Exemption revoked for a donor-controlled partnership gifting program

Plain-English summary

A charity accepted donated nonvoting interests in partnerships and limited liability companies through arrangements created and administered by a professional adviser. The IRS examination found that donors retained control over the underlying assets, the donated interests were not freely transferable, and little or no actual economic benefit passed to the charity. The organization also made grants without documented selection standards or due diligence, kept incomplete records, omitted income and ownership interests from Forms 990, and allowed insiders or donors to direct transactions and payments. The IRS concluded that the organization had substantial nonexempt purposes, served private interests, and allowed net earnings to inure to private persons. Under a closing agreement, its Section 501(c)(3) status was revoked retroactively and its remaining assets were to be returned to donors.

Ruling snapshot

• Question: Should the organization's Section 501(c)(3) status continue despite its partnership gifting arrangements, reporting failures, private benefit, and inurement?
• Outcome: revocation
• Key authorities: IRC §§ 170, 501(c)(3), 6001, 6033, 7428; Treas. Reg. §§ 1.501(c)(3)-1, 1.6001-1, 1.6033-1; Rev. Rul. 68-489; Rev. Rul. 59-95

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
TEGE EO Examinations Mail Stop 4920 DAL
1100 Commerce St.
Dallas, Texas 75242

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Date: January 12, 2018

Release Number: 201830022
Release Date: 7/27/2018

UIL Code: 501.03-00 Tax Year Ending:
December 31, 20XX, 20XX, 20XX, 20XX, 20XX

Taxpayer Identification Number:
Person to Contact:

Employee Identification Number:
Employee Telephone Number:

(Phone)
(Fax)

CERTIFIED MAIL — RETURN RECEIPT

Dear

This is a final determination that you do not qualify for exemption from Federal income tax under
internal Revenue Code (the “Code”) section 501(a) as an organization described in Code section
501(c)(3) effective January 1, 20XX. Your determination letter dated October 5, 20XX is revoked.

The revocation of your exempt status was made for the following reason(s):

Organizations described in section 501(c)(3) of the Internal Revenue Code and exempt from tax
under section 501(a) must be both organized and operated exclusively for exempt purposes. You
have failed to establish that you are operated exclusively for exempt purposes and that no part of
your net earnings inure to the benefit of private shareholders or individuals.

The transferors/donors of business and property interest, including limited partnerships and
limited liability companies, to you handled their business and property interests in substantially
the same way both before and after the purported transfers/donations to you.

Also, little or no actual economic benefits were transferred to you as a result of the purported
transfers/donations.

Contributions to your organization are no longer deductible under IRC §170 after January 1, 20XX.

Organizations that are not exempt under section 501 generally are required to file federal income
tax returns and pay tax, where applicable. For further instructions, forms, and information, please

visit www.irs.gov.

If you decide to contest this determination, you may file an action for declaratory judgment under
the provisions of section 7428 of the Code in one of the following three venues: 1) United States
Tax Court, 2) the United States Court of Federal Claims, or 3) the United States District Court for
the District of Columbia. A petition or complaint in one of these three courts must be filed within
90 days from the date this determination letter was mailed to you. Please contact the clerk of the
appropriate court for rules and the appropriate forms for filing petitions for declaratory judgment
by referring to the enclosed Publication 892. You may write to the courts at the following
addresses:

United States Tax Court
400 Second Street, N.W.
Washington, D.C. 20217

U.S. Court of Federal Claims
717 Madison Place, N.W.
Washington, D.C. 20439

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

Processing of income tax returns and assessments of any taxes due will not be delayed if you file
a petition for declaratory judgment under section 7428 of the Internal Revenue Code.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help
protect your taxpayer rights. TAS 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 TAS
assistance, which is always free, TAS will do everything possible to help you. Visit
www.taxpayeradvocate.irs.gov or call 1-877-777-4778.

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

Sincerely,

Maria Hooke
Director, EO Examinations

Enclosure:
Publication 892

Department of the Treasury Date: April 17, 2017
fi) Internal Revenue Service eg:
Tax Exempt and Government Entities Taxpayer Identification Number:
IRS Exempt Organizations Examinations Fc
orm:

Tax Year(s) Ended:
20XX- 20XX
Person to Contact/ID Number:

Contact Numbers:
Telephone:
Fax:

Manager’s Name/ID Number:

Manager’s Contact Number:

Response due date:
May 17, 2017

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

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

For additional information

If you have any questions, please call the contact person at the telephone number shown in the
heading of this letter. If you write, please provide a telephone number and the most convenient
time to call if we need to contact you.

Thank you for your cooperation.

Sincerely,

Mary A. Epps

Director, EO Examinations
Enclosures:
Report of Examination
Form 6018

Publication 892
Publication 3498

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

Form 886-A
(Rev. January 1994)

EXPLANATIONS OF ITEMS

Schedule number or exhibit

Name of taxpayer

-Tax
Identification Number

DECEMBER 31, 20XX-
20XX

Issue:

Whether the I.R.C. §501(c)(3) exempt status of
be revoked effective January 1, 20XX.

