• was handwritten in its place.
• The contract was unsigned.

• hasn't filed the Form 941 since the December 31, 20XX for employees.
• hasn't provided receipts for the payments to
According to the statements and general ledger, the
made payments to from January 21, 20XX through November 29, 20XX
(see Schedule H).
• According to the general ledger check # —_ for $ 0 was written to , but
was in fact check # _ for $ 0 was written to
• Check# was deposited into the personal account (see
Schedule L6).
• stated that they leased employees from
• Didn't provide documentation showing the payments to were for

business purposes.

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended
December 31, 20XX
December 31, 20XX
December 31, 20XX
• Provided a leasing contract that had “ ” name strikethrough and “

• was handwritten in its place.
• The contract was unsigned.

• hasn't filed the Form 941 since the December 31, 20XX for employees.
• hasn't provided receipts for the payments to
According to the statements and general ledger, the

made payments to / from July 19, 20XX through November 17, 20XX (see
Schedule 1).

didn’t provide documentation showing the payments to were for

business purposes because provided a leasing contract that had
name was strikethrough and was handwritten in its place and the contract
was unsigned.
• stated that they leased employees from

• Didn't provide documentation showing the payments to were for

business purposes.
• Provided a leasing contract that had “ ” name strikethrough and “

• was handwritten in its place.
• The contract was unsigned.

• hasn't filed the Form 941 since the December 31, 20XX for employees.

• hasn't provided receipts for the payments to and

• and made partial correction under I.R.C. section 4958 with payments
to from March 2, 20XX through November 20, 20XX (see Schedule 11).
• These payments came from and

According to the statements and general ledger,

made payments to . from March 5, 20XX through March 7, 20XX (see

Schedule J).

• provided a signed copy of a Promissory Note with signing for
“Borrower” and signing for “Lender” with no witnesses or Notary

showing the date executed.
• Date on the Promissory Note was February 16, 20XX.

• hasn't provided:
• Payment schedule.
• Interest paid.
• And didn’t have the ability to repay the loan.
• Per fax received December 6, 20XX from CPA and Power of
Attorney; “ has shut down and all monies owed to it are not
expected to be paid. All monies it owes to creditors are with a trustee and

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

being negotiated.” provided documentation showing that j
was Administratively Dissolved on September 4, 20XX.
• and made partial correction under I.R.C. section 4958 with payments
to from February 16, 20XX through June 17, 20XX (see Schedule J1).
• These payments came from

According to the statements and general ledger, the
“Lender” made payments to “Borrower” from January 26, 20XX through
March 21, 20XX (see Schedule K).
• provided a copy of the first page of a Promissory Note without signatures,
witnesses, or Notary showing the date executed.
• hasn't provided:
• Payment schedule.
• Interest paid.
• And didn’t have the ability to repay the loan.
• Per fax received December 6, 20XX from CPA and Power of
Attorney; “The notes started as amounts loaned to the entities similar to a
Line of Credit. All of the monies were not collected prior to the companies
shutting down. closed its doors and all monies secured went to a
trustee to negotiate with all creditors owed. is on the
creditor list but not priority. was a for-profit C corporation.”
provided documentation showing that : was Administratively
Dissolved on September 3, 20XX.
• and made partial correction under I.R.C. section 4958 with payments to
from January 14, 20XX through June 17, 20XX (see Schedule K1).
• These payments came from

According to the statements and general ledger, the
made check and debit card purchases that appear personal in nature from January 1,
20XX through December 31, 20XX (see Schedule L).

• hasn't provided receipts for the purchases shown on Schedule L.

• provided some documentation showing a business purpose for some of
the expenses, but they didn’t provide documentation for most of the expenses
that made from January 1, 20XX through December 31, 20XX.

