Foundation lost exemption for substantial insider benefits

View official IRS release (PDF)

Plain-English summary

A public charity that provided addiction counseling and transitional housing gave one executive control over its bank accounts and debit card. The examination found numerous unsubstantiated cash withdrawals, checks, personal credit-card payments, travel expenses, cigar purchases, and a payment tied to a home loan, while the organization supplied little or no evidence connecting those transactions to charitable work. The IRS found multiple substantial excess-benefit transactions, no meaningful financial safeguards, and no correction. It concluded that the foundation's earnings inured to an insider and that the organization operated for private rather than public interests. The IRS revoked Section 501(c)(3) status and required corporate income tax returns. The final letter states a redacted January 1 effective date, while the attached examination report states a redacted July 1 effective date.

Ruling snapshot

• Question: Did substantial, unsubstantiated payments and withdrawals benefiting an insider require revocation of the foundation's exemption?
• Outcome: Revocation.
• Key authorities: IRC §§ 501(c)(3) and 4958; Treas. Reg. §§ 1.501(c)(3)-1 and 53.4958-2; Founding Church of Scientology v. United States.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

Internal Revenue Service
TE/GE EO Examinations

1100 Commerce Street MS 4920 DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES Date: OCT -2 2017
DIVISION

Person to Contact:
Identification Number:
Contact Telephone Number:

In Reply Refer to:

Release Number: 201816012
Release Date: 4/20/2018

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT:

UIL: 501.03-00

CERTIFIED MAIL - Return Receipt Requested

Dear

This is a Final Adverse Determination Letter as to your exempt status under section
501(c)(3) of the Internal Revenue Code. Your exemption from Federal income tax under
section 501(c)(3) of the code is hereby revoked effective January 1, 20xx.

Our adverse determination was made for the following reasons:

Treas. Reg. section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not operated
exclusively for exempt purposes unless it serves a public rather than a private interest. You
operated for the benefit of private interests of a particular and specified individual.

As such, you failed to meet the requirements of I.R.C. section 501(c)(3) and Treasury
Regulations section 1.501(c)(3)-1(d)(1)(ii) in that you have not demonstrated 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.

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 December 31, 20xx and for all

years thereafter.

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.

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.

We will notify the appropriate State Officials of this action, as required by section 6104(c) of
the Internal Revenue Code.

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

Sincerely yours,

Maria Hooke
Director, EO Examinations

Enclosures:
Publication 892

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

Date:
March 28, 2017

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
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
Office of the Taxpayer Advocate

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,

For Maria Hooke
Director, EO Examinations

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

Enclosures:

Report of Examination
Form 6018
Publication 892
Publication 3498

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

Schedule number or exhibit

Form 886-A

Name of taxpayer Tax Identification Number | Year/Period ended

June 30, 20XX

ISSUE

Whether tax exempt status under Internal Revenue Code
(IRC) §501(c)(3) should be revoked on the ground of inurement.

FACT

Background

(Foundation) was incorporated in in July 20xx for the
purpose of providing counseling to individuals seeking recovery from alcohol and drug
addiction. In September 20xx, the Foundation applied for tax exempt status under IRC
§501(c)(3). In a letter dated April 26, 20xx, the IRS recognized the Foundation as
a tax exempt entity described in IRC §501(c)(3). The Foundation was further classified
as a public charity described in IRC §170(b)(1)(A)(vi) and §509(a)(1). The Foundation's
tax exempt status remains in effect to the present day. Although no longer operating,
the Foundation's corporate status remains active at the writing of this report.

The Foundation operates on a fiscal year basis ended on June 30. Prior to the FY June
30, 20xx, the Foundation's main source of revenue came from state government. The
Foundation disclosed on its June 30, 20xx Form 990-EZ that its government contract
was suspended; thus causing the Foundation to suspend services and use assets to
pay outstanding liabilities and recurring debt during period of suspension.