Facts:

The

, should

was organized as a section 501(c)(3) organization on January

26, 20XX. The organization was granted exempt status under section 501(c)(3) as a
publicly supported organization described in sections 509(a)(1) and 170(b)(1)(A)(vi)
per our letter dated October 5, 20XX.

Articles of Incorporation states:

The organization is organized exclusively to support any and all selected
501(c)(3) public supported organizations with the emphasis on church
and religious based ministries.

/

This tax-exempt entity was created in20XX.
company, is its registered agent, and has been in control of this
company. Over the years, there have been individuals named as

directors (
teacher,

parents, friends including

zk

organized this

- local school

- laborers), but all significant decisions

and business activities are performed by

promoting the gifting plan,

. Without
would have no other business purpose.
prepares all of the related tax-exempt returns, Forms 990.

directs payments from this entity to himself. direct payments from

to this entity. This entity accepts contributions of LLC interests and
receives cash distributions from the LLC's it owns. On its latest filed
return (Form 990, Schedule R), it shows the percentage of ownership
and interest values for over 0 entities worth over $0 million BUT it does
not show that it owns

Form 886-A (I-1994)Catalog Number 20810WPage__ publish.no.irs.gov Department ofthe Treasury-Internal Revenue Service

Form 886-A Schedule number or exhibit

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer -Tax DECEMBER 31, 20XX-
Identification Number 20XX

Form 1023

Forms 990 for 20XX thru 20XX year were examined. In
statements provided during the examination, stated that:

( ) primary goal is to support charitable organizations
exclusively both locally and nationally. Funds are raised through
distributions from LPs and LLCs wherein has been gifted an interest.
markets its services through financial planners who implement charitable
giving plans for their clients. They refer their clients
to _ as their designated charity in most situations. has as a program
where certain donors can direct their gifts to their favorite charities or
charitable causes. All directed gifts are required to be distributed to
organizations who qualify under one or more of the exempt categories.

only material expense is the marketing/fundraising fees paid to
financial advisors who refer donors to

20XX Form 990

In its 20XX Form 990, the organization reported $0 as total contributions ($0 -came
from arelated entity- ), and investment income of $0. Total
assets shown onthe balance sheet was $0 as of 12/31/20XX. It reported a total of $0 in
grants.

The Forms 990 for 20XX- 20XX were not complete. The Form 990 for 20XX omitted
Part IV (List of Officers, Directors, Trustees). The return was signed by

without indicating his title in the organization. Part V, line 38a was answered incorrectly.
stated that he made a loan of $0 to the organization. The minutes of the organization
and State of records reflect and his wife as the officers and
Board members of the organization. They have been listed on the Form 990 as officers
from 20XX- 20XX. was listed as Vice President on the 20XX and 20XX
returns. has stated several times that he was not

Form 886-A (I-1994)Catalog Number 208 10W Page publish.no.irs.gov Department ofthe Treasury-Internal Revenue Service

Form 886-A Schedule number or exhibit

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer -Tax DECEMBER 31, 20XX-
Identification Number 20XX

involved in the day to day operations of the organization. Agent interviewed

on April 22, 20XX and he stated that he just signs the checks as directed by

and he hasn't been involved with the organization for the last 5-6 years other than that.

Agent also noted that signed all of the returns except for 20XX (signed by
), 20XX (signed by but name was typed in, and 20XX return

that was signed by

is an attorney, a certified public accountant, and a certified valuation
analyst. He earns his revenue from high-wealth clients to which he assists in forming
and administering various partnerships and LLCs established to accomplish
charitable giving. He also provides valuation services. He serves as the
organization's accountant, bookkeeper, tax return preparer, legal advisor,
spokesman, and POA. The Board of Directors minutes provided by the organization
indicated that he was not an officer of the organization during the examination years.

has organized several tax-exempt entities including
( ( )
( ); (is a one- member LLC under _) and
-(For Profit). These have been used as the organizations to which many of his clients
ultimately donate portions of their LLC interest to (i.e. Interest of 0%). The LLC
entities then distribute funds to the tax-exempt company and it then sends checks to
various other charities (such as churches after charging an
administration/management fee). When the clients gift a portion of the created LLC's,
a charitable deduction is created. He receives income for his professional services
and the related tax exempt entities serve as the charitable gifting avenue.

is involved in the majority of the transactions required to set up the
limited partnership "arrangements" for his clients. is involved in the day-to-day
operations of __, the recipient of the gifts of limited partnership interests.

With respect to the limited partnership "arrangements", prepares the majority
of the required legal documents. prepares the limited partnership agreements
(including documents related to issuance of General and Limited Partnership Units),
the limited liability company operating agreements (including documents related to
the issuance of Managing and Non-Managing Member Units), the appraisals of the
limited partnership interests and non-managing member interests, the required
Secretary of State filings, as well as the preparation of the Federal Forms 1065 and
Schedules K-1. also prepares the documents related to the contribution of the
limited partnership interests to the exempt organizations; these documents include

Form 886-A (I-1994)Catalog Number 208 10W Page publish.no.irs.gov Department ofthe Treasury-Internal Revenue Service

Form 886-A Schedule number or exhibit

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer -Tax DECEMBER 31, 20XX-
Identification Number 20XX

the "Assignment of Limited Partnership Units", the "Assignment of Non-Managing
member Units", the "Consent to Assignment of the Limited Partnership Interest", and
the "Consent to the Assignment of the Non-Managing Member Units".

