Religious organization loses exemption after commercial activity, private inurement, and inadequate records

Plain-English summary

A religious organization operated a retail book and gift shop, arranged pilgrimage tours, and received fees for tax-return preparation. The IRS found that these activities were conducted substantially in a commercial manner and were not exclusively directed to exempt purposes. The examination also found that the organization's president used organizational funds for personal mortgage, vehicle, credit-card, food, and other expenses, while the organization had no effective financial controls and did not report the payments as compensation or excess-benefit transactions. The organization failed to provide complete books, inventory records, bank records, receipts, and other documents needed to establish how its money was received and spent. The IRS concluded that the organization's earnings inured to its president, that substantial nonexempt activity and private benefit violated section 501(c)(3), and that the lack of records independently prevented it from proving qualification. Its exemption was revoked, and contributions were no longer deductible under section 170 from the redacted effective date.

Ruling snapshot

• Question: Should a religious organization retain section 501(c)(3) status when it conducts substantial commercial activities, uses funds for its president's personal expenses, and fails to produce adequate records?
• Outcome: revocation
• Key authorities: IRC §§ 501(c)(3), 4958, 6001, and 6033; Treas. Reg. § 1.501(c)(3)-1; Rev. Ruls. 59-95, 70-534, and 77-366

Full text (IRS public release)

Scanned document; transcription proofread from IRS OCR against all 28 page images. Obvious OCR misreads were corrected, blank redactions were preserved, and wording is otherwise verbatim. Fully redacted exhibit pages are identified as such.

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TEGE: EO Examinations
1100 Commerce Street, MC 4920 DAL

Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: AUG 10, 2017
Release Number: 201804011
Release Date: 1/26/2018 Person to Contact:
UIL Code: 501.03-00

Identification Number:

Contact Telephone Number:
Telephone:
Fax:

EIN:
CERTIFIED MAIL - Return Receipt Requested

Dear

This is a final determination that your exempt status under section 501 (c)(3) of the Internal Revenue
Code is revoked. Recognition of your exemption under Internal Revenue Code section 501(c)(3) is
revoked effective for the following reasons:

You have failed to produce documents to establish that you are operated exclusively
for exempt purposes within the meaning of Internal Revenue Code section 501(c)(3),
and that no part of your net earnings inure to the benefit of private shareholders or
individuals. You failed to respond to repeated reasonable requests to allow the
Internal Revenue Service to examine your records regarding your receipts,
expenditures, or activities as required by I.R.C. sections 6001, 6033(a)(1) and Rev.
Rul. 59-95, 1959-1 C.B. 627.

As such, you failed to meet the requirements of I.R.C. section 501(c)(3) and Treasury
Regulation Section 1.501(c)(3)-1(a)(1) in that you failed to establish that you are operated
exclusively for exempt purposes within the meaning of Internal Revenue Code section

501 (c)(3).

Contributions to your organization are no longer deductible under section 170 of the Internal
Revenue Code, effective

You are required to file Federal income tax returns on Form 1120. These returns should be filed
with the appropriate Service Center for the year ending , and for all subsequent
years.

Processing of income tax returns and assessment 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 in court, you must initiate a suit for declaratory
judgment in the United States Tax Court, the United States Claim Court or the District Court of
the United States for the District of Columbia before the 91st day after the date this determination
was mailed to you. Contact the clerk of the appropriate court for the rules for initiating suits for
declaratory judgment. Please contact the clerk of the respective court for rules and the
appropriate forms regarding filing petitions for declaratory judgment by referring to the enclosed
Publication 892. Please note that the United States Tax Court is the only one of these courts
where a declaratory judgment action can be pursued without the services of a lawyer. You may
write to the courts at the following addresses:

United States Tax Court
400 Second Street, NW
Washington, DC 20217

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005

U. S. District Court for the District of Columbia
333 Constitution Ave., N.W.
Washington, DC 20001

The Taxpayer Advocate Service (TAS) 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 yours,

Enclosures:
Publication 892 Director, EO Examinations


Department of the Treasury Date: August 16, 2016

Internal Revenue Service
Tax Exempt and Government Entities
IRS Exempt Organizations Examinations

Taxpayer Identification Number:
Form:

Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:

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
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

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


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

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

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,

Director, EO Examinations

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

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


“

4

a

Schedule number or exhibit
Form 886-A
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of taxpayer Tax Identification Number Year/Period ended
ISSUE
Should the exempt status of under Section 501(a) of the
Internal Revenue Code (IRC) as an organization described in IRC Section 501(c)(3) be revoked effective
?