The Foundation filed a Form 990-EZ for the tax years ended June 30, 20xx and 20xx
reporting zero revenue, expenses, assets, and liabilities. The Foundation filed a Form
990-N, e-Postcard, for the tax years ended June 30, 20xx and 20xx. The Foundation
has not filed a Form 990 or 990-N for the tax years ended June 30, 20xx and 20xx.

Per the most recently filed and properly processed Form 990-N, the Foundation's
address was

Board Members. Officers, and Employees

Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the
Internal Revenue Code, listed the following officers:

1. ,CEO
2. , COO (no longer with the Foundation during the audited year)
   3 (formerly known as ), CFO

Form 886-A (1-1994) | Cat. No. 20810W Page1 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

June 30, 20XX
had continuously served as the Foundation's CEO. oversaw
the Foundation's operations and was responsible for its success. had the
authority to bind the Foundation into legal contracts.
In a letter dated April 11, 20xx to the IRS, provided the following narrative
regarding
Chief Financial Officer is held by . education
was completed in . She has x years experience working in
Health Care Services. [sic] those years experience have been in

administrative management, x of which were in finance, accounts
receivable/payable and payroll. This is her first year in Social Recovery
Model, however, her indepth experience in the health care field bring
valuable insight and experience.

Per ; has not been involved with the Foundation since 20xx.
and got married in 20xx.

Per , there were x board members on the Foundation's board of directors.

However, they were not involved in the Foundation's operations. stated

that there were board meetings, but for the most part there was not much to discuss.
The examining requested the minutes of board meetings but was not provided.

claim the minutes along with other records were destroyed by a former
employee. provided an one-page police report for this incident, which
involved a former employee making verbal threats against and others.
The police report makes no reference to records being destructed or stolen.

Foundation Activities

Per verbal explanation, despite the loss of contract, the Foundation
continued to provide services on a smaller scale. The services included referring
people to job searching, signing up for health insurance, and help for domestic issues.
During this period, the Foundation moved several times. The Foundation's returns
Form 990, 990-EZ, and 990-N shows several address. One of the addresses is

. This is house, which he owned.

During the audit, information document requests were mailed to this address.

claimed to have used his own money to pay the rent and other expenses
and provided a schedule listing approximated out of pocket expenses he paid on behalf
of the Foundation. However, provided no evidence to support his claim.

Form 886-A (1-1994) Cat. No. 20810w Page 2 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

June 30, 20XX

Starting in November 20xx, the Foundation began providing transitional housing service
to substance abuse clients. The Foundation leased a house located at
in . The lease payment was $x,xxx/mo.

In February 20xx, the Foundation resumed providing counseling services to individuals
with alcohol and drug addiction. In April 20xx, the Foundation opened two additional
facilities located at in to provide transitional living.
The rent for all facilities was paid out of the Foundation's bank account.

The Foundation ceased providing services in June 20xx, due to billing issues with the
insurer. alleged that the Foundation overbilled for its services

and demanded refunds. The Foundation was unable to repay the fees and stopped
providing services in June 20xx. kept the facilities opened until
April 20xx because the lease has not expired. Clients were required to pay rent.

Receipts and Disbursements From Bank Accounts

In January 20xx, the Foundation opened a checking account (#xxxxxxxxxx) and a

savings account (#xxxxxxxxxx) with Bank. Only and his wife
, even though she was no longer involved with the Foundation, had

access to the Foundation's bank accounts.

Bank statements from January through June 20xx, shows total deposits (excluding
transfers between accounts) of $xxx,xxx. $xxx,xxx of the deposits was a donation from
board member . Fee payments from totaled
$xxx,xxx. Deposits from clients and other sources totaled $xx,xxx. Disbursements,
excluding transfers between accounts, totaled $xxx,xxx.

Debit Card Purchases (Exhibit 1)

The Foundation had a debit card issued by Bank in connection with the
checking account. was the only person who had access to the debit card.
Bank statements show debit card was used to pay/purchase utilities, household
supplies, groceries, etc. for clients who lived at the Foundation's transitional homes.