With respect to established the exempt organization and continues his
involvement in all aspects of day-to-day operations ( is a maintenance
worker for the school system, and is a school teacher) for
the exempt organization. prepared and filed the Forms 1023 application with
the Internal Revenue Service for approval to create and operate the exempt
organization.. prepares and files all required state documents with
Secretary of State. prepares and files the annual Federal Forms 990 for the

exempt organization.

The limited partnership interests and the non-managing member interests transferred
to are not "transferable partnership interests." According to the limited partnership
agreement, a limited partner may transfer their limited partnership interest if certain
conditions are satisfied. One of the conditions requires the unanimous written
consent of all the partners. This condition would require not only the exempt
organizations’ agreement to the sale but would also require the agreement of all
partners. According to the limited liability company, operating

agreement certain requirements must be met to transfer a membership interest. One
of the requirements is the unanimous approval of all members. This condition would
not only require the exempt organizations' agreement to the sale but would require
the agreement of all members.

is involved in the majority of the transactions required to set up the
limited partnership "arrangements" for his clients. is involved in the day-to-day
operations of ; , and _, the recipients of the gifts of limited partnership
interests.

With respect to the limited partnership "arrangements", prepares the majority
of the required legal documents. prepares the limited partnership agreements
(including documents related to issuance of General and Limited Partnership Units),
the limited liability company operating agreements (including documents related to
the issuance of Managing and Non-Managing Member Units), the appraisals of the
limited partnership interests and non-managing member interests, the required
Secretary of State filings, as well as the preparation of the Federal Forms 1065 and
Schedules K-1. also prepares the documents related to the contribution of the
limited partnership interests to the exempt organizations; these documents include
the "Assignment of Limited Partnership Units", the "Assignment of Non-Managing
member Units", the "Consent to Assignment of the Limited Partnership Interest", and
the "Consent to the Assignment of the Non-Managing Member Units".

Form 886-A (I-1994)Catalog Number 20810W Page___ publish.no.irs.gov Department ofthe Treasury-Internal Revenue Service

Form 886-A Schedule number or exhibit
(Rev. January 1994) EXPLANATIONS OF ITEMS
Name of taxpayer -Tax DECEMBER 31, 20XX-
Identification Number 20XX
With respect to established the exempt organizations and continues his

involvement in all aspects of day-to-day operations for the exempt organization.
prepared and filed the Forms 1023 application with the Internal Revenue

Service for approval to create and operate the exempt organizations.

prepares and files all required state documents with Secretary of State.

prepares and files the annual Federal Forms 990 for the exempt organizations.

The limited partnership interests and the non-managing member interests transferred
to are not "transferable partnership interests." According to the limited partnership
agreement, a limited partner may transfer their limited partnership interest if certain
conditions are satisfied. One of the conditions requires the unanimous written
consent of all the partners. This condition would require not only the exempt
organizations' agreement to the sale but would also require the agreement of all
partners. According to the limited liability company, operating agreement certain
requirements must be met to transfer a membership interest. One of the
requirements is the unanimous approval of all members. This condition would not
only require the exempt organizations' agreement to the sale but would require the
agreement of all members.

prepared and signed the 20XX and 20XX Form 990 returns. It should be
noted that on the 20XX Form 990, name was typed on the return. The
required signature was actually signature.

Board Meetings

The only board meeting held was the annual meeting where officers were appointed. No
other issues were documented and no other actions were authorized. The minutes for
the meeting held on January 14, 20XX indicated that "over the last 0 years there has
been several audits of current donors to." "All of these audits were approved and
validated and were given No Changes by the IRS". "The President stated that the IRS
may decide to audit the organization in an effort to revoke the exempt organization's tax
status" "The President stated that the opinion of counsel from tax attorneys including, tax
litigators is that | should at no point voluntarily allow the IRS to revoke its exempt
status based on No Change audits of donors who gifted LLC units to the organization.
Also the overwhelming weight of legal authority which does not prohibit from
acceptance of LLC units where the LLC agreement is approved and the manager of the
LLC is required to comply with the fiduciary duty which ensures that the LLC interest
owned by _ is protected."