• Some of the documentation was insufficient to show business purpose of the
expenses paid.
• made payments to United States Treasury from August 22, 20XX through
June 29, 20XX (see Schedule L1).
• The Internal Revenue Service didn’t receive any payment for Employer
Identification Number

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended
December 31, 20XX
December 31, 20XX
December 31, 20XX
• The Internal Revenue Service’s systems don’t show any payments being
made by or owed from account.

• didn't file the Form 941 for Employment Taxes for 20XX, 20XX, or
20XX.

• didn’t file the Form 990-T for Unrelated Business Income Taxes for
20XX, 20XX, or 20XX.

• made payments to and monthly (see
Schedule L2).
• Two (2) or three (3) payments were made to each month.
• Sometimes payments to were paid the same months as
• stated that they provided a bill for , but no receipt was
received.

• didn’t provide any documentation showing that these payments had a
business purpose.
• didn’t provide any documentation showing owned these
cellphone accounts.
• made payments to insurance companies (see Schedule L3).
• provided documentation for payments to:

• One (1), monthly bill, but the account was for

• One (1), annual business insurance (building).

• One (1), Insurance annual medical liability insurance for employee
dentist ( , ).

• One (1), paid but is only a copy of the debit withdraw on the
statement.

• didn’t provide documentation for the rest of insurance paid.
• These payments are included in Schedule L.
• made payments to Utilities from January 5, 20XX through December 5,

20XX (see Schedule L4).

• The Internal Revenue Service received a fax on November 29, 20XX from

CPA (Power of Attorney (POA)).

• Fax stated “During 20XX, there were 4 different organizations providing

that were controlled by the . A combination of the

economy, job losses, and therefore less insurance, freezing of state funds,
etc from 20XX through 20XX caused the various companies to begin
declining. In 20XX one office closed. By March 20XX, only Center
(the second location ) remained. After that,

have caused even further
demise.”

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended
December 31, 20XX
December 31, 20XX
December 31, 20XX
• office closed their office in 20XX.
• office was still operating in 20XX and 20XX at
• ( ) doesn’t service
• provided one (1) bill for dated October 26, 20XX for service at
7 didn’t provide any bills for 20XX payments.
• provided one (1) bill for Utilities for service to #
" didn’t provide any bills for 20XX payments.
• The Internal Revenue Service received a fax from CPA and POA on
January 31, 20XX stating:
• “The technology company has restored some of the files lost on
the computer that crashed. We are now compiling what they have on

a flash drive. The files are the closed files, but do include 0%+ transactions.
It’s all we have been able to get from the corrupted data.

All files were restored to our system, which is Sage 50 20XX.

The 20XX return was completed bases upon the information the client had on
file. As mentioned, the files were corrupt. We are still in efforts to re-construct
files...”

• According to the general ledger check # — for $0 dated December 20, 20XX was
written to but was in fact it was written to and
deposited into the personal account (see Schedule L5).

• According to the general ledger check # for $ 0 dated November 14, 20XX
was written to but was in fact check # —_ for $ 0 dated November 16,
20XX was written to and deposited into the personal
account (see Schedule L6).

• Due to the facts that corrupt computer files, and General Ledger proven
inaccurate; all expenses need substantiation.

• didn’t provide documentation substantiating the business purpose for
the expenses listed in Schedule L.

made direct payments to employees (see Schedule M).

• stated that they leased employees from ;
• Didn't provide documentation showing the payments to were
for leasing employees for work provided to
• Provided a leasing contract that had “ ” name strikethrough and “

• was handwritten in its place.
• The contract states that any additional payments to employees not reported to

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

, FICA and Federal Income Tax Withholdings (FIT) are the
responsibility of the payer.
• The contract was unsigned.

• hasn't filed the Form 941 since the December 31, 20XX for employees.

• filed the Form 1099-misc for some employees (see Schedule M1).

• didn’t pay employment taxes (FICA) or Federal Income Tax Withholdings
(FIT) to the Internal Revenue Service.
• appears to have withheld FIT from employees checks by the uneven

amounts directly paid to the employees.

stated “Other documents included which will account for some of the
expenses listed as personal are reimbursements made by the taxpayer.” In their
response to Information Document Request # 27 and 28 dated February 5, 20XX.
• However, didn’t provide documentation showing that these expenses
meet the reimbursement requirements.

