Inactive child-feeding charity loses exemption after fraud case

Plain-English summary

A charity participated in federal afterschool and summer feeding programs intended to provide meals to children in low-income areas. Its leader pleaded guilty to conspiring to obtain program funds through bribes and inflated claims for meals that were not served. After the investigation, program funding stopped, the feeding operation shut down, and the organization carried on no further activity. It also stopped filing Forms 990 and did not respond to repeated IRS requests for books and records sent to the organization and listed officers. The IRS concluded that the organization failed the operational test and revoked its section 501(c)(3) exemption from a redacted effective date.

Ruling snapshot

• Question: Should exemption be revoked when the organization ceased all exempt activity and failed to provide records or required returns?
• Outcome: Revocation, with the effective date redacted in the IRS release.
• Key authorities: IRC §§ 501(c)(3), 509(a)(2), 6001, 6033, and 7428; Treas. Reg. § 1.501(c)(3)-1; Rev. Proc. 90-27; Rev. Rul. 59-95

Full text (IRS public release)

[Redaction note: the IRS release blanks the organization's identity, officers, locations, dates, tax years, addresses, agreement and prison numbers, amounts, sentence length, effective date, and contact information.]

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

TAX EXEMPT AND

GOVERNMENT ENTITIES Date: OCT 12 2017
DIVISION
Release Number: 201806009 Person to Contact:
Release Date: 2/9/2018
UIL Code: 501.03-00 Identification Number:

Contact Telephone Number:
Telephone:
Fax:

EIN:

CERTIFIED MAIL - Return Receipt Requested

Dear [illegible]:

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 reason(s):

You did not respond to our requests for information about your financial records and activities
necessary to complete our examination. Therefore, you have not demonstrated that you are operated
exclusively for exempt purposes within the meaning of Internal Revenue Code section 501(c)(3).

As such, you failed to meet the requirements of Internal Revenue Code section 501(c)(3) and Treasury
Regulation Section 1.501(c)(3)-1(d), in that you failed to establish that you were operated exclusively for

an exempt purpose.

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

You may call the IRS telephone number listed in your local directory. An IRS employee there may be
able to help you, but the contact person at the address shown on this letter is most familiar with your
case. You may also call the Internal Revenue Service Taxpayer Advocate.

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

Date:
June 28, 2016
Taxpayer Identification Number:

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

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 [illegible]:

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:

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

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

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

Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer

ISSUE

Should the income tax exemption of a Section 501(c)(3) organization be revoked since the organization
fails the operational test on the grounds that the failure to conduct any activities violates the requirement
that it be operated exclusively for exempt purposes?

FACTS

filed Articles of Incorporation with the Secretary of States’ Office on
August 11, 20xx. The officers of as stated on this filing were and

filed Form 1023 “Application for Recognition of Exemption” on August 11, 20xx. The stated
purpose of is to improve the emotional and physical health of children, by providing social,
academic and cultural learning opportunities, in a safe, nurturing, afterschool environment.
conducted its mission by participating in two federally funded Child Nutrition Programs.

The Food and Nutrition Service is an agency of the United States Department of Agriculture ("USDA")
which administers the Child Nutrition Programs. The Child Nutrition Programs include the Child and Adult
Care Feeding Program ("CACFP") and the Summer Feeding Service Program ("SFSP").

The CACFP has an at-risk afterschool component which offers federal funding to afterschool programs
that serve a meal and/or snack to children in low-income areas.

The SFSP was established to ensure that children in low-income areas continued to receive nutritious
meals when school was not in session and operates in the summer when school is not in session. The at-
risk afterschool component of the CACFP and the SFSP are hereinafter referred to as the "Feeding
Programs."

In , the Feeding Programs are administered by the Department of Human
Services ("DHS"). The Food and Nutrition Service is an agency of the United States Department of
Agriculture ("USDA") which administers the Child Nutrition Programs. The Child Nutrition Programs
include the Child and Adult Care Feeding Program ("CACFP") and the Summer Feeding Service Program
("SFSP").

Sponsors are organizations which participate in the Feeding Programs. Both private nonprofit and for-
profit organizations can participate as Sponsors in the at-risk afterschool component of the CACFP.
However, only nonprofit organizations are eligible to participate as Sponsors in the SFSP.