Debit card was also used to pay for cellphone bills, airline tickets, hotels, car rental,

Cigars. claimed that the travel expenses were for trips to and
( was from ) to explore new
business opportunities. However, provided no evidence for such claim.

Debit cards purchases for these items totaled $xx,xxx.

Form 886-A (1-1994) Cat. No. 20810W Page 3 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

June 30, 20XX

Cash Withdrawals and Online Transfers (Exhibit 2)

Bank statements shows $xxx,xxx cash withdrawals and online transfers to
bank account maintained at Credit Union.

claims the ATM withdrawals below were used to fill van with gas, purchase
lunch for clients, and cash supplies, etc., but provided no evidence to support his claim.
Note that one of the ATM withdrawal was made in

Date Acct. Description Amount
3/23/xx Checking ATM withdrawal in XXX.XX
3/23/xx Checking ATM withdrawal in XXX.XX
3/24/xx Checking ATM withdrawal in XXX.XX
3/25/xx Checking ATM withdrawal in XXX.XX
3/31/xx Checking ATM withdrawal in XXX.XX
4/23/xx Checking ATM withdrawal in XXX.XX
2/4/xx Checking ATM withdrawal XXX.XX
3/27/xx Checking ATM withdrawal XXX.XX

claims the x withdrawals below were for security deposit and rent for the
facilities. The lease agreements for the facilities
called for monthly rent payment of $x,xxx and security deposit of $x,xxx. Neither the
Foundation nor provided the lessor's acknowledgment of receipt of the

security deposit and that the Foundation received the security deposit back at the
expiration of the lease. The bank statement showed that the Foundation had been
paying for rent with checks.

Date Acct. Description Amount
3/17/xx Checking Withdrawal in branch/store XX,XXX.XX
4/9/xx Checking Withdrawal in branch/store X,XXX.XX
5/28/xx Checking Withdrawal in branch/store X,XXX.XX

claims the $x,xxx withdrawals made on June 16, 20xx (see Exhibit 2) was
for purchase of a new van but provided no evidence such as title and registration to
support his claims. The $x,xxx was described in the general ledger as rent payment for
the facility. The balance sheets show no vehicle or van as assets.

claimed the $xx,xxx withdrawal made on February 26, 20xx (see Exhibit
2) was used to repay cash debt but provided no evidence that the Foundation actually
received this loan. The $xx,xxx withdrawal was described in the general ledger as a
transfer from savings to checking account.

Form 886-A (1-1994) Cat. No. 20810W Page 4_ 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
June 30, 20XX
Neither the Foundation nor offered explanations or substantiations for the

remaining withdrawals listed on Exhibit 2.
Checks Payable to

made the following checks to himself. verbally explained that
the checks represented his salary and reimbursements for out of pocket expenses, but
provided no proofs to show that he actually paid for any expenses.

Date Check # Payee Description on Checks Amount
3/2/xx XXXX X,XXX
3/2/xx XXXX X,XXX
3/11/xx = XXXX X,XXX
3/11/xx XXXX X,XXX
3/12/xx = XXXX X,XXX
3/13/xx XXXX Salary X,XXX
3/13/xx — XXXX Salary X,XXX
3/13/xx — XXXX X,XXX
3/18/xx — XXXX Salary X,XXX
3/18/xx = XXXX Salary X,XXX
3/19/xx —— XXXX XX,XXX
3/19/xx —— XXXX XX,XXX
3/19/xx — XXXX Salary X,XXX
3/19/xx — XXXX Salary X,XXX

XXX, XXX
An inspection of tax return filed for the tax year 20xx revealed a Form W-2
from the Foundation to . The Form W-2 reports the following:
• Wages: $XXX,XXX
• Federal income tax withholding: $XX,XXX
Social security tax withholding: $x, XXX
• Medicare tax withholding: $X,XXX

The IRS has no records of the Foundation paying the $xx,xxx (Xx,xxx + X,XXX + X,XXx)
federal taxes withheld on wages. The Foundation's records and bank
statements neither showed the withholding nor the payments of the taxes above.