LAW

Section 1.501(c)(3)-1(a) of the regulations states that 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.

Income Tax Regulation ("Regulation") section 1.501(c)(3)-1(c)(2) provides that 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.

Regulation section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not
organized or operated exclusively for one or more of the purposes specified in
subdivision (i) of this subparagraph unless it serves a public rather than a private
interest. Thus, to meet the requirement of this subdivision, it is necessary for an
organization to establish that it is not organized or operated for the benefit of private
interests such as designated individuals, the creator or his family, shareholders of the
organization, or persons controlled, directly or indirectly, by such private interests.

In Revenue Ruling 69-266, 1969-1 C.B. 151, an organization formed and controlled
by a doctor of medicine, "hired" to conduct research programs consisting of
examining and treating patients who are charged the prevailing fees for services
rendered, is not exempt under section 501(c)(3) of the Code. Under the facts
described the operation of the dental practice by the organization does not differ

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

significantly from the private practice of dental for profit organizations. The
organization's primary function is to serve the private interest of its creator rather than
a public interest.

In Revenue Ruling 69-545, 1969-2 C.B. 117, to qualify for exemption from Federal
income tax under section 501(c)(3) of the Code, a nonprofit hospital must be
organized and operated exclusively in furtherance of some purpose considered
‘charitable’ in the general accepted legal sense of the term, and the hospital may not
be operated, directly or indirectly, for the benefit of private interests.

In Revenue Ruling 69-632, 1969-2 C.B. 120, a nonprofit organization composed of
members of a particular industry to develop new and improved uses for existing
products of the industry is not exempt under section 501(c)(3) of the Code. The
association's members select research projects in order to increase their sales by
creating new uses and markets for their product. The primary purpose of the
association's research is to serve the private interests of its creators, rather than the
public interest.

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

In B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), the court found that a
corporation organized to provide counseling services was not exempt under section
501(c)(3) because its activities constituted the conduct of a trade or business that is
ordinarily carried on as a commercial venture organized for profit. The corporation's
primary purpose was not charitable, educational or scientific, but rather commercial in
nature. Further, the court found that the organization's financing did not resemble that
of a typical 501(c)(3) organization as it had not solicited, nor had it received voluntary
contributions from the public. Its only source of income was from the fees for services
that it collected. Those fees were set high enough to recover all projected costs and
produce a profit. Moreover, it did not appear that the corporation ever planned to
charge a fee less than "cost."

In Airlie Foundation v. Commissioner, 283 F. Supp. 2d 58 (D.D.C., 2003), the court
relied on the "commerciality" doctrine in applying the operational test under section
501(c)(3). Because of the commercial manner in which the organization conducted its
activities, the court found that it was operated for a nonexempt commercial purpose,
rather than for a tax exempt purpose. The case noted that among the major factors

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

that courts have considered in assessing commerciality are competition with for-profit
entities, pricing policies, the extent and degree of below cost services provided and
the reasonableness of financial reserves. Additional factors include whether the
organization uses commercial promotional methods (such as advertising) and the
extent to which the organization receives charitable donations.

Revenue Procedure 2007-52, Section 12.01(1) states that where there is a material
change, inconsistent with exemption, in the character, the purpose, or the method of
operation of an organization, revocation or modification will ordinarily take effect as of
the date of such material change.

Section 3121(a) of the Code, states that for purposes of this chapter, the term “wages”
means all remuneration for employment, including the cash value of all remuneration
(including benefits) paid in any medium other than cash; except that such term shall not
include.