Sponsors seeking to participate in the Feeding Programs are required to submit an application to DHS for
approval. Sponsors are required to obtain DHS approval for each Site from which they intend to operate
the Feeding Programs.

A Site is the location where meals are served under each of the Feeding Programs during a supervised
time period, and these Sites can include locations such as schools, recreation centers, playgrounds,
parks, churches, community centers, and housing projects.

When Sponsors enter into an agreement with DHS, they acknowledge their responsibility to oversee the
administration of the Feeding Programs at their approved Site(s).

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

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

Explanation of Items Exhibit
Year/Period Ended

Name of Taxpayer

Based on guidance published by the USDA, DHS regulations set forth specific requirements for persons
who are eligible to receive meals under the Feeding Programs ("Eligible Persons") and for what meals are
eligible to be served under the Feeding Programs ("Eligible Meals").

Based on guidance published by the USDA, DHS regulations set forth strict requirements for Sponsors to
keep and maintain certain records, which include, but are not limited to, daily site records in order to
document the number of Eligible Meals served and documentation of the allowable operating and
administrative costs for the Feeding Programs.

In order to receive reimbursement, Sponsors access the DHS website using their personalized login
information and submit data for their Sites, which include the number of eligible meals served to generate
a reimbursement claim ("Claim"). The amount of reimbursement on each Claim is based on a straight-
forward calculation ("Claim Amount"). The number of Eligible Meals served to Eligible Persons is
multiplied by a rate established by Congress. Additionally, the average daily attendance of each feeding
site is calculated by dividing the number of Eligible Meals served by the number of days in operation
("Average Daily Attendance”).

Sponsors must provide a budget with the submission of an application to participate in each Feeding
Program. The budget is made up of Revenues (Claim Amounts), Operating Expenses (food, food service
labor, supplies, rent, maintenance, utilities) and Administrative Expenses (administrative labor, office
rent, office supplies, audit fees, communication, insurance and legal fees). There is no line item for
depreciation because DHS generally prohibits Sponsors from making capital expenditures; i.e. vehicles,
buildings, and equipment. The Sponsor's budgets are evaluated and approved by DHS employees.

Based on guidance published by the USDA, DHS regulations set forth strict requirements for Sponsors
regarding the use of Claim Amounts received from the Feeding Programs that exceed a Sponsor's
expenditures at the end of that Feeding Program. Those funds must be used in a way that benefits
services to children or other Child Nutrition Programs operated by the Sponsor. If the Sponsor terminates
its relationship with the Feeding Programs, the excess funds must be returned to DHS. The Sponsors
receive training from DHS to establish their knowledge and understanding of the proper use and
disposition of excess funds.

participated as a Sponsor for the Feeding Programs beginning

in June . was a Sponsor for the Feeding Programs through

(Agreement Number ) and (Agreement Number ), which had approved
Sites in cities including .

In April 20xx, a federal grand jury, in the Eastern District of , returned a Superseding
Indictment against , charging her with conspiring to fraudulently obtain USDA program
funds. From in or about January 20xx to in or about August 20xx, , knowingly and intentionally

conspired to fraudulently obtain USDA program funds under the care, custody and control of DHS, to
which she was not entitled in violation of Title 18, United States Code, Section 1343.

participated as a Sponsor for the Feeding Programs during the summer months in the years 20xx,
20xx, and 20xx and during the school years 20xx and 20xx.

In applications to participate as a Sponsor, listed Sites where children would be fed and
listed the maximum number of children fed at each Site.

made payments by check to certain employees. These payments constituted bribes
in exchange for which certain DHS employees, knowing that inflated claims would be submitted, approved

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

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

Name of Taxpayer Year/Period Ended

the applications containing a specified number of Sites and a maximum number of children who would be
fed at each Site.

During the time participated in the Feeding Programs, greatly inflated the number of Eligible
Meals served, thus claiming more children were fed at the Sites than were actually were fed.

Because applications were approved for a specified number of Sites and a specified number
of children, inflated Claims were approved and paid for by DHS without further scrutiny.
The Claims were approved because the number of Eligible Meals submitted for reimbursement did not
exceed the number which had been approved in the applications.