FACTS

was incorporated on in the State of as a non-profit corporation. Article II of
the Articles of Incorporation stated that the purpose of the corporation is to provide pilgrimages, low cost
products and functions for the . was listed as the initial Board of Director of

filed Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal
Revenue Code, on

Part II of the Form 1023 sets forth the purposes of . It states that purpose is to provide
and information to . It will be accomplished by running the
religious store and conducting pilgrimage tours.

The attachments to Form 1023 provide more detail of projects and project objectives. The
explanation, under the title , provided that the beginning of was as a
religious store that opened in19 with$ worth of merchandise. 7 ½ years later there was

$ in inventory and additional income from the pilgrimages provided to benefit

. The 1023 attachment states that Religious store averages $ a month and a
would bring in $ and more as time goes on.

Internal Revenue Service granted tax exempt status to on

The Part I of the Forms 990 for the years through provided that exempt activities

were serving the and of the with solid teaching and materials, prayer

ministry, pilgrimages, conferences, youth ministry as well as a web presence for information and
prayer requests.

The Forms 990 filed by from through provided the following:

• All Forms 990 were signed by the president of '

• Revenue was reported as fundraising events and/or contributions on the Forms 990.

• No wages or salaries were reported on the Forms 990.

• No beginning inventory and no ending inventory was reported on the Forms 990.

• No inventory for sale or use was reported on the Forms 990.

• No loan from current and/or former officers, directors, and disqualified persons reported on the Forms
990 from through . A $ loan from to was reported on the Forms 990
for the years and , and balance of the loan at the end of year was $ . No loan
from to was reported on the Form 990 for the year 20

• No section 4958 excess benefit transactions were reported during the years from through

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 Year/Period ended
Activities:
The website describes and its activities. It states that

is a locally-owned and operated religious store and pilgrimage company established in19 by

During the course of the examination, indicated that received revenue from three
different sources: book store/gift shop, pilgrimage tours, and tax preparation.

Book Store/Gift Shop

operates a book store / gift shop staffed by and volunteers. It is located at
. The store has variety of religious items such as bibles, small statues, crosses,
chains, CDs, books, and pictures. The store hours are

explained in the response to Information Document Request 003 that she started the pilgrimage
and resource center and religious store in . received its tax exempt status in
She figured that all revenue and inventory of Religious Store should not be part of . Thus,
she executed an agreement with that all the materials in the religious store will become her
donation to when sold, and will be responsible for replenishing inventory when necessary.
All stock will be returned to her if ceases its operation.

provided an electronic copy of an agreement between and during the
examination. The agreement provided that all the merchandise of the religious store belongs to
, provided exclusive rights to to sell the merchandise, all the proceeds of the sales
are donated to , and is required re-stock the merchandise. The agreement was effective as
of January 1,20 _ , and was added to corporation papers on January 1,20 _ . No inventory list was
included in the agreement. See Exhibit 1 for the agreement between and

During the course of examination, provided its bank statements for the year and

account statements for the months of April, June, and November of . Although
requested, no other financial records, such as copies of cancelled checks, deposit slips, credit card
statements, and additional bank statements were provided for the examination.

No beginning inventory and no ending inventory was reported on Forms 990 since its inception.
reported $ expenses on materials supplies and equipment of its Form 990 for the year

20 . However, no detailed books and records such as invoices, receipts, purchase orders, and

cancelled checks were provided to verify the expenditures.

There were two types of revenues reported on the Form 990 for the year under examination, fundraising
revenue and contributions. No book store revenue was identified on Form 990, and no detailed records
such as cash register tapes were provided to verify the revenues received from the merchandise sales of
the book store / gift shop.

The copies of cancelled checks of were secured by the SBSE Division of IRS. Through review of
these records purchases from

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 Year/Period ended

were identified as merchandise purchases. Total
merchandise purchases were $
for the years and , respectively.

To date, no detailed books and records including inventory records were provided to reconcile the
inventory purchases and sales for the year under examination.