Section 3121(a)(1) of the Code, states that in the case of the taxes imposed by sections
3101(a) and 3111(a) that part of the remuneration which, after remuneration (other than
remuneration referred to in the succeeding paragraphs of this subsection) equal to the
contribution and benefit base (as determined under section 230 of the Social Security
Act) with respect to employment has been paid to an individual by an employer during
the calendar year with respect to which such contribution and benefit base is effective,
is paid to such individual by such employer during such calendar year. If an employer
(hereinafter referred to as successor employer) during any calendar year acquires
substantially all the property used in a trade or business of another employer
(hereinafter referred to as a predecessor), or used in a separate unit of a trade or
business of a predecessor, and immediately after the acquisition employs in his trade or
business an individual who immediately prior to the acquisition was employed in the
trade or business of such predecessor, then, for the purpose of determining whether the
successor employer has paid remuneration (other than remuneration referred to in the
succeeding paragraphs of this subsection) with respect to employment equal to the
contribution and benefit base (as determined under section 230 of the Social Security
Act) to such individual during such calendar year, any remuneration (other than
remuneration referred to in the succeeding paragraphs of this subsection) with respect
to employment paid (or considered under this paragraph as having been paid) to such
individual by such predecessor during such calendar year and prior to such acquisition
shall be considered as having been paid by such successor employer;

Section 3121(d)(2) of Code defines the term employee as any individual who, under
the usual common law rules applicable in determining the employer-employee
relationship, has the status of an employee.

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

Section 31.3121(d)-1(c)(2) of the regulations provide in general that the relationship of
employer-employee exists when the person for whom the services are performed has
the right to direct and control the individual who performs the services not only as to the
result to be accomplished by the work, but also as to the details and means by which
that result is accomplished. It is not necessary that the employer actually direct or
control the manner in which the services are performed, it is sufficient if he or she has
the right to do so.

Section 31.3121(d)-1(a)(3) of the regulations provides that, if the relationship of an
employer and employee exists, the designation or description of the parties as anything
other than that of employer and employee is immaterial. Thus, if such relationship
exists, it is of no consequence that the employee is designated as a partner,
coadventurer, agent, independent contractor, or the like. Similar language is found in
sections 31.3306(i)-1(d) and 31.3401(c)-1(c) of the regulations.

Section 4958(c)(1)(A) of the Code, states the term “excess benefit transaction” means
any transaction in which an economic benefit is provided by an applicable tax-exempt
organization directly or indirectly to or for the use of any disqualified person if the value
of the economic benefit provided exceeds the value of the consideration (including the
performance of services) received for providing such benefit. For purposes of the
preceding sentence, an economic benefit shall not be treated as consideration for the
performance of services unless such organization clearly indicated its intent to so treat
such benefit.

Section 4958(f)(1)(A) of the Code, states the term “disqualified person” means, with
respect to any transaction— any person who was, at any time during the 5-year period
ending on the date of such transaction, in a position to exercise substantial influence
over the affairs of the organization.

Section 4958(f)(1)(B) of the Code states the term “disqualified person” means, with
respect to any transaction— a member of the family of an individual described in
subparagraph (A).

Section 4958(f)(6) of the Code states that, the terms “correction” and “correct” mean,
with respect to any excess benefit transaction, undoing the excess benefit to the
extent possible, and taking any additional measures necessary to place the
organization in a financial position not worse than that in which it would be if the
disqualified person were dealing under the highest fiduciary standards, except that in
the case of any correction of an excess benefit transaction described in subsection
(c)(2), no amount repaid in a manner prescribed by the Secretary may be held in any
donor advised fund.

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

Section 1.62-2(c)(1) of the Code states for purposes of sections 1.62-1, 1.62-1T, and
1.62-2, the phrase “reimbursement or other expense allowance arrangement” means an
arrangement that meets the requirements of paragraphs (d) (business connection, (e)
(substantiation), and (f) (returning amounts in excess of expenses) of this section. A
payor may have more than one arrangement with respect to a particular employee,
depending on the facts and circumstances. See paragraph (d)(2) of this section (payor
treated as having two arrangements under certain circumstances).