Form 886-A (1-1994) Cat. No. 20810W Page_5_ 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

June 30, 20XX
Checks Payable to Other Individuals

made the following checks to other individuals.

Date Check # Payee Description on Checks Amount
2/26/xx XXXX Feb 20xx salary X,XXX
2/28/xx = XXXX Feb X,XXX.XX
2/28/xx XXXX March X,XXX.XX
3/11/xx — XXXX Partial loan repayment X, XXX
3/11/xx = XXXX None X,XXX

For loan 12/31/xx $xx,xxx
final payment balance paid
16/xx XXXX in full XX, XXX
3/18/xx XXXX March 20xx salary X,XXX
4/23/xx —_ XXXX April contractual services X,XXX
XX, XXX
and are parents. Neither the Foundation nor

Publicly available property deed records obtained from
December 20xx,

provided evidence to establish business connection for the above payments,
or that the Foundation received the loans, which warranted repayments.

The lender was

Bank statements show the following credit card payments for

revealed that in

appeared to refinance his house located at
. The loan amount was $xx,xxx, the same as description on check.
, the same payee listed above. See Exhibit 3.

Payments for Personal Credit Card Bills

and his wife

personal credit cards. Neither the Foundation nor
provided evidence to establish business connection for the above credit card payments.

Check

Date # Description Amount
2/17 1xx online payment xxxxxxxxxx XXX.XX
3/11/xx online payment xxxxxxxxxx XXX.XX
3/30/xx online payment Xxxxxxxxxx XXX.XX
5/11/xx online payment xxxxxxxXxXxx XXX.XX
6/11/xx online payment xxxxXxxxxxx XXX.XX
2/17/xx online payment xxxxxxxxxx XXX.XX
3/11/xx online payment xxxxxxxXxXxx XXX.XX
6/11/xx online payment xxxxxxxxxx XXX.XX

Form 886-A (1-1994)

Cat. No. 20810W Page 6_

Department of the Treasury Internal Revenue Service

Schedule number or exhibit

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

Tax Identification Number | Year/Period ended

June 30, 20XX

Name of taxpayer

4/2/xx Bank payment XXX.XX
4/20/xx Bank payment XXX.XX
6/12/xx Bank payment XXX.XX
2/18/xx Bank payment XXX.XX
3/12/xx Bank payment XXX.XX
3/2/xx — XXXX Check - X,XXX.XX
3/2/xx —_XXXX Check - X,XXX.XX

X,XXX
LAW

IRC §501(c)(3) provides for exemption from income tax for corporations, and any
community chest, fund, or foundation, organized and operated exclusively for religious,
charitable, scientific, testing for public safety, literary, or educational purposes, or to
foster national or international amateur sports competition (but only if no part of its
activities involve the provision of athletic facilities or equipment), or for the prevention of
cruelty to children or animals, no part of the net earnings of which inures to the benefit
of any private shareholder or individual, no substantial part of the activities of which is
carrying on propaganda, or otherwise attempting, to influence legislation (except as
otherwise provided in subsection (h)), and which does not participate in, or intervene in
(including the publishing or distributing of statements), any political campaign on behalf
of (or in opposition to) any candidate for public office.

Treasury Regulations (Regs.) §1.501(c)(3)-1(a)(1) provides that, in order to be exempt
as an organization described in §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.

Regs. §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.

Regs. §1.501(a)-1(c) defines the words private shareholder or individual in section 501 as
persons having a personal and private interest in the activities of the organization.