Pilgrimage Tours

There were two pilgrimage tours conducted by during the year . advertised the trips
through website and brochures. The tour charges covered air fares, hotels, meals, admission
fees, and international visa fees. The individuals paid their pilgrimage tours by personal checks or by
credit cards. then wire transferred the funds to a third party travel agency,

, which helped to conduct the tours and make reservations overseas. Finally, made
flights reservations for the participants of the pilgrimages.

She explained in the response to Information Document Request 003 that every pilgrimage began with a
who had contacted and requested a specific pilgrimage based on the

final destination. Then, took on the task of preparing the itinerary, sending the itinerary to the

overseas tour company for a quote, pricing airfare, advertise the trip, confirming arrangements for travel

and accommodations, and handling all the accounting for the pilgrimage tour.

further explained in the response that the destination becomes the pilgrimage for the
people who want to accompany this on his journey. The did not handle any of the business
aspects because the travel and tours are provided as a donation to aid [redacted]’s own Spiritual life and
enhance of his . indicated in the response that her role was a nonpaid professional
guide while traveling with the group. Both of the and travel expenses were paid by
the participants of the pilgrimages.

The two pilgrimages conducted by inthe year 20 were , and

led the pilgrimage tour. The tour was from
through . There were 7 people took the pilgrimage tour, , and 5 paid
participants. The participants were charged $ per person double occupancy. paid a total of
$ ‘to for the pilgrimage tour, $ to for flight
reservations, and $ to for flight related insurances such as baggage insurance,

travel delay insurance, and flight insurance.

The second pilgrimage to was led by from
. There were 10 people took the pilgrimage tour, , and 8 paid
participants. The participants were charged $ per person double occupancy. Then, paid

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
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended
$ [redacted] to for booking the tour, $ to for flight reservations,
and $ to for flight related insurances.
In May, figured out that did not have enough funds to pay for
booking the pilgrimage tour. In order to conduct the tour, decided to borrow
funds from a private commercial lender, . On May 30, 20, borrowed
$ from

statements provided by and SBSE Division of IRS revealed that paid
$ daily from May 31,20 to March 21,20 to for the repayment of the loan.
To date, no detailed books and records were provided to reconcile the revenue and expenses of
pilgrimage activities conducted by for the year under examination.
Tax Preparation

explained during the interview held by agent on May 12,20 ‘that she prepared

individual tax returns. The individuals paid for tax preparation service either by the checks and/or
credit/debit cards. The checks written by the individuals were either marked as donations or tax
preparation fees. She deposited all income received from tax preparation service in the bank account of

. Then, she used some of the funds from account to pay for her personal expenses such
as mortgage monthly payments, auto payments, utilities, and food expenses.

explained in the response to Information Document Request 003 that she did not have a huge
tax business prior to beginning the ministry she was called to do. She was an accountant and facilitated
taxes for her clients.

To this date, and were not able to provide the detailed books and records to show the
revenue received from the different revenue sources.

During the course of examination by SBSE Division of IRS, the Tax Compliance Officer identified 8
Forms 1040 for the year were prepared by , and estimated that the total revenue received
from tax preparation was $ in the year

Summary of day to day operations:

provided a folder marked as 20 minutes of meetings in the response to Information Document
Request 003. In the folder, there were summary of day to day operations for the year 20 . The
summary of day to day operations contained opening prayers and daily activity descriptions. No board
meeting information was provided in the summary of day to day operations.

2
3

Form 886-A (1-1994) Catalog Number 20810W Page 4_ 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 Year/Period ended

The samples of the summary of day to day operations are shown below:

• January : We celebrated First Friday Mass with Friday night to start the New Year with
Spiritual Warfare prayers and healing prayers. has to have next week and
we are storming heaven so nothing happen . needed prayers for

and final healing.

• January : came in from and donated to .

called from , lighting candle at as well as his home parish for the

end of the demonic attacks against the Ministry, myself and all our Board members especially IRS.

• February : Real busy. came in with . Talked about future trips.

• February : were in. They will be praying with us. was very upset
over the IRS attack on me and the ministry. and family and myself went to for mass
with . We were all anointed by him and of course

• March : in and brought for me to look at. All in ministry are for getting it for the
security of being able to travel when necessary. The is showing signs of problems.