Section 1.62-2(d)(1) of the Code states in part, except as provided in paragraphs (d)(2)
and (d)(3) of this section, an arrangement meets the requirements of this paragraph (d)
if it provides advances, allowances (including per diem allowances, allowances only for
meals and incidental expenses, and mileage allowances), or reimbursements only for
business expenses that are allowable as deductions by part VI (section 161 and the
following), subchapter B, chapter 1 of the Code, and that are paid or incurred by the
employee in connection with the performance of services as an employee of the
employer. The payment may be actually received from the employer, its agent, or a third
party for whom the employee performs a service as an employee of the employer, and
may include amounts charged directly or indirectly to the payor through credit card
systems or otherwise.

Section 1.62-2(e)(1) of the Code states, an arrangement meets the requirements of this
paragraph (e) if it requires each business expense to be substantiated to the payor in
accordance with paragraph (e)(2) or (e)(3) of this section, whichever is applicable,
within a reasonable period of time. See section 1.274-5T or section 1.162-17.

Section 1.62-2(e)(2) of the Code states, an arrangement that reimburses travel,
entertainment, use of a passenger automobile or other listed property, or other business
expenses governed by section 274(d) meets the requirements of this paragraph (e)(2) if
information sufficient to satisfy the substantiation requirements of section 274(d) and the
regulations thereunder is submitted to the payor. See section 1.274-5. Under section
274(d), information sufficient to substantiate the requisite elements of each expenditure
or use must be submitted to the payor. For example, with respect to travel away from
home, section 1.274-5(b)(2) requires that information sufficient to substantiate the
amount, time, place, and business purpose of the expense must be submitted to the
payor. Similarly, with respect to use of a passenger automobile or other listed property,
section 1.274-5(b)(6) requires that information sufficient to substantiate the amount,
time, use, and business purpose of the expense must be submitted to the payor. See
sections 1.274-5(g) and 1.274-5(j), which grant the Commissioner the authority to
establish optional methods of substantiating certain expenses. Substantiation of the
amount of a business expense in accordance with rules prescribed pursuant to the
authority granted by sections 1.274-5(g) or 1.274-5(j) will be treated as substantiation of
the amount of such expense for purposes of this section.

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

Section 1.274-5(f)(4)(i) of the Code states, in general. For purposes of this paragraph (f)
an adequate accounting means the submission to the employer of an account book,
diary, log, statement of expense, trip sheet, or similar record maintained by the
employee in which the information as to each element of an expenditure or use
(described in paragraph (b) of this section) is recorded at or near the time of the
expenditure or use, together with supporting documentary evidence, in a manner that
conforms to all the adequate records requirements of paragraph (c)(2) of this section.
An adequate accounting requires that the employee account for all amounts received
from the employer during the taxable year as advances, reimbursements, or allowances
(including those charged directly or indirectly to the employer through credit cards or
otherwise) for travel, entertainment, gifts, and the use of listed property. The methods of
substantiation allowed under paragraph (c)(4) or (c)(5) of this section also will be
considered to be an adequate accounting if the employer accepts an employee's
substantiation and establishes that such substantiation meets the requirements of
paragraph (c)(4) or (c)(5). For purposes of an adequate accounting, the method of
substantiation allowed under paragraph (c)(3) of this section will not be permitted.

Section 6001 of the Code state that, every person liable for any tax imposed by this
title, or for the collection thereof, shall keep such records, render such statements,
make such returns, and comply with such rules and regulations as the Secretary may
from time to time prescribe. Whenever in the judgment of the Secretary it is
necessary, he may require any person, by notice served upon such person or by
regulations, to make such returns, render such statements, or keep such records, as
the Secretary deems sufficient to show whether or not such person is liable for tax
under this title. The only records which an employer shall be required to keep under
this section in connection with charged tips shall be charge receipts, records
necessary to comply with section 6053(c), and copies of statements furnished by
employees under section 6053(a).