Regs. §1.501(c)(3)-1(f)(2)(i) states that, regardless of whether a particular transaction is
subject to excise taxes under §4958, the substantive requirements for tax exemption
under §501(c)(3) still apply to an applicable tax-exempt organization described in
§501(c)(3) whose disqualified persons or organization managers are subject to excise
taxes under §4958. Accordingly, an organization will no longer meet the requirements

Form 886-A (1-1994) Cat. No. 20810W Page 7_ Department of the Treasury-Internal Revenue Service

Schedule number or exhibit

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

Tax Identification Number | Year/Period ended

June 30, 20XX

Name of taxpayer

for tax-exempt status under §501(c)(3) if it fails to satisfy the requirements of paragraph
(b), (c) or (d) of this section.

Regs. §1.501(c)(3)-1(f)(2)(ii) provides that, in determining whether to continue to
recognize the tax-exempt status of an applicable tax-exempt organization (as defined in
§4958(e) and §53.4958-2) described in §501(c)(3) that engages in one or more excess
benefit transactions that violate the prohibition on inurement under §501(c)(3), the
Commissioner will consider all relevant facts and circumstances, including, but not
limited to, the following -

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

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

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
§4958(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.

IRC §4958(c) defines the term "excess benefit transaction" as 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 performance of services
unless such organization clearly indicated its intent to so treat such benefit.

IRC §4958(e) defines "applicable tax-exempt organization" as an organization described
in either IRC §501(c)(3) or §501(c)(4) or an organization which was so described at any
time during the five-year period ending on the date of the excess benefit transaction.

IRC §4958(f)(1) defines a "disqualified person" as (A) any person who was, at any time
during the five-year period ending on the date of such transaction, in a position to
exercise substantial influence over the affairs of the organization, (B) a member of the
family of a disqualified person, and (C) a 35% controlled entity.

Form 886-A (1-1994) Cat. No. 20810W Page_8_ 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

June 30, 20XX

The taxpayers have the burden of proofs that they are entitled to deductions. See
Hradesky v. Commission, 540 F.2d 821 (5th Cir. 1976), and Welch v. Helvering, 290
U.S. 111, 115 (1933).

In Founding Church of Scientology v. United States, 412 F.2d 1197 (Ct. Cl. 1969), cert.
den., 397 U.S. 1009 (1970), an organization argued that it had paid its founder for

expenses incurred in connection with his services, made reimbursements to him for
expenditures on its behalf, and made some payments to him as repayments on a loan.
The organization could produce no evidence of contractual agreements for services, or
documents evidencing indebtedness for which expenses had been incurred. The Court
concluded that

nothing we have found in the record dispels the substantial doubts the
court entertains concerning the receipt of benefit by the Hubbards from
plaintiffs net earnings. Since plaintiff has failed to meet its burden of proof,
we hold therefore that a part of the corporate net earnings was a source
of benefit to private individuals. Supra, at 1202.

TAXPAYER'S POSITION

The Foundation's position is not known.

GOVERNMENT'S POSITION

It's the Foundation and burden to establish that the debit car purchases,
checks, withdrawals and transfers of fund, personal credit card payments, described in
this report were connected to the Foundation's activities, thus furthering its exempt
purpose. See Hradesky v. Commission and Welch v. Helvering.

Despite numerous written requests and follow-up phone calls, neither the Foundation
nor provided proofs establishing how these transactions were connected
to the Foundation's activities, thus furthering its exempt purpose.

The transactions were personal in nature. For example, the purchase of cigar, the trips
to and , the unsubstantiated cash withdrawals, the uses of
Foundation's fund to repay personal home loan, and credit cards, etc. Therefore, it's
determined that these transactions were not connected to the Foundation's activities.

claimed some of the payments represented reimbursements for
approximated out of pocket expenses, but provided no proofs that he actually paid for
these expenses.

Form 886-A (1-1994) Cat. No. 20810W Page 9 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

June 30, 20XX

claimed some of the payments represented repayment of loans but
provided no proofs that the Foundation actually received the loans. One of the loans
(from ) was actually for the house which owns.