• March :: It will be official to get the : however, the payoff of $ is still a bill to be
paid as soon as possible to clear the loan taken out to pay for the pilgrimages. This is approved by
the Board of Directors. sent Salesman in to sign papers because “someone wanted to buy

• March : Wentto to finalize the papers for the truck.

• April :Paidthe payment in amount of $ Balance for $

• May = : Am applying for loan with today for the pilgrimage. 10 people
only for this one. Talked to and we talked about and he sent me pictures of the sun

as well as a video. He promised he will get the loan if at all possible but admitted that it is impossible
to fund a non-profit.

• June :Wehave no more signups so we have to force this pilgrimage because has to the
• June — : Leave for ; pilgrimage with only 10. (Only 8 paying, we have to pay for
and me).

To this date, no other board meeting minutes were provided by

Financial Records:

Form 886-A (1-1994)  CatalogNumber20810W _—Page 5 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 Year/Period ended
With the financial records provided by and SBSE Division of IRS, the expenses other than
inventory purchases and pilgrimage were identified and described below:
Mortgage
Per Schedule L of Form 990 filed by for the year20 , made a $ loan to ;
and there was a written loan agreement. At the end of 20 _, the balance of the loan was $

explained during the interview held on May 12, 20 __, that she put significant funds into to
cover overhead cost. She indicated that she refinanced her personal residence and deposited
the proceeds in bank account. provided a copy of the May, 20 statement from

. The statement showed that the loan started on 09/08/__. Also, it provided that the
original principal balance, current principal balance, and monthly payment of the loan were $
, respectively.

explained in a letter dated June 4,20 ‘that there was a $ loan taken out on 09/08/
against her property for operating expenses, and she has actually paid almost all of it herself from her
account directly to over the years. provided a spreadsheet statement to
show the payments made by her to . However, no loan agreement was provided.

also indicated in the letter dated June 4,20 _ that she often used her debit or credit cards to
deposit money to checking account to pay its bills or rents in order to keep open. No
personal debit or credit card statements were provided to support this statement.

phoned the Service on September 30, 20 . During the phone conversation,
indicated that she filed the 20 Form 990 wrong. She explained that the loan did not occur in 20 _, it
occurred in 20 instead. She further explained that she re-financed her mobile home in 20 . She
stated that she gave the funds to after she received them from the mortgage firm. She
emphasized that does not owe her, but is the collateral of her property. When
was asked why she did not record the loan in the year that was occurred, she said she did not do it
because she did not need the money at that time, and she always paid her mortgage from her own

funds. But, she exhausted of her funds after , and she needed to help
her to pay the mortgage. Thus, she recorded the loan inthe year 20 . was asked to provide
the bank records to show that the fund was transferred from her account to account in 20

She said that she did not maintain the bank records.
Per the statements provided by and SBSE Division of IRS, paid
a total of $ for the years
, and , respectively.

Car Loan & Car Insurance

The summary of day to day operations provided in response to Information Document Request 003

indicated that purchased a from for in March, 20
Prior to the purchase of : owned a . The documents provided
by SB/SE Division of IRS showed that, purchased a new for $ on March 8,

Form 886-A (1-1994) Catalog Number 20810W Page 6_ 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 Year/Period ended
20 . She put $ in cash down, received a $ cash rebate, and financed $ . The auto
loan was initially through which was later bought out by . In and
there were several payments made out of to .

paid a total of $ and $ for the years 20 and 20_, respectively.
In20 , opened a account and refinanced her truck with

. The balance on the loan with was paid off by
for $ on October 1, 20

In March 20, purchased a new . The documents provided by
SB/SE Division of IRS showed that went to and signed the
purchase agreement on March9, 20 . The car loan was financed through .

made 3 payments for a total of $ to inthe year20 . statement
showed that a final payment was made on August 17, 20 __, and the total of the payments was
$ . could not confirm who made the final payments on August 17, 20
However, the statements provided by SB/SE Division of
IRS showed that the payment of $ to was made on behalf of by

as a new-loan to on August 15, 20

made 2 payments for a total of $ to In the year 20 . Perthe
statements provided by SBSE Divisions of the Internal Revenue Service (IRS), made 11 payments
for a total of $ to in the year 20

Bank and Credit Card Payments

transferred funds to bank, credit card, and store credit card accounts. The total
transfers were $ for the
years , and respectively.
Although requested, was not able to provide any documents or explanations of its funds used by
Others
used funds for cash withdrawals, restaurants, food purchases, roof repair, insurance,

attorney fees, garden products, health products, car washes, utilities payments, drugstore purchases,
doctor appointment, cell phone, personal credit card payments, and payments made to her daughters’.
The total funds used by to pay for her expenses were $

for the years and respectively.

