Bingo organization loses exemption for private benefit and minimal charity

Plain-English summary

An organization recognized under Section 501(c)(3) held volunteer-run bingo games every Friday and reported no other activity. It made only three charitable contributions during the examined year and had no formal grant process, while most net gaming income was used to pay its treasurer. A divorce decree between the president and treasurer required continued bookkeeping employment at a guaranteed salary and gave each a right of first refusal over the operation if the other left or bankruptcy was considered. The IRS concluded that the organization conducted no charitable program commensurate with its financial resources and instead supported the private interests of its officers. It revoked the exemption because bingo was a trade or business, charitable distributions were insubstantial, and net earnings benefited private individuals.

Ruling snapshot

• Question: Did the bingo organization operate exclusively for charitable purposes without serving its officers' private interests?
• Outcome: Revocation.
• Key authorities: IRC § 501(c)(3); Treas. Reg. §§ 1.501(a)-1(c), 1.501(c)(3)-1; Rev. Rul. 64-182; Rev. Rul. 67-5

Full text (IRS public release)

DEPARTMENT OF THE TREASURY

Internal Revenue Service

TE/GE EO Examinations
1100 Commerce Street MC 4920 DAL
Dallas, TX 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: FEB 06 2018

Number: 201829022
Release Date: 7/20/2018

UIL: 501.03-00

Person to Contact:
Identification Number:
Telephone Number:
In Reply Refer to:

LAST DATE FOR FILING A PETITION
WITH THE TAX COURT:

CERTIFIED MAIL – Return Receipt Requested
Dear

This is a Final Adverse Determination Letter that your exempt status under section 501(c)(3)
of the Internal Revenue Code (IRC) is revoked. Recognition of your exemption under IRC
section 501(c)(3) is revoked effective July 1, 20 .

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

You have not established that you are operated exclusively for an exempt
purpose or that you have been engaged primarily in activities that accomplish
one or more exempt purposes within the meaning of IRC section 501(c)(3).

You have not established that no part of your net earnings inure to the benefit
of any private shareholder or individual.

Contributions to your organization are not 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 June 30, 20 , 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, Exempt Organizations Examinations

Enclosure:
Publication 892

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

Date:
September 18, 2017
Taxpayer Identification Number:

Form:
Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Manager’s name:

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. 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).

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.

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

Thank you for your cooperation.

Sincerely,

Maria Hooke
Director, EO Examinations

Enclosures:

Report of Examination -RAR 886-A
Form 4621-A

Form 6018

Publication 892

Publication 3498

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of Items
Name of Taxpayer Year/Period Ended
June 30, 20XX
Issue:
Whether or not qualifies for exemption under Section

501(c)(3) of the Internal Revenue Code?

Facts:

(“Organization”), is located in , ,submitted Form 1023;
Application for Recognition of Exemption, dated June 29, 19XX. Organization received a
determination letter granting it tax exempt status as an organization described in Internal
Revenue Code section 501(c)(3) on October 26, 19XX. Organization’s Form 990, Return of
Organization Exempt from Tax under Section 501(c)(3), for the tax year ending June 30, 20XX, is
currently under examination.

Attached to the organization’s application was a copy of the Articles of Corporation filed with
the State of . Article Three states:

Said Corporation is organized exclusively for charitable, religious, educational, and
scientific purposes, including for such purposes, the making of distributions to
organizations that qualify as exempt organizations under section 501(c)(3) of the
Internal Revenue Code, or corresponding section of any future federal tax code.”

Article Four lists the initial trustees of the corporation as and
During the examination it was confirmed that that is still the President of the
organization and is listed as the Secretary/Treasurer of the organization. These

two individuals are officers, and/or Directors of the organization, as set forth under ‘Article III
(1)’ of the organization’s bylaws.

holds bingo events every Friday during the year. The bingo games themselves are
conducted by volunteers. President, , stated that the organization has no other
activities. The organization issued only three charitable contributions during the year under
examination for a total of $0.

1. • $0
2. • $0
3. • $0

Charities are picked by all members of board and donations are based on need. It does not
appear that the organization has any formal application or grant process.

According to the organization’s Form 990-EZ tax returns’ the organization’s only employee is
Treasurer , who provides bookkeeping services. A comparison shows that an

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

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

Name of Taxpayer Year/Period Ended

June 30, 20XX

average 0% of the net gaming income over the course of 0 calendar years is paid to
, and less than 0% of the organization’s net gaming income actually goes to charitable
organizations in furtherance of Organization’s stated exempt purpose.