It's therefore determined that the Foundation's net earnings have inured, in substantial
part, to the benefit of , the Foundation's insider as defined by Regs.
1.501(a)-1(c). This violates Regs. §1.501(c)(3)-1(c)(2) and warrants revocation of the
Foundation's 501(c)(3) status. Attempting after the fact to demonstrate that an
undocumented transaction is a typical business arrangement is not likely to prevent a

finding of inurement. See Founding Church of Scientology v. United States.
Interaction with IRC §4958

In determining whether to continue to recognize the tax-exempt status of an applicable
tax exempt organization that engages in one or more excess benefit transactions that
violate the prohibition on inurement under IRC §501(c)(3), all relevant facts and
circumstances, including, but not limited to, the following are taken into account:

1. The size and scope of the organization's regular and ongoing activities that further
   exempt purposes before and after the excess benefit transaction(s) occurred;

2. 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;

3. Whether the organization has been involved in multiple excess benefit transactions
   with one or more persons;

4. Whether the organization has implemented safeguards that are reasonably
   calculated to prevent excess benefit transactions; and

5. Whether the excess benefit transaction has been corrected, or the organization has
   made good faith efforts to seek correction from the disqualified person(s) who
   benefited from the excess benefit transaction.

All factors should be considered in combination with each other. Depending on the
particular situation, greater or lesser weight may be assigned to some factors than to
others. The safeguard and correction factors will weigh more heavily in favor of
continuing to recognize exemption where the organization discovers the excess benefit
transactions and takes action before the IRS discovers the excess benefit transactions.
Further, with respect to the correction factor, correction after excess benefit transactions
are discovered by the IRS, by itself, is never a sufficient basis for continuing exemption.
Regs. §1.501(c)(3)-1(f)(2)(ii).

Discussion of the 5 factors

Form 886-A (1-1994) Cat. No. 20810W Page 10 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

June 30, 20XX

1. The size and scope of the organization's regular and ongoing activities that further
   exempt purposes before and after the excess benefit transaction(s) occurred.

There's no ascertainable evidence of the Foundation's activities since losing its contract
in 20xx. The Foundation disclosed on its Form 990 that its operations were suspended.

claimed the Foundation continued to provide services during the period of
suspension but provided no evidence to support this claim. The Foundation resumed
operation for a brief few months from January to June 20xx. Due to the inability to
repay the over-charged fees owed to , it is doubtful that the Foundation
would be able to operate again.

2. 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.

Disbursements totaled $xxx,xxx. Of $xxx,xxx, excess benefit transactions accounted for
$xxx,xxx, or xx% of total disbursements:

Cash withdrawals: $XXX, XXX
Checks to : $ XX,XXX (XXX,XXX- XXX,XXX reported on W-2)
Checks to others: $ XX,XXX
Personal credit cards payments: $ X,Xxx
Debit card purchases: $ XX,XXX
Travel: $ X,XXX
Total: $XXX, XXX

As shown above, the size, xx%, of the excess benefit transactions in relation to the size
of the Foundation's activities that further its exempt purpose is substantial. It's
reasonable to argue that the excess benefit transactions directly contributed to the
Foundation's inability to repay the over-charged fees to causing itto cease
operations. It's not know how much of the $xxx,xxx fees from was over-
billed. Regardless, such over-billed amount was substantially less than the excess
benefit transactions amount of $xxx, xxx.

3. Whether the organization has been involved in multiple excess benefit transactions
   with one or more persons.

As illustrated above, the Foundation has been involved in multiple excess benefit

transactions. cut checks to himself, some of which were unsubstantiated.
wrote checks to others, presumably for his own benefits as he has not
provided evidence of business connection. used the Foundation's fund to

pay personal credit card bills, personal travels, cigars, and home loan.

Form 886-A (1-1994) Cat. No. 20810W Page 11 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
June 30, 20XX
withdrew money from the Foundation's bank and accounts but provided no

evidence how the withdrawals benefited the Foundation.