Personal Tax Records

No forms W-2 or 1099-Misc. was filed by for the years from 20 = through 20

Form 886-A (1-1994)  CatalogNumber20810W Page 7 publish.no.irs.gov Department of the Treasury-Internal Revenue Service

w

Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended

LAWS

IRC §501(a) provides, in part, that organizations described in IRC §501(c) are exempt from federal
income tax. Section 501(c)(3) of the Code describes, in part, an organization that is organized and
operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational
purposes, no part of the net earnings of which inures to the benefit of any private shareholder or
individual.

IRC §6001 states 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.

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

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

Treasury Regulations §1.501(c)(3)-1(c)(2) states 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.

Treasury Regulations §1.501(c)(3)-1(d)(1)(ii) states 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.

Fact patterns suggesting inurement also frequently suggest excess benefit transactions between an
exempt organization and disqualified person under §4958. The recent regulations issued under
§501(c)(3), at Treas. Reg. §1.501(c)(3)-1(f)(ii), instruct the Service to consider a variety of factors to
determine whether revocation is appropriate when section 4958 excise taxes also apply:

(A) The size and scope of the organization’s regular and ongoing activities that further exempt
purposes before and after the excess benefit transaction or transactions occurred;

(B) The size and scope of the excess benefit transaction or transactions (collectively, if more than
one) in relation to the size and scope of the organization’s regular and ongoing activities that
further exempt purposes;

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
(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer Tax Identification Number Year/Period ended

(C) Whether the organization has been involved in multiple excess benefit transactions with one or
more persons;

(D) Whether the organization has implemented safeguards that are reasonably calculated to prevent
excess benefit transactions; and

(E) Whether the excess benefit transaction has been corrected (within the meaning of section
495(f)(6) and §53.4958-7), or the organization has made good faith efforts to seek correction from
the disqualified person(s) who benefited from the excess benefit transaction.

Treasury Regulations §1.501(c)(3)-1(f)(iv) Example 3 supposes that an organization’s founder diverts
significant portions of the organization’s funds to pay personal expenses, which reduces the funds available to
conduct exempt activity, over the course of multiple years. The board of trustees never authorized the
organization to pay the founder's personal expenses and takes no action to seek repayment or terminate
the founder's involvement with the organization. The founder claims that the payments represent loans,
but no contemporaneous documentation exists and no payments of principal or interest were ever made
to the organization. Based on the factors above, the regulations contemplate that not only does the
diversion of funds constitute an excess benefit transaction under §4958, but the prohibition against
inurement has been violated and the organization no longer qualified as an organization described in
§501(c)(3).

Rev. Rul. 70-534, 1970-2 CB 113, (Jan. 01, 1970) A nonprofit organization whose primary activity is
conducting travel study tours that include courses on the culture of the United States, foreign countries,
and nature studies taught by certified teachers is exempt under section 501(c)(3) of the Code.

Rev. Rul. 77-366, 1977-2 C.B. 192, states that a nonprofit organization that arranged and conducted
winter-time cruises during which activities to further religious and educational purposes were provided in
addition to extensive social and recreational activities was not operated exclusively for exempt purposes
and did not qualify for exemption.

In Rameses School of San Antonio, Texas v. Commissioner, T.C. Memo 2007-85, the Tax Court held that
a private school failed to qualify for exemption under section 501(c)(3) because it operated for the private
benefit of its founder. The Tax Court stated; Factors highlighted of a prohibited relationship have included
control by the founder over the entity's funds, assets, and disbursements; use of entity moneys for
personal expenses; payments of salary or rent to the founder without any accompanying evidence or
analysis of the reasonableness of the amounts; and purported loans to the founder showing a ready
private source of credit. Nearly all of these factors are present here,

Scripture Press Foundation v. United States, 285 F. 2d 800 (1961) cert. den. 363 U.S. 985(1962), states
that a corporation engaged in the publication and sale of religious periodicals, books, and supplies to
churches and to individuals was held to be operated for the primary purpose of carrying on a trade or
business, and was not entitled to exemption.