Form 886-A (1-1994)CatalogNumber 20810WPage__publish.no.irs.gov Department ofthe Treasury-Internal Revenue Service

Form 886-A Schedule number or exhibit

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer -Tax DECEMBER 31, 20XX-
Identification Number 20XX

Board of Directors

The organization stated (correspondence letter 10/8/20XX) that from 20XX- 20XX, the

directors were not related. and his wife have been the
directors of from 20XX to present. works full time for
County school corporation. (Revenue Agent confirmed this and that he is employed as a
custodian) during his interview of on 4/29/20XX. is
currently attending college and works for a local bank. (Agent did not confirm this
statement).

stated in the interview that he has not been active with the organization for
over 0 years. The filed Form 990 indicates the following: 20XX- - Pres,

- VP, 20XX- - VP, - Pres, 20XX- - Pres,
- VP, 20XX- - Pres, - VP, 20XX- -
President
Activities

The organization stated that their activities support local and nationwide charities as
part of its mission. The Directors ( and ) choose the
charitable organizations to support for 20XX- 20XX. They could not explain how they
selected the organizations to fund nor could they explain how they became aware of
the organizations they were funding. (Especially organizations located out of state).
They stated that there were no loans made prior to 20XX. The organization contracts
with professional fundraisers to help raise funds for the organization. The fundraiser
is paid a percentage of the "gift" amount received. These fees are only paid after the
"gift" has been received by the organization. An examination of the organization's
financial and operational records indicates that the organization had substantial
"donors" who reside outside of . The primary "fundraisers" live and work in

. It was noted that these fundraisers did not receive a Form 1099 for the clients they
provided.

During the examination years, created the following transactions:

1. On August 30, 20XX, was formed by and he paid
$0 for O member units.

2. On August 31,20XX, he transferred units to (an
entity he created) for $0 consideration (gifted).

3. On October 12, 20XX, "gifts" Intellectual Property (IP) stated to be:
Customer lists, Contacts lists, Trade Secrets, Systems and Processes, Client
Agreements, Appraisal Systems and Accounting Processes to (who
became an officer of in 20XX) for $0 consideration. He appraised this IP at

$0. These are the same services he performs in his private business and reports on his
individual tax return. He explained to his business associates (financial planners and
contacts) that payments from new clients (Nov 20XX and forward) requesting

Form 886-A (I-1994)Catalog Number 208 10W Page publish.no.irs.gov Department ofthe Treasury-Internal Revenue Service

Form 886-A Schedule number or exhibit

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer -Tax DECEMBER 31, 20XX-
Identification Number 20XX

formation and administering services for their charitable gifting arrangements are to now

be made payable to , LLC.

4. On October 13, 20XX, transferred the IP to

5. On October 15, 20XX, was created. was issued
0% of the membership interest (0 units)

6. On October 20, 20XX, transferred the in
exchange for 0 LLC units of . ( formed on
August 20, 20XX and he paid $0 for 0 member units. On August 31, 20XX,

transferred units to for $0 consideration.)

7. On October 23, 20XX, transferred the O units in
to for $0 consideration. (This was not reported on
Form 990)

8. On October 25, 20XX, and entered into a Trade Secret and
Intellectual Property Licensing Agreement whereby pays 0% of its gross
revenues to for the use of the IP.

9. On April 30, 20XX, transferred his 0% interest in to
for $0 consideration

10. prepares all of the related entities tax returns.

11. On January 1, 20XX, ( ) assigned any and all

interest of any kind currently owned in Limited Partnerships or LLCs to

, a 501(c)(3) public charity.

12. On February 11, 20XX, filed Certificate of Dissolution with the

Secretary of State Office. (Voluntarily Dissolved- 1/1/20XX, Adoption date- 1/7/20XX and
effective date- 2-11-20XX)

13. On February 11,20XX, created -a For- Profit
Domestic Corporation

Promotion of Partnership

The examination of the financial and operational records presented showed that

main activity was the promotion of a program where a donor creates an entity, a LLC
entity, with a 0% non-voting interest owned by the donor, and a 0% voting interest
owned by donor. The donor contributes the 0% non-voting interest or 0% to

creating a partnership or disregarded entity. Through the agreement creating a
partnership entity, the general partner retains full control of the partnership entity. The
non-voting interest cannot be sold, transferred, or substituted without the general
partner's permission. The general partner can admit new non-voting interest members
diluting ownership and the general partner can dispose of assets at will and on any
terms and controls any distributions. In some partnership agreements, the non-voting
interest assigns a power of attorney to the general partner. The donor then donates the
non-voting interest to while retaining the ownership of the general partner. The

Form 886-A (I-1994)CatalogNumber 20810W Page___ publish.no.irs.gov Department ofthe Treasury-Internal Revenue Service

Form 886-A Schedule number or exhibit

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer -Tax DECEMBER 31, 20XX-
Identification Number 20XX

donor never relinquishes control of the underlying assets. There were 0, 0, 0, 0, and
0 partnerships returns (Form 1065) filed respectively for 20XX, 20XX, 20XX, 20XX,
and 20XX.