From Form 990-EZ, Part 1

Year End June 30, 20XX | Year End June 30, 20XX | Year End June 30, 20XX
Line % of Net % of Net % of Net

Line Item Amounts Income Amounts Income Amounts Income

6a | Gross Income from Gaming $0 $0 $0
6c | Direct Expenses from Gaming $0 $0 $0
6d | Net Income from Gaming $0 $0 $0
10 | Grants 0) 0% $0 0% $0 0%
12 | Salaries to $0 0% $0 0% $0 0%
When asked about the salary provided to , Organization President

provided copy of his divorce decree, filed January 19, 20XX, between himself and
The divorce decree stipulates the following in paragraph number 3:

• The parties have jointly operated a 501(c)(3) non-profit corporation for charitable
fundraising purposes entitled

• has worked for and run the business and _ has worked for the business
as its sole bookkeeper. __ will continue to work for as bookkeeper
and will continue to work for and run the business.

• will receive her full pay in a timely fashion of $0 (gross) weekly until and

through August 31, 20XX.

• As of September 1, 20XX will then receive $0 (gross) weekly pay in a timely
fashion as long as she maintains bookkeeping of the company up to date and in
good order at any time after the divorce either party for any reason decides to
give up working for , or if the business decides to file for bankruptcy,
then the other party, upon Notice from the party seeking to leave the business
or upon Notice of a decision to file for bankruptcy, shall have the right of first
refusal to take over and continue the non-profit business, prior to
dissolution or filing for bankruptcy.

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

Form 886A Department of the Treasury - Internal Revenue Service Schedule No. or Exhibit
Explanation of Items
Name of Taxpayer Year/Period Ended
June 30, 20XX
Law:

Treasury Regulations section 1.501(a)-1(c) - Private shareholder or individual defined. The
words private shareholder or individual in Code section 501 refer to persons having a personal
and private interest in the activities of the organization.

Regulation 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.

Treasury Regulation section 1.501(c)(3)-1(c)(1) provides: (c) Operational test. (1) Primary
activities.

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 Code 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.

Regulation section 1.501(c)(3)—1 (d) Exempt purposes—(1) In general
(i) 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:

(a) Religious,

(b) Charitable,

(c) Scientific,

(d) Testing for public safety,

(e) Literary,

(f) Educational, or

(g) Prevention of cruelty to children or animals.
(ii) 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.

Regulation section1.501(c)(3)-1(c)(2) Distribution of earnings. 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. For the definition of the words private
shareholder or individual, see paragraph (c) of section 1.501(a)-1.

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

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

Name of Taxpayer Year/Period Ended

June 30, 20XX

Regulation section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or
operated exclusively for one or more of the purposes specified in Regulation section
1.501(c)(3)-1(d)(1)(i) 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. Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii).

Where an individual or small group has exclusive control over the management of the
organization’s funds and is the principle recipient of the distributions of the organization,
prohibited inurement is strongly suggested (See Church of Eternal Life & Liberty v.
Commissioner, 86 T.C. 916, 927 (1986)).

In Rev. Rul. 67-5, 1967-1 C.B. 123, the Service found a foundation controlled by its creator's
family, was operated to enable the creator and his family to engage in financial activities which
were beneficial to them, but detrimental to the foundation. This resulted in the foundation's
owning non-income-producing assets, which prevented it from carrying on a charitable
program commensurate in scope with its financial resources. The Service concluded the
foundation was operated for a substantial non-exempt purpose and served the private interests
of the creator and his family. Therefore, the foundation was not entitled to exemption from
federal income tax under section 501(c)(3).

In Help the Children, Inc. v. Commissioner, 28 T.C. 1128 (1957), an organization operated bingo
games. Its charitable function consisted of contributions to charitable institutions of amounts,
which were insubstantial when compared to gross receipts from the bingo games. The court
held the organization did not qualify for exemption under IRC section 501(c)(3) because it did
not operate any charitable institutions and its principal activity was the profitable operation of
bingo games on a business or commercial basis.

In Make a Joyful Noise, Inc. v. Commissioner, T.C. Memo 56-1003 (1989), the court held that
operating regularly scheduled bingo games on behalf of other exempt organizations was a trade
or business unrelated to the organization's exempt purposes. In that case, the court concluded
that the petitioner failed to carry its burden of proving that its participation in bingo games was
an insubstantial part of its activities.