In Easter House v. U.S., 12 Cl. Ct. 476, 486 (1987), aff'd, 846 F.2d 78 (Fed. Cir. 1988), 846 F. 2d
78(Fed. Cir. 1988), cert. den., 488 U.S. 907 (1988), the organization, in exchange for a fee, provided
adoption services to parents seeking to adopt a child, including services to pregnant women who
intended to place their newborns for adoption. The Claims Court concluded that the organization's
business purpose of operating an adoption service, not the advancement of educational and charitable
activities, was its primary goal. It competed with other commercial organizations providing similar

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

Name of taxpayer Tax Identification Number Year/Period ended

services. Thus, “plaintiff’s competition provides its activities with a commercial hue.” 12 Cl. Ct. at 486.
Accordingly, the organization did not qualify for exemption under I.R.C. §501(c)(3).

Christian Stewardship Assistance, Inc. v. Commissioner, 70 T.C. 1037(1978), an organization was
formed as a nonprofit corporation to assist charitable organizations in their fundraising activities with
individual contributions. The organization engaged in a service which provided financial planning advice
on charitable giving and tax planning to wealthy individuals referred to it by subscribing charitable
organizations. The court held that the organization’s tax planning services are a nonexempt activity that
is substantial in nature and not incidental to its charitable purpose. Therefore, the organization failed to
qualify for exemption under section 501(c)(3) of the Code.

GOVERNMENT’S POSITION

The 501(c)(3) tax exempt status of the should be revoked because it
is not operated exclusively for tax exempt purposes. An organization described in section 501(c)(3) must
establish that no more than an insubstantial part of its activities is not in furtherance of an exempt
purposes. Treas. Regs. 1.501(c)(3)-1(c)(1).

In the year 20, ran a book store/gift shop, conducted 2 pilgrimage tours, and performed tax
preparations. The revenues from the activities were deposited in account.
Activities

• Book Store / Gift Shop

book store and gift shop is located in a street shopping center at
The facility is leased at the rate of $ per month. It is surrounded and adjacent to many other
stores and shops. The store sales variety of religious items such as bibles, small statues, crosses,
chains, CDs, books, and pictures.

The store hours are . The store accepts cash, check,
American Express, Discover, MasterCard, and Visa. The store is run by and
volunteers.

No detailed books and records, such as cash register tapes and/or sale receipts, were provided to show
whether all of the proceeds from the merchandise sale were deposited into account.

Section 501(c)(3) of the Code provides, in part, for the organization to be exempt from Federal income
tax the organization must be organized and operated exclusively for charitable, religious or educational
purposes, no part of the net earnings of which inures to the benefit of any private shareholder or
individual.

Reviewed bank accounts revealed that its funds were comingled with those of its president,
. It was difficult to differentiate personal funds from

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Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended

failed to provide requested books and records under IRC section 6001 and section 6033 to
demonstrate that no part of its net earnings inured to the benefit of any private shareholder or individual,
including . For this reason, fails to meet the operational test of Section 501(c)(3).

In addition, operates its book store and gift shop similarly to the book stores and gift shops that
were commercially operated as described in Scripture Press Foundation v. United States.

Although activity of operating of a book store and gift shop may, in part, further religion,
has a substantial business purpose. is operated in a commercial manner and is in
competition with other local businesses. Accordingly, operating a book store and gift shop in a
commercial manner is not an exempt activity.

• Pilgrimage Tours

conducted two pilgrimage tours during the year 20 . The pilgrimage tours were led by

to different religious sites in . The activities accomplished both religious and non-religious,
or both educational and non-educational purposes. And, no structured educational program was provided
during the tours.