The Partnership/LLC/LP agreement that has with its donors does not allow to have
any control of the assets of the partnership. The General Partner (Donor) has complete
control of the assets. He can sell, trade, or use the assets for nonexempt purposes
without consent of . only receives the income generated from the assets as
reported on the Form 1065's and K-1's. It was also noted that several identified
financial planners had setup LLC/LP with and therefore created a relationship that
will identify them also as an insider.

charges a fee to set up and maintain the partnerships and to appraise .
the non-voting interest donated to . He charges an additional annual fee based on
the asset value. Appraisals are for around 0% to 0% of the book value even though
the appraisal states that non-voting interest is not transferable and has no control.
The LLC and partnership interests accepted by that were reviewed included very
few prepared by independent contractors. The majority was prepared by

and all that the agent reviewed were appraised by . Fees for the
preparation and appraisals were deposited to the account but it was not possible to
determine if the funds were part of funds or private practice. The

agreements do not allow sales or distributions and the appraisals note that the
donated 0% limited interests are completely controlled by the general partner.
Donations are exclusively non-voting interests in partnerships and LLC's, a small
amount of cash distributions and fees. Investments are the maintained partnership
and LLC agreements and residual income.

Income from the partnerships in 20XX- 20XX

After donation receives K-1 Forms for the allotted share (usually 0%) of income
from the partnership. The general partner receives 0% of the income. treats the
income as passive income excluded from UBIT.

During the years 20XX- 20XX, _ failed to report on its Form 990, all income from
Schedule K-1's. The Schedule K-1's arise from limited partnership interests
resulting from non-cash contributions. The donors claim a charitable deduction for
the amounts reported as contributions on Form 990. The donors are the general
partners that retain control over the assets held by the partnerships. The income
reported on the Schedule K-1's issued to should be reported on its Form 990. The
organization also had income from disregarded entities. Agent was not able to
determine the exact amounts due to the fact that these entities are not required to

Form 886-A (I-1994)CatalogNumber 20810WPage__ publish.no.irs.gov Department ofthe Treasury-Internal Revenue Service


Form 886-A Schedule number or exhibit

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer -Tax DECEMBER 31, 20XX-
Identification Number 20XX

file income tax returns and the organization did not maintain records to identify the
sources of revenue and the related expenses.

In a past examination (20XX- 20XX), IRS successfully revoked the tax exempt status
of a related entity also created and operated by . That entity was also
created and operated in the exact same manner as . agreed to the
decision to revoke the entity's exempt status and stated in his response (dated
12/20/20XX) he would agree to our proposed revocation of tax exempt status as
of 1/1/20XX if we would offer a closing agreement identical to the one the Service
entered with him on a related entity that was revoked on the same issues. This would
be an obvious way to settle the case.

Law:

Section 501 of the Code provides for the exemption from federal income tax of
corporations organized and operated exclusively for charitable or educational purposes,
provided that no part of the net earnings of such corporations inures to the benefit of
any private shareholder or individual. See § 501(c)(3). -

Section 1.501(c)(3)-1(a)(1) of the Income Tax Regulations provides that in order for an
organization to be exempt under section 501(c)(3) of the Code it 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 or operational test, it is
not exempt

Section 1.501(c)(3)-1(c)(1) of the Income Tax Regulations provides that an organization
operates exclusively for exempt purposes only if it engages primarily in activities that
accomplish exempt purposes specified in § 501(c)(3). An organization must not
engage in substantial activities that fail to further an exempt purpose.

Section 1.501(c)(3)-1(c)(2) of the regulations 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

Section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated
exclusively for exempt purposes unless it serves a public rather than a private interest.
To meet this requirement, it is necessary for an organization to establish that it is not
organized or operated for the benefit of private interests.

Section 1.501(c)(3)-1(d)(2) defines the term "charitable" for § 501(c)(3) purposes as
including the relief of the poor and distressed or of the underprivileged, and the
promotion of social welfare by organizations designed to lessen neighborhood tensions,

Form 886-A (I-1994)CatalogNumber20810WPage__ publish.no.irs.gov Department ofthe Treasury-Internal Revenue Service

Form 886-A Schedule number or

(Rev. January 1994) EXPLANATIONS OF ITEMS exhibit

Name of taxpayer -Tax DECEMBER 31, 20XX-
Identification Number 20XX

to eliminate prejudice and discrimination, or to combat community deterioration.
The term "charitable" also includes the advancement of education. "

Section 1.501(c)(3)-1(d)(3)(i) provides, in part, that the term "educational" for § 501(c)(3)
purposes relates to the instruction of the public on subjects useful to the individual and
beneficial to the community.

Section 1.501(c)(3)-1(e) provides that an organization that operates a trade or business
as a substantial part of its activities may meet the requirements of § 501(c)(3) if the
trade or business furthers an exempt purpose, and if the organization's primary purpose
does not consist of carrying on an unrelated trade or business

In Better Business Bureau v. United States, 326 U.S. 279 (1945), the Supreme Court
stated that the presence of a single nonexempt purpose, if substantial in nature, will
preclude exemption under section 501(c)(3) of the Code, regardless of the number or
importance of statutorily exempt purposes. Thus, the operational test standard
prohibiting a substantial nonexempt purpose is broad enough to include inurement,
private benefit, and operations that further nonprofit goals outside the scope of section
501(c)(3).