4. Whether the organization has implemented safeguards that are reasonably
   calculated to prevent excess benefit transactions.

There were no safeguards or checks and balances. had complete control
over the Foundation's bank accounts, which allowed him to use the Foundation’s bank
accounts as if they were his personal bank accounts.

5. Whether the excess benefit transaction has been corrected, or the organization has
   made good faith efforts to seek correction from the disqualified person who benefited
   from the excess benefit transaction.

No corrections have been made.

Considering the 5 factors above, the excess benefit transactions resulted in inurement.
Therefore, revocation is warranted.

CONCLUSION

The Foundation's tax exempt status under IRC §501(c)(3) should be revoked effective
July 1, 20xx, on the ground of inurement. The Foundation is required to file a Form
1120, U.S. Corporation Income Tax Return, for the tax ended year June 30, 20xx and
all future years.

Form 886-A (1-1994) Cat. No. 20810W Page 12 Department of the Treasury Internal Revenue Service

EXHIBIT 1

Date Description Amount Total
3/3/xx Card purchase X,XXX.XX X,XXX.XX
3/17/xx Card purchase XX.XX
5/13/xx Card purchase XX.XX
6/10/xx Card purchase XX.XX XXX.XX
3/17/xx | Card purchase XXX.XX
3/30/xx Card purchase XX.XX
3/30/xx Card purchase XXX.XX X,XXX.XX
2/18/xx Card purchase XX.XX
2/18/xx Card purchase XXX.XX
5/18/xx Card purchase XX.XX
6/9/xx Card purchase XXX.XX
6/12/xx Card purchase XXX.XX
6/16/xx Card purchase XX.XX
6/29/xx Card purchase XXX.XX
2/19/xx Card purchase XXX.XX
4/11xx Card purchase XXX.XX
4/11xx Card purchase XX.XX
4/27/xx Card purchase XXX.XX
5/11/xx Card purchase XXX.XX -X,XXX.XX
4/15/xx Card purchase XXX.XX
6/1/xx Card purchase XXX.XX XXX.XX
3/30/xx Card purchase XXX.XX XXX.XX
4/1/xx Card purchase XXX.XX
4/10/xx Card purchase XXX.XX
5/11/xx Card purchase XXX.XX
5/14/xx Card purchase XXX.XX
6/17/xx Card purchase XXX.XX X,XXX.XX
3/20/xx Card purchase X,XXX.XX X,XXX.XX
3/2/xx Card purchase X.XX X.XX
6/15/xx Card purchase XXX.XX XXX.XX
3/17/xx Card purchase XXX.XX XXX.XX
6/15/xx Card purchase XXX.XX XXX.XX
3/13/xx Card purchase XXX.XX XXX.XX
3/24/xx Card purchase XXX.XX XXX.XX
3/17/xx Card purchase XXX.XX XXX.XX
3/16/xx Card purchase X,XXX.XX X,XXX.XX
3/31/xx Card purchase XXX.XX XXX.XX
6/8/xx Card purchase XXX.XX XXX.XX
3/3/xx Card purchase X,XXX.XX
2/27/xx Card purchase X,XXX.XX X,XXX.XX
3/13/xx Card purchase XXX.XX
6/22/xx Card purchase XXX.XX XXX.XX
6/25/xx Card purchase . XXX.XX XXX.XX
5/26/xx Card purchase XXX.XX XXX.XX
3/10/xx Card purchase XX.XX