Each pilgrimage tour began with a requested to provide a specific pilgrimage based
on the final destination. conducted the pilgrimage tour according to the request and
the travel expenses were paid by

Rev. Rul. 70-534, 1970-2 CB 113, (Jan. 01, 1970) provided that a nonprofit organization whose primary
activity is conducting travel study tours that include courses on the culture of the United States, foreign
countries, and nature studies taught by certified teachers is exempt under section 501(c)(3) of the Code.

is dissimilar to the organization described in Rev. Rul. 70-534 because it does not provide any
structured educational programs. In the ruling, the activity served a bona fide educational purpose since
the courses were conducted by certified teachers, consisted of lectures, instruction, preparation of
reports, recitation, examinations, and the issuance of grades.

pilgrimage activity is similar to the organization in Rev. Rul. 77-366. Even if some of the
activities are religious and educational in nature, there is substantial time available for recreational and
other non-exempt activities.

is not operated exclusively for section 501(c)(3) purposes since provided a substantial
private benefit to the priest who requested the pilgrimage tour.

• Tax Preparation

prepared individual tax returns and the individuals paid the tax preparation service fees to
either by checks and/or credit/debit cards. During the course of examination by the SBSE Division of
IRS, the Tax Compliance Officer identified Forms 1040 for the year 20 that were prepared by
, and estimated that the total revenue received from tax preparation fees was $ in the year
20

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Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended

The tax preparation service is regularly carried on as a business activity and not substantially related to
furthering the exempt purpose of

tax preparation service activity is not charitable within the meaning of the Code and Regulations.
Treas. Reg. §1.501(c)(3)-1(d)(2). provided the tax preparation service in a commercial manner
similar to the organization described in Easter House v. U.S., 12 Cl. Ct. 476(1987), which was determined
to be carrying on essentially commercial activities in competition with ordinary commercial enterprises,
rather than activities that furthered a charitable purpose.

Similar to Christian Stewardship Assistance, Inc. v. Commissioner, 70 T.C. 1037(1978), tax
preparation service is a nonexempt activity that is substantial in nature and not incidental to its charitable
purpose.

Private Benefit Transactions

Examination of records revealed that used the organization funds for personal
expenses.

• Merchandise purchases

Per the agreement between and , all the merchandise sold by the store belongs to

. No value of merchandise has been reported in the assets section of Forms 990 since its
inception. The merchandise is purchased from various distributors and is then sold at the retail level. The
payments made for merchandise purchases constitute private benefit received by because all
the merchandise of the store belongs to , per the agreement between and
Total merchandise purchases by the organization were $

. for the years and , respectively.
• Mortgage
indicated in the phone conversation with the Service on , that she re-
financed her personal mobile home in 20 and gave the funds to after she received them from
the mortgage firm. However, she was not able to provide the loan agreement or any document to
demonstrate the funds were transferred from her account to account in 20
made mortgage payments to for personal residence. These
payments constituted private benefit received by because the payments were for her personal
residence. The total mortgage payments made were $
for the years and respectively.

• Car payments

made payments from account to
to pay her car loan. These payments constituted private benefit received by . The total car loan
payments made by were $ for the years
and , respectively.

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Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended

• Bank and Credit Card Payments

transferred funds from account to her bank, credit card, and store credit accounts for
her personal use, and no explanation of the funds use was provided by . These transfers
constituted private benefit received by . The total payments transferred by to
bank, credit, and store credit card accounts were $
for the years and respectively.

• Food and Others

used funds for cash withdrawals, restaurants, food purchases, roof repair, insurance,
attorney fees, garden products, health products, car washes, utilities payments, drugstore purchases,
doctor appointment, cell phone, personal credit card payments, and payments made to her daughters.
These funds used by constituted private benefit received by . The total funds used by
to pay for her personal benefit were $
for the years , and respectively.

Expense summary

Year: [redacted]
Expense category                 Total expenses paid by [redacted]    Reported by President
Bank Cards                       [redacted]                            0
Merchandise                      [redacted]                            0
Truck                            [redacted]                            0
Mortgage                         [redacted]                            0
Others                           [redacted]                            0
Total                            [redacted]                            0

Year: [redacted]
Expense category                 Total expenses paid by [redacted]    Reported by President
Bank Cards                       [redacted]                            0
Merchandise                      [redacted]                            0
Truck                            [redacted]                            0
Mortgage                         [redacted]                            0
Others                           [redacted]                            0
Total                            [redacted]                            0