Rev. Rul. 68-489, 1968-2 C.B. 210, holds that an organization will not jeopardize its
exemption under section 501(c)(3) of the Code, even though it distributes funds to
nonexempt organizations, provided it retains control and discretion over use of the
funds for section 501(c)(3) purposes. The revenue ruling states that the exempt
organization ensures use of the funds for section 501(c)(3) purposes by limiting
distributions to specific projects that are in furtherance of its own exempt purposes. It
retains control and discretion as to the use of the funds and maintains records
establishing that the funds were used for section 501(c)(3) purposes.

In Best Lock Corporation v. Commissioner, 31 T.C. 620 (1959), the court upheld the
denial of an organization that loaned funds to members of the founder's family, even
though the loans were repaid. The court determined that loans to family members and
unsecured loans to friends of the founder and his family promoted private rather than
charitable purposes.

IRC § 6001 provides that every person liable for any tax imposed by the IRC, or for the
collection thereof, shall keep adequate records as the Secretary of the Treasury or his
delegate may from time to time prescribe.

IRC § 6033(a)(1) provides, except as provided in IRC § 6033(a)(2), every organization
exempt from tax under section 501(a) shall file an annual return, stating specifically the
items of gross income, receipts and disbursements, and such other information for the

Form 886-A (I-1994)CatalogNumber 20810WPage__ publish.no.irs.gov Department ofthe Treasury-Internal Revenue Service

Form 886-A Schedule number or exhibit

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer -Tax DECEMBER 31, 20XX-
Identification Number 20XX

purposes of carrying out the internal revenue laws as the Secretary may by forms or
regulations prescribe, and keep such records, render under oath such statements,
make such other returns, and comply with such rules and regulations as the Secretary
may from time to time prescribe.

Treas. Reg. § 1.6001-1(a) in conjunction with Treas. Reg. § 1.6001-1(c) provides that
every organization exempt from tax under IRC § 501(a) and subject to the tax imposed
by IRC § 511 on its unrelated business income must keep such permanent books or
accounts or records, including inventories, as are sufficient to establish the amount of
gross income, deduction, credits, or other matters required to be shown by such person
in any return of such tax. Such organization shall also keep such books and records as
are required to substantiate the information required by IRC § 6033.

Treas. Reg. § 1.6001-1(e) states that the books or records required by this section shall
be kept at all times available for inspection by authorized internal revenue officers or
employees, and shall be retained as long as the contents thereof may be material in the
administration of any internal revenue law.

Treas. Reg. § 1.6033-1(h)(2) provides that every organization which has established its
right to exemption from tax, whether or not it is required to file an annual return of
information, shall submit such additional information as may be required by the district
director for the purpose of enabling him to inquire further into its exempt status and to
administer the provisions of subchapter F (section 501 and the following), chapter 1 of
the Code and IRC § 6033.

Rev. Rul. 59-95, 1959-1 C.B. 627, concerns an exempt organization that was requested
to produce a financial statement and statement of its operations for a certain year.
However, its records were so incomplete that the organization was unable to furnish
such statements. The Service held that the failure or inability to file the required
information return or otherwise to comply with the provisions of IRC § 6033 and the
regulations which implement it, may result in the termination of the exempt status of an
organization previously held exempt, on the grounds that the organization has not
established that it is observing the conditions required for the continuation of exempt
status.

In accordance with the above cited provisions of the Code and regulations under
IRC §§ 6001 and 6033, organizations recognized as exempt from federal income tax
must meet certain reporting requirements. These requirements relate to the filing of a
complete and accurate annual information (and other required federal tax forms) and
the retention of records sufficient to determine whether such entity is operated for the
purposes for which it was granted tax-exempt status and to determine its liability for
any unrelated business income tax.

Form 886-A (I-1994)Catalog Number 20810W Page _ publish.no.irs.gov Department ofthe Treasury-Internal Revenue Service

Form 886-A Schedule number or

(Rev. January 1994)) EXPLANATIONS OF ITEMS exhibit

Name of taxpayer -Tax DECEMBER 31, 20XX-
Identification Number 20XX

Benefiting Private Interests

Even if an organization's activities serve a charitable class or are otherwise charitable
within the meaning of § 501(c)(3), it must demonstrate that its activities serve a public
rather than a private interest within the meaning of Reg. § 1.501(c)(3)-1(d)(1).

Rev. Rul. 72-147, 1972-1 C.B. 147, held that an organization that provided housing to
low income families did not qualify for exemption under § 501(c)(3) because it gave
preference to employees of business operated by the individual who also controlled the
organization. The ruling reasoned that, although providing housing for low-income
families furthers charitable purposes, doing so in a manner that gives preference to
employees of the founder's business primarily serves the private interest of the founder
rather than a public interest.