The Claims submitted were through the internet and most Claims were paid through transfers from
the State of which travelled interstate to bank account.

All in violation of Title 18, United States Code, Section 1349.

In August 20xx, a federal investigation was conducted by the United States Department of Agriculture—
Office of Inspector General, United States Secret Service, Federal Bureau of Investigation, Internal
Revenue Service-Criminal Investigations, and the United States Marshals Service into the Feeding
Programs as administered by DHS in the state of

No payments were made to or after the investigation started. According
to the Grand Jury indictment, the final payment to was on June 25, 20xx.
On August 3, 20xx, pled guilty to Count 1 of the Superseding Indictment charging with

conspiring to commit wire fraud. The charge relates to a conspiracy to fraudulently obtain United States
Department of Agriculture (USDA) program funds intended to feed children in low income areas during the
school year and summer.

On March 15, 20xx, , who pled guilty to conspiring to commit wire fraud on August 3, 20xx, was
sentenced to months imprisonment, to be followed by three years of supervised release. She was also
ordered to pay joint restitution of $ surrendered for service of sentence atthe
institution designated by the Bureau of Prisons on June 13, 20xx.

, prison number , is currently incarcerated in the Federal Correctional
Institute in

The officers listed on the Form 1023 were:
, President
, Vice President
, Treasurer
, Secretary
, Board member

received Letter 947 from the Internal Revenue Service granting exemption as a 501(c)(3)
organization on June 14, 20xx

The Fiscal Year End for is

filed Form 990 for the fiscal years ended (the initial return) and
( The last Form 990 filed with Internal Revenue Service) The was dated February 12,
20xx and signed by . The officers listed on this document were:
, Officer

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

Form 886-A Department of the ‘Treasury - Internal Revenue Service Schedule No. or
Explanation of Items Exhibit
Name of Taxpayer Year/Period Ended
, Officer
, Officer
, Officer
, Officer
has not filed Form 990 for the periods ended , or

entire funding came from its participation in the Feeding Program, after August 20xx,
there was no longer any funding coming to through DHS and the Feeding Program was
shut down and no activity was carried on from that date forward to the present time.

has failed to respond to Internal Revenue Service requests for books and records.

Appointment Letter was mailed via ground shipment by United Parcel Service (UPS) to
address , as shown on the Form 990 for the period ended . This Letter

advised that it had been selected for examination for the period ended . This

letter was returned by UPS on as undeliverable with a label stating “The Receiver Is

Out Of Business”.

Another Appointment Letter 3611 dated was mailed certified through the United

States Postal Service (USPS) to certain addresses. These addresses were as follows:

The letter mailed to the PO Box was picked up by an individual and certified receipt was signed on June
21, 20xx. The other letters were returned as undeliverable. There has been no contact by or any
person, with the revenue agent, as a result of the delivery of the letter mailed to the post office box
address.

Modified Letter 3611 dated June 13, 20xx was mailed certified through USPS to certain addresses
and addresses found for officers as shown on the last filed Form 1023. The Letter 3611 was modified to
include the following statement to the Original Letters mailed on May 23, 20xx and May 27, 20xx, as
follows:

“Organizations described in IRC 501(c)(3) and exempt under section 501(a) must be both
organized and operated exclusively for exempt purposes. You have failed to produce
documents to establish that you are operated exclusively for exempt purposes and that no
part of your net earnings inures to the benefit of private shareholders or individuals. Your

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

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

Name of Taxpayer Year/Period Ended

continued failure to respond to reasonable requests to allow the Internal Revenue Service to
examine your records regarding your receipts, expenditures, or activities and your failure to

_ file information returns as required by IRC 6001, 6033(a)(1) and Rev. Rul. 59-95, 1959-1 C.B.
627, could result in the revocation of your exempt status.”