In P.L.L. Scholarship Fund, v. Commissioner, 82 TC 196 (1984) the Tax Court held that petitioner
was not operated exclusively for exempt purposes under the provisions of section 501(c)(3).
Petitioner was incorporated as a nonprofit corporation for the purpose of raising money to be
used for providing college scholarships. The money was raised from the operation of bingo
games on the premises of a commercial establishment owned by insiders of the petitioner. The
court stated that: “Since the record in this case does not show that the petitioner was operated

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

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

Name of Taxpayer Year/Period Ended

June 30, 20XX

exclusively for exempt purposes, but rather indicates that it benefited private interests,
exemption was properly denied.”

Revenue Ruling 64-182, 1964-1 C.B. 186, concluded that an organization qualified for
exemption under section 501(c)(3) of the Code where it used the proceeds from a business
activity to conduct a charitable, program, “commensurate in scope” with its financial resources,
of making grants to other charitable organizations. Thus, an organization whose principal
activity is operating games of chance may nevertheless qualify for exemption, provided it uses
the proceeds of that business activity in a real and substantial charitable program (such as
charitable grant making) commensurate in scope with its financial resources, and otherwise
meets the requirements of exemption.

Government’s Position:

Organization is not operated exclusively for exempt purposes, because more than insubstantial
part of its activities is not in furtherance of an exempt purpose. Organization’s only activity is
to conduct bingo games to raise funds for other organizations. Conducting bingo is a trade or
business which in and of itself does not constitute an exempt function. See Help the Children,
PLL Scholarship Fund, et. al. Rev. Ru. 64-182, indicates that an organization may still qualify for
exemption in such circumstances if it uses the proceeds of a business activity in a real and
substantial charitable program commensurate in scope with its financial resources, and
otherwise meets the requirements of exemption.

Organization has not demonstrated that it operates a real and substantial charitable program
commensurate with its financial resources. There is no formal grant program, and a very
insubstantial amount of the net gaming proceeds are actually paid to charity (0%, 0%, and 0%,
respectively in 20XX, 20XX, and 20XX).

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

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

Name of Taxpayer Year/Period Ended

June 30, 20XX

Organization does not appear to otherwise meet the requirements of exemption because it is
operated for the substantial nonexempt purpose of supporting the private interests of

and , the President and Treasurer of Organization, respectively. The divorce
decree appears to have treated Organization and its earnings as essentially a business asset
that could be divided in the proceedings, and in which both parties had a continuing business
interest (including a right of first refusal in the event of exit of one officer or bankruptcy).

Organization has not demonstrated why providing employment and gross weekly
salary of $0, in satisfaction of a court order binding on private individuals, furthers the
organization’s exempt purpose. The vast majority of the net gaming income (0%, 0%, and 0%, in
20XX, 20XX, and 20XX, respectively), is used to provide with a guaranteed income.
It requires Organization to continue employment at a certain salary and does not
take any consideration of whether or not the compensation is reasonable and appropriate to
the work performed. Further, the implication is that , may have avoided having to
divide other assets with his ex-spouse in the divorce proceedings, given that she was awarded
the guaranteed employment. This directly goes against Treasury Regulation section 1.501(c)(3)-
1(d)(ii) which states that the organization must not be operated or organized for the benefit of
designated individuals.

The organization also appears to be violation of State gaming laws.

Organization has no other activities than the act of putting together bingo games and the
organization is 0% funded by these games of chance. Therefore, the Internal Revenue Service
believes that

Taxpayers Position:

Conclusion:

The government believes that revocation of the organization’s exempt status should be sought.
The organization does not qualify for exemption due to the organization’s operations and the
above stated law. Organization conducts no real charitable program. Further,

does not appear to operate exclusively for exempt purposes and instead is organized and
operated in a manner such that its net earnings benefits private shareholders. It is not an
organization exempt under section 501(c)(3).

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

Page: -6-

Form 886A Department of the Treasury - Internal Revenue Service
Explanation of Items

Schedule No. or Exhibit

Name of Taxpayer

Year/Period Ended

June 30, 20XX

Based on the foregoing reasons, the organization does not qualify for exemption under section
501(c)(3) and its tax exempt status should be revoked. Accordingly, the organization's exempt

status should be revoked effective July 1, 20XX.

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

Page: -7-