In KJ's Fund Raisers v. Commissioner, T.C. Memo 1997-424 (1997), affd, 1998 U.S.
App. LEXIS 27982 (2d Cir. 1998), the Tax Court held, and the Second Circuit affirmed,
that an organization formed to raise funds for distribution to charitable causes did not
qualify for exemption under § 501(c)(3) because its activities resulted in a substantial
private benefit to its founders. The founders of the organization were the sole owners of
KJ's Place, a lounge at which alcoholic beverages were served. The founders served
as officers of the organization and, at times, also controlled the organization's board.
The Tax Court found, and the Second Circuit agreed, that the founders exercised
substantial influence over the affairs of the organization. The organization's business
consisted of selling "Lucky 7" or similar instant win lottery tickets to patrons of KJ's
Place. The organization derived most of its funds from its lottery ticket sales. The
organization solicited no public donations. The lottery tickets were sold during regular
business hours by the owners of the lounge and their employees. From the proceeds of
the sales of the lottery tickets, the organization made grants to a variety of charitable
organizations. Although supporting charitable organizations may be a charitable
activity, the Tax Court nevertheless upheld the Commissioner's denial of exemption to
the organization on the ground that the organization's operation resulted in more than
incidental private benefit. The Tax Court held, and the Second Circuit affirmed, that a
substantial purpose of KJ's activities was to benefit KJ's place and its owners by
attracting new patrons, by way of lottery ticket sales, to KJ's Place, and by discouraging
existing customers from abandoning KJ's Place in favor of other lounges where such
tickets were available. Thus, the organization was not operated exclusively for exempt
purposes within the meaning of § 501(c)(3).

An organization does not serve a public rather than a private interest within the meaning
of Reg. 1.501(c)(3)-1(d)(1) if any of its assets or earnings inure to the benefit of any
insiders (or disqualified persons). Treas. Reg. § 1.501(c)(3)-1(d)(1)(ii).

Form 886-A (I-1994)CatalogNumber 20810WPage___ publish.no.irs.gov Department ofthe Treasury-Internal Revenue Service

Form 886-A Schedule number or exhibit

(Rev. January 1994) EXPLANATIONS OF ITEMS

Name of taxpayer -Tax DECEMBER 31, 20XX-
Identification Number 20XX

A number of courts have held that unaccounted for diversions of a charitable
organization's resources by one who has complete and unfettered control can constitute
inurement. Parker v. Commissioner, 365 F.2d 792, 799 (8th Cir. 1966); Kenner v.
Commissioner, 318 F.2d 632 (7th Cir. 1963); Church of Scientology, 823 F.2d at 1316-
17, 1319.

The provision of inurement can be direct or indirect. In Church of Scientology, 823 F.2d
at 1315, the organization transferred in excess of $3.5 million to a for-profit corporation
incorporated by the organization's founder and his wife. The directors of the corporation
were high-ranking members of the Church of Scientology. The directors approved the
founder's decision to transfer $2 million from the corporation's account to the ship Apollo
aboard which the founder and his family lived. The Ninth Circuit held that the funds
funneled through the for-profit corporation constituted inurement to the founder and his
family. Church of Scientology, 823 F.2d at 1318.

In Church by Mail, Inc. v. Commissioner, 765 F.2d 1387 (9th Cir. 1985), the Ninth Circuit

held that a church that conducted its activities by mail did not qualify for exemption
under § 501(c)(3) because a substantial purpose of its activities was to benefit a for-
profit corporation controlled by the church's insiders. The church employed an
advertising agency controlled by its insiders to provide all of the printing and mailing
services for the church's mass mailings. The advertising agency devoted approximately
two-thirds of its time to the work for the church. The majority of the church's income
was paid to the advertising agency. Although the advertising agency claimed to have
clients unrelated to the church, it did not advertise its services and refused to identify its
other clients. The Ninth Circuit held that the church was operated for the substantial
non exempt purpose of "providing a market for [the advertising agency's] services" and,
thus, primarily served the private interests of the advertising agency and its owners
rather than a public purpose. In so holding the Ninth Circuit rejected the church's
argument that the income paid by the advertising agency should not be included in the
determination of reasonableness and treated this income as indirect inurement of the
church's earnings to the church's insiders.

The prohibition on inurement in § 501(c)(3) is absolute. The Service has the authority to
revoke an organization's exempt status for inurement regardless of the amount of
inurement. See, Spokane Motorcycle Club, supra; The Founding Church of
Scientology, 412 F.2d at 1202.

Government's Position:

does not qualify as an organization described in IRC 501(c)(3)

- because (1) it is not operated for an exclusive exempt purpose; (2) it

Form 886-A (I-1994)CatalogNumber 20810WPage__ publish.no.irs.gov Department ofthe Treasury-Internal Revenue Service

Form 886-A Schedule number or

(Rev. January 1994)} EXPLANATIONS OF ITEMS exhibit

Name of taxpayer -Tax DECEMBER 31, 20XX-
Identification Number 20XX

substantially benefits private interests and (3) its net earnings inure to the benefit of
private shareholders and individuals.