Section 1.6001-1(a) of the Regulations state, except as provided in paragraph (b) of this
section, any person subject to tax under subtitle A of the Code (including a qualified
State individual income tax which is treated pursuant to section 6361(a) as if it were
imposed by chapter 1 of subtitle A), or any person required to file a return of information
with respect to income, shall keep such permanent books of account or records,
including inventories, as are sufficient to establish the amount of gross income,
deductions, credits, or other matters required to be shown by such person in any return
of such tax or information.

Section 1.6001-1(c) of the Regulations state, 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

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

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 1.6033-3.

Current Activities:

• was incorporated by ( ).
• Atthe time of incorporation also owned and operated
offices called:
• The majority of the decisions made for were done by and his
wife
• Per the Form 990 for years ended December 31, 20XX and December 31,
20XX

• There was one (1) officer.

• Per the Form 990 for years ended December 31, 20XX
• There were five (5) officers.
• No officers were listed besides

During the initial interview stated that the provides

services for individuals, majority kids, with low income families. also stated
that the majority of the payments received are from individuals on Medicare and
Medicaid. stated that the organization originated in . The
organization later set up an office in , . The organization received the most
of their income from the state for Medicare and Medicaid patients.

During the interview with office manager , the office manager stated that
they check online for insurance the day of making the appointment or at least the day
before the appointment to see what insurance will cover and for co-pay. If no insurance
or the patient is out of insurance then the patient has to pay full price. If the patient can't
pay the cost the organization would create a payment plan, but full payment is required
before receiving treatment unless the patient is in pain. If the patient can’t afford the
treatment then the organization would “refer” the patient to agencies so the patients can
get insurance or a local organization provides some free services. If a patient should
have two different insurances, the office is required to bill the “primary” insurance
first (non-Medicaid) then secondary insurance.

The office manager stated that the organization accepts all insurances and all patients.

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

During the examination it was discussed that the organization had a relationship
between the for- profit organizations which were owned by the
President and founder of

During the examination a question was asked about the relationship between

and the for profit organizations and how it relates to the exempt purpose

of the organization.

• A letter dated December 3, 20XX received from the organization's representative
stated that formed on or around March 24, 19XX. His
experience with the practice was that many calls came to the office requesting
emergency work for children on Public insurance (Medicare and
Care). He inquired about the possibility of opening a separate office to service this
population and was the result of this effort. was formed July 20XX. An
attorney was found to assist with the incorporation and tax exempt application status
and the purpose of the corporation was to provide to low income youth.
feels that as many as 0% of the patients seen at were children.

and other specialist were hired to efficiently manage the
patient load.

• The letter also stated that the for-profit and not-for-profit corporation had
relationships that were limited to the use of Practice management and professional,
on occasion.

• The letter also stated that in 20XX substantially all the organizations revenue were
paid by , Third Party Administrator for the Medicaid program in and

Third Party Administrator for the Medicaid program and
State for kids in
• The letter also stated that the organization’s determination of a patient's low income

status was based on their enrollment in either Medicaid or . Ifa new
patient with a nonemergency condition sought without public insurance,
the office would refer them to for eligibility and enrollment.

Form 990 for tax years ending December 31, 20XX; December 31, 20XX; and
December 31, 20XX show the following income received:

12/31/20XX 12/31/20XX 12/31/20XX
Gross Receipts
Medicare Pmts 0 0 0
Dental:
After reviewing statements and cancelled checks for the years ended

December 31, 20XX and December 31, 20XX it appears that the following entities also
made payments to

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended
December 31, 20XX
December 31, 20XX
December 31, 20XX
There were also payments made by individuals for services provided by

didn’t provide a list of charitable care or forgiveness of debt to a charitable class.

During the initial interview, the question was asked how the activities provided by
differ from services provided by “ ” and “ ”, which were owned and
operated by : stated that the difference is only provide
service for Medicare and Medicaid patients and the other two for-profits provides
services for individuals that has insurance or can afford to pay for the services.