The Modified Letter 3611 dated June 13, 20xx was mailed to the following addresses:

[both of these two letters were returned as undeliverable]

[these letters were delivered, however no contact has been made with the revenue agent}

This last certified letter was delivered and a phone call was made to the revenue agent by

The caller informed the revenue agent that she was not an officer of and has had no contact
with that organization for several years. The agent explained to that Internal Revenue
Service records showed that she was identified as an officer on the Application For Exemption Form 1023
and again identified as an officer on the last Form 990 filed for the period ended June 30, 20xx. The
Internal Revenue Service has not received any documentation that she has resigned or been replaced,
therefore, she is still an officer of | and as such, she had the authority to conduct organizational
business and bind the organization to agreements. restated that was not an officer and
explained that she was uncomfortable discussing with the agent and would not hold herself out to
be an officer of . informed the revenue agent that he could contact by
mail at or call him at phone number informed the agent that
is the son of . The revenue agent called this phone number on June 21, June 23 and
June 27, 20xx and reached an answering machine. The revenue agent left a message for a return call:
however no return phone call has been made to the revenue agent.

The revenue agent called the phone number for , President at

on the following dates May 23, 25 and 26, 20xx and June 2 and 7, 20xx. The agent reached the
answering for and the agent left a message for her to return the agent's phone call.

returned one phone call on May 25, 20xx, however, the agent was away from his phone and no other
contact has been made from her.

LAW:

IRC Section 501(c)(3) of the Internal Revenue Code (“IRC”) exempts from federal income tax
organizations which are organized and operated exclusively for charitable, educational, and other exempt

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

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

Name of Taxpayer Year/Period Ended

purposes, provided that no part of the organization’s net earnings inures to the benefit of any private
shareholder or individual.

Tax Reg. Section 1.501(c)(3)-1(a)(1) provides 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.

Tax Reg. Section 1.501(c)(3)-1(d)(i) states that an organization may be exempt as an organization
described in section 501(c)(3) if it is organized and operated exclusively for one or more of the following
purposes: religious, charitable, scientific, testing for public safety, literary, educational, or prevention of
cruelty to children or animals.

Reg. 1.501(c)(3)—1(c)(1) provide that an organization is “operated exclusively” for charitable purposes
only if it engages primarily in activities which accomplish one or more of such exempt purposes specified
in Section 501(c)(3).

REG 1.501(c)(3)-1(b)(4) provides that an organization is not organized exclusively for one or more exempt
purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be
considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by
reason of a provision in the organization's articles or by operation of law, be distributed for one or more
exempt purposes, or to the Federal government, or to a State or local government, for a public purpose, or
would be distributed by a court to another organization to be used in such manner as in the judgment of
the court will best accomplish the general purposes for which the dissolved organization was organized.
However, an organization does not meet the organizational test if its articles or the law of the State in
which it was created provide that its assets would, upon dissolution, be distributed to its members or
shareholders.

IRC Section 509(a)(2) of the IRC specifies such public charities normally receive more than one-third of
its support in each taxable year from any combination of gifts, grants, contributions, or membership fees,
and from gross receipts from admissions, sales of merchandise, performance of services, or furnishing of
facilities.

Rev Proc. 90-27, 1990-1 C.B. 514, (April 30, 1990) states that a ruling or determination letter recognizing
exemption may be revoked or modified by (1) a notice to the taxpayer to whom the ruling or determination
letter originally was issued, (2) enactment of legislation or ratification of a tax treaty, (3) a decision of the
United States Supreme Court, (4) issuance of temporary or final regulations, or (5) issuance of a revenue
ruling, revenue procedure, or other statement published in the Internal Revenue Bulletin. The revocation
or modification may be retroactive if the organization omitted or misstated a material fact, operated in a
manner materially different from that originally represented, or, in the case of organization to which section
503 applies, engaged in a prohibited transaction with the purpose of diverting corpus or income of the
organization from its exempt purpose and such transaction involved a substantial part of the corpus or
income of such organization. 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.

GOVERNMENT'S POSITION:
Since the organization has failed to carry on exempt operations since through the

present, this constitutes a failure to meet the operational test and thus it does not qualify for tax exemption
under IRC Section 501(c)(3) of the IRC.

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

Page: -6 -

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

Name of Taxpayer Year/Period Ended

TAXPAYER POSITION:
The taxpayer has not responded to any letters mailed to it as stated in the Facts section of this report.
CONCLUSION:

The organization does not qualify for exemption under IRC 501(c)(3), therefore its tax exempt status
should be revoked effective .

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