Not operated for an exclusive exempt purpose

does not engage in any charitable activities. The
organization stated on its Form 1023, that it will not make grants, loans or other
distributions to organizations. During 20XX- 20XX, the organization made distributions to
various organizations and individuals. The organization did not provide any
documentation to support the claim that monies are awarded based on need. The
organization did not have any specific guidelines and procedures to determine whether
an individual qualified (as a charitable class) for a charitable or educational grant. There
was no independent group of individuals who were charged the task of making the grant
selections. The organization did not exercise due diligence in determining that the
monies that the grants were being used for the intended exempt purpose. When agent
interviewed the President (__. ) and about the award procedures, they stated
that there were no specific procedures, they would send checks to whomever
told them. Therefore, the grants awarded do not qualify as an exempt function expense
and is considered to be a private benefit to the individuals who received the funds.

main activity in 20XX- 20XX was the promotion of partnerships and disregarded

entities with donors. In 20XX, received the assets of
(a related 501(c)(3) entity) as a result of their voluntary
termination with the State of . These assets were the same type of assets (LLCs,

partnerships, disregarded entities) that the organization is reporting on their Form 990.
The donors were never informed of the transfer by the organization.

continues to operate a program that (1) allows individuals, partnerships, limited
partnerships, and LLC's to claim a section 170 deduction for asset(s) donated to —_, but
allows the donor to retain control and subsequently purchase the asset(s) back at a
value that is substantially less than the charitable amount initially claimed. These
transactions do not exclusively serve an exempt purpose described in section 501(c)(3)
and provides substantial private benefit to persons who do not belong to a charitable
class (including the organization's founder)

It is the Service's position that the donor does have advisory and/or control of
monies/assets contributed only by him (not over the entire general fund and segregated
as the organization seems to be stating) and even though the organization claims
there's no segregated fund recorded, the facts are that the funds are identified when
donated and checks were issued to the donor's named charity. These transactions are
structured to give the appearance that they are donor advised funds when in fact, the
organization has not provided any information to support the position that they control

Form 886-A (I-1994)CatalogNumber 20810WPage__publish.no.irs.gov Department ofthe Treasury-Internal Revenue Service

Form 886-A _ Schedule number or

(Rev. January 1994)} EXPLANATIONS OF ITEMS exhibit

Name of taxpayer -Tax DECEMBER 31, 20XX-
Identification Number 20XX

the distributions of the monies, and they did not perform their due diligence in making
sure that the funds were being used for exempt purposes. This will allow the shifting of
income from taxable entities to a tax exempt organization for the purpose of deferring or
avoiding taxes. These transactions have the same economic effect as the transaction
described in Notice 2004-30, IRB 2004-17, April 26, 2004.

The Partnership/LLC/LP agreement that has with its donors does not allow to
have any control of the assets of the partnership. The General Partner (Donor) has
complete control of the assets. He can sell, trade, or use the assets for nonexempt
purposes without consent of . only receives the income generated from the assets
as reported on the Form 1065's and K-1's. It was also noted that several identified
financial planners had setup LLC/LP with and therefore created a relationship that will
identify them also as insiders.

It is our position that the partnership activities, which were the main activities of , had a
substantial non-exempt purpose. In addition, the partnership activities provided a
private benefit to the donors.

Inurement

The gifting of IP to and was subsequently
transferred to _, is considered to be inurement because he received a financial benefit
in the form of a 170 deduction When he never gave up control of the IP. The IP

licensing Agreement between and calling for a 0%
fee for the use of the IP is considered to be inurement because had complete
control of when "gifted" him his ownership and it was acknowledged
by the parties that the services offers could only be performed by

(promoting and_ developing charitable gift plans for high wealth individuals.

This entails creating LLC's, LLP's, Trusts, filing organization papers, valuating client's
properties, working with other financial planners, preparing tax and information returns.
has no other employees. acknowledges he did all of the work and was the brains
behind the business, without him, there would be no business. He directed the financial
planners and other contacts to "write my fee to ; stated that
this income is reported on tax return, which is consolidated with Form
990, and therefore wouldn't show up as taxable income.

Taxpayer's position:

In a past examination (20XX- 20XX), IRS successfully revoked the tax
exempt status of a related entity also created and operated by

Form 886-A (I-1994)CatalogNumber 20810W Page __ publish.no.irs.gov Department ofthe Treasury-Internal Revenue Service

Form 886-A Schedule number or

(Rev. January 1994) | EXPLANATIONS OF ITEMS exhibit

Name of taxpayer -Tax DECEMBER 31, 20XX-
Identification Number 20XX

that was created and operated in the exact same manner as_.
agreed to the decision and stated in his response (dated 12/20/20XX) to our
IDR request that the revocation of the tax exempt status of | would be an
obvious way to settle the case.

Conclusion:

It is the IRS's position that —_ failed the operational test as described in Income Tax
Regulations 1.501(c)(3)-1(d)(1) and 1.501(c)(3)-1(d)(ii). was not operated
exclusively for an exempt purpose. It serves private rather than public interests. Its
net earnings inured to the benefit of private shareholders and individuals. The
Service agreed to enter into a Closing Agreement whereby the organization's exempt
status will be revoked, effective January 1, 20XX and the remaining assets shall be
returned to the donors. The organization agreed and signed the Form 906.

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