Source: bank statements 1

EXHIBIT 1

Date Description Amount Total

3/10/xx Card purchase XX.XX

3/10/xx Card purchase XXX.XX

6/12/xx Card purchase XXX.XX

2/18/xx Card purchase XXX.XX X,XXX.XX

5/18/xx Card purchase XX.XX

5/22/xx Card purchase XX.XX

6/8/xx Card purchase XX.XX

6/12/xx Card purchase XX.XX

6/17/xx Card purchase XX.XX XXX.XX

4/10/xx Card purchase XXX.XX

4/10/xx Card purchase XXX.XX XXX.XX
XX, XXX XX, XXX

Source: bank statements 2

Exhibit 2

Description Amount

Date Acct.
3/23/xx Checking ATM withdrawal in XXX.XX
3/23/xx Checking ATM withdrawal in XXX.XX
3/24/xx Checking ATM withdrawal in XXX.XX
3/25/xx Checking ATM withdrawal in XXX.XX
3/31/xx Checking ATM withdrawal in XXX.XX
4/23/xx Checking ATM withdrawal in XXX.XX
2/4/xx Checking ATM withdrawal XXX.XX
3/27/xx Checking ATM withdrawal XXX.XX
2/4/xx Checking ATM transaction fee X.XX
3/27/xx Checking ATM transaction fee X.XX
4/14/xx Checking Cash in branch/store X,XXX.XX
4/23/xx Checking Cash in branch/store X,XXX.XX
4/23/xx Checking Cash in branch/store X,XXX.XX
2/27/xx Checking Fee for transfer to X.XX
6/15/xx Checking Fee for transfer to XX.XX
2/27/xx Checking Online transfer to X,XXX.XX
6/15/xx Checking Online transfer to X,XXX.XX
2/3/xx = Checking Withdrawal in branch/store X,XXX.XX
2/17/xx Checking Withdrawal in branch/store X,XXX.XX
2/19/xx Checking Withdrawal in branch/store X,XXX.XX
3/9/xx Checking Withdrawal in branch/store X,XXX.XX
3/17/xx Checking Withdrawal in branch/store XX.XX
3/17/xx Checking Withdrawal in branch/store XX,XXX.XX
4/9/xx Checking Withdrawal in branch/store X,XXX.XX
5/21/xx Checking Withdrawal in branch/store X,XXX.XX
5/28/xx Checking Withdrawal in branch/store X,XXX.XX
6/2/xx Checking Withdrawal in branch/store X,XXX.XX
6/11/xx Checking Withdrawal in branch/store X,XXX.XX
6/11/xx Checking Withdrawal in branch/store X,XXX.XX
6/16/xx Checking Withdrawal in branch/store X,XXX.XX
2/26/xx Savings Withdrawal in branch/store XX,XXX.XX
4/14/xx Savings Cash withdrawal in branch/store XX XXX.XX_
XXX, XXX
explanation

1 Money for gas, lunch for clients, supplies, etc.

2 deposit and last month rent.

3 rent

4 rent

5 Purchase new van.

6 Repay debt.

7 Unknown.

Source:

bank statements

=— = — =— — — = —

NO

On

(Deed 3 of 44)
Property Address:
Name Owner:
County:

Data Source:

Sales Information
Document Type:
Sale Price:

Loan Amount:

Sale Date:
Recording Date:
Parcel Number:
Book:

Page:

Mortgage Information
Document Type:
Transaction Type:

Loan Type:

Interest Rate:

DEED OF TRUST

$XX, XXK
12/04/20xx
01/06/20xx

XXXXK-XXX-XAK

DEED OF TRUST
REFINANCE
PRIVATE PARTY LENDER

EXHIBIT 3

Lender Name:

Title Company:
Document Number:
Interest Rate Type:

(Deed 4 of 44)
Property Address:
Name Owner:
Owner Address:
County:

Data Source:

Sales Information
Document Type:
Sale Price:

Loan Amount:
Terms:

Sale Date:
Recording Date:
Parcel Number:
Book:

Page:

Mortgage Information

Document Type:

Transaction Type:
Loan Type:
Interest Rate:

DEED OF TRUST

$XXX, XXX
30 Years
08/13/20xx
10/01/20xx

XXXX-XXX-XXX

MORTGAGE MODIFICATION
AGREEMENT

Lender Name:

Title Company:
Document Number:
Interest Rate Type:

(Deed 5 of 44)
Property Address:
Name Owner:

https://

XXXXX

9/28/20xx