No documentation was provided to the Internal Revenue Service showing how
distinguish between the individuals that are considered a charitable class. No
documentation was provided showing what type of documentation the individuals had to
provide to show they were low income or a charitable class of individuals.

A document request was issued to requesting detailed explanation as to how
the services provided for payment from the entities listed above relates to the exempt
purposes. The document request also requested supporting documents such as
invoices and receipts showing what services the organization provided for the funds
received and provides explanation as to what other funds are received by the
organization besides Medicaid and Medicare.

No documentation was provided for this request.

Another document request was sent to requesting the following: “The program
offers cost free dental and medical services to rural residents of . The
Program also offers community prevention services, nutrition, crises intervention
services along with other services that provide holistic approach to health. These
activities were explained in detail in the 1023 application.

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

After reviewing the expense items and the cancelled checks, it appears that the
aforementioned activities were not provided by the organization during the years of
examination. “Please provide supporting documentation showing the organization did
provide these activities. The documentation could be but not limited to invoices,
receipts, newsletters, advertising etc.”

No documentation was provided showing any of these activities were provided by the
organization.

Taxpayer’s Position:

stated that they believe that they meet the requirements of charitable care
and therefore are exempt under I.R.C. section 501(c)(3).

believes that payments to credit card and to
itself by and are reimbursements for their personal use of
assets.

hasn’t responded about inurement and has thirty (30) days to respond.

Government’s Position:

isn’t operated exclusively for charitable, educational, or religious purposes
consistent with I.R.C. section 501(c)(3) of the Code nor section 1.501(c)(3)-1(a) of
the Income Tax Regulations and therefore fails to meet the operational test.
Specifically, the facts above indicate that they didn’t operate exclusively for exempt
purposes but were operating in a commercial manner and assets were used to inure
to the benefit of and

isn’t distinguishable from any other commercial operation in that
charged similar fees for all of their products, marketed these products to the general
public through advertising, and are carrying on similar operations as a for-profit entity.
In fact provided the “FEE SCHEDULE ” when ask for a fee schedule.

isn’t a hospital and their claim of ‘charitable care’ wasn’t documented to show
that this charitable care was provided.
However, before ‘charitable care’ can be considered, has to meet the
operational test to show that no part of their earnings inure in whole or in part to the
benefit of private shareholders or individuals.
In fact, stated that the organization’s credit cards were used for personal use
by and and therefor inurement occurred.

Form 886-A (1-1994) Catalog Number 20810W Page 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 | Year/Period ended
December 31, 20XX
December 31, 20XX
December 31, 20XX

That and are disqualified persons under I.R.C. section 4958.

That the payments and purchases made to:

• credit card.

• Non- credit cards.

• credit card without substantiation.

• credit card purchases.

• payment to other financial institutions without substantiation.

• payments to

• direct payments to

• direct payments to

• direct paymentto /

• payments to

• payments to

• purchases by checks and debit cards.

are inurement and and were the recipients of the inurement.

That and made partial correction under I.R.C. section 4958 when they

made payments to credit card and to directly and weren't

reimbursements.

That isn’t exempt from Federal Income Tax under I.R.C. section 501(c)(3)
due to inurement and operating in a commercial manner.

Form 1120 has to be filed by the organization as a Personal Service Corporation for
year ended December 31, 20XX and all subsequent years.

That is a Personal Service Corporation.
Conclusion:
allowed the organization’s assets to be used by and , both
disqualified persons, while running a just like the two (2) additional
offices that owned and operated.

personal use of assets constitutes inurement and is grounds for revocation
of exempt status under I.R.C. section 501(c)(3).

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

Year/Period ended

December 31, 20XX
December 31, 20XX
December 31, 20XX

isa
Corporation

section 504(c)(3).

office that is operating like any other Personal Service
office and is grounds for revocation of exempt status under I.R.C.

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