Year: [redacted]
Expense category                 Total expenses paid by [redacted]    Reported by President
Bank Cards                       [redacted]                            0
Merchandise                      [redacted]                            0
Truck                            [redacted]                            0
Mortgage                         [redacted]                            0
Others                           [redacted]                            0
Total                            [redacted]                            0

Year: [redacted]
Expense category                 Total expenses paid by [redacted]    Reported by President
Bank Cards                       [redacted]                            0
Merchandise                      [redacted]                            0
Truck                            [redacted]                            0
Mortgage                         [redacted]                            0
Others                           [redacted]                            0
Total                            [redacted]                            0

Year: [redacted]
Expense category                 Total expenses paid by [redacted]    Reported by President
Bank Cards                       [redacted]                            0
Merchandise                      [redacted]                            0
Truck                            [redacted]                            0
Mortgage                         [redacted]                            0
Others                           [redacted]                            0
Total                            [redacted]                            0

Year: [redacted]
Expense category                 Total expenses paid by [redacted]    Reported by President
Bank Cards                       [redacted]                            0
Merchandise                      [redacted]                            0
Truck                            [redacted]                            0
Mortgage                         [redacted]                            0
Others                           [redacted]                            0
Total                            [redacted]                            0

The total of the payments made and funds transferred on behalf of for her personal benefit was
$ for the years

, and , respectively. The summary of personal expenses for the
years through are shown on Exhibit 2.

did not report the president's, , use of the organization’s funds for personal expenses paid
on its Forms 990 as wages to officers, issue Forms W-2 or 1099 to its President, or report on Forms 990
(Part IV, line 25 b and c) whether the organization engaged in section 4958 excess benefit transactions
during the years from through

used funds for her personal expenses totaling $ for the years through
, and she did not report the expenses paid or funds used for her personal benefit on her Forms 1040
as income for those years.

account, its primary asset, is commingled with personal finances.
used account for both personal and organizational matters. allows its
assets to be used by its president for non-exempt personal purposes. Such use constitutes inurement
and fails the operational test under Treasury Regulations 1.501(c)(3)-1(c)(1), which states, “an
organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance
of an exempt purposes.”

The Service asked to provide all books and records of its assets, liabilities, receipts and
disbursements. Other than account statements for the months of April,
June, and November of , summary of day to day operations, Title Security loan information,

and flyers of Pilgrimage trips, no other financial records, such as copies of cancelled checks,
deposit slips, and credit card statements were provided to show how its expenditures furthered
exempt activities.

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Schedule number or exhibit

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

Name of taxpayer Tax Identification Number Year/Period ended

There are no internal controls to ensure that funds were only used for exempt purposes.
had free reign over the following:

• Pay the loan of her personal vehicles;
• Pay the mortgage of her personal residence;
• Use funds to pay for her personal credit cards for and her personal expenses.

There is no record of the other Board members having any involvement with the finances of

Analysis under the factors laid out in Treas. Regs. §1.501(c)(3)-1(f) support the conclusion that
revocation of exempt status is appropriate in this case. This situation is very similar to
example 3 of the regulation. The funds available for activities before and after the
transactions appear to have been affected. diverted thousands of dollars in payments of
personal expenses, yet only had minimal documented charitable activities. The size and scope of
the transactions are substantial in relation to exempt activities.

The excess benefit transactions between and multiple and repeated during 20
through 20 . There were no internal controls in place, the board did not question

management of funds, and no safeguards were put in place to prevent the occurrence of
excess benefit transactions. No correction is known to have been sought by or made to

In summary, managed more like a personal business than an exempt organization.
had control over funds, assets and disbursements and made use of

the funds for personal use. essentially appear to have had access to a zero interest line

of credit with no promissory notes, terms of repayment, interest charged, or balance approved by

an informed board of directors for purported loans between and The income and

assets of inured to the benefit of , founders and president of , thus

was not operating exclusively for exempt purposes as required by section 501(c)(3),

Rameses School of San Antonio, Texas v. Commissioner, T.C. Memo 2007-85.

Form 886-A (1-1994) Catalog Number 20810W Page 15 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

Exhibit 1 – Agreement between [redacted] and [redacted]

[The agreement on exhibit pages 16 and 17 is redacted in the IRS public release.]

Exhibit 2 – Funds used for [redacted] personal benefit.

[The schedules on exhibit pages 18 through 23 are redacted in the IRS public release.]