IRS revoked charity that facilitated donor-controlled LLC contribution schemes

Plain-English summary

A tax-exempt organization operated donor-advised funds and routinely accepted noncash interests in limited liability companies. The IRS found that the donors retained voting and management control, controlled distributions, received favorable allocations, and could reclaim donated interests if the organization's exemption was audited, jeopardized, or revoked. It concluded that these arrangements were the same as or substantially similar to the tax-avoidance transactions described in Notice 2004-30. The organization also used the services of a person who had been permanently enjoined from promoting an abusive charitable-contribution scheme, and the IRS found that the organization served as a vehicle for that scheme. Because these nonexempt activities were more than insubstantial and benefited private interests, the IRS revoked the organization's section 501(c)(3) status retroactively to the year it began accepting the LLC interests.

Ruling snapshot

• Question: Did the organization's donor-advised fund and LLC-interest activities satisfy the section 501(c)(3) operational test?
• Outcome: revocation, retroactive to the first year the organization accepted the disputed LLC interests
• Key authorities: IRC §§ 501(a), 501(c)(3), 170, and 1361(b)(1)(D); Treas. Reg. § 1.501(c)(3)-1; Notice 2004-30; Better Business Bureau of Washington, D.C. v. United States

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Independent Office of TE/GE Appeals
2525 Capitol Street, Suite 201
Fresno, CA 93721

Date: AUG 08 2019
Person to contact:
Name:
ID number:
Telephone:
Fax:
Employer ID number:
Release Number: 201944017
Release Date: 11/1/2019 Uniform issue list (UIL):

501.03-00, 501.03-05, 501.03-30

Certified Mail
Dear

This is a final adverse 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 Section 501(c)(3)

of the Code.

We have hereby revoked the favorable determination letter to you dated June 28, and you are no
longer exempt under Section 501(a) of the Code effective January 1

We made the adverse determination for the following reasons:

You operate as a sponsoring organization for donor advised funds in which you routinely accept non-
cash contributions of LLC interests. The non-cash contributions you accept are substantially similar to
the type of transaction described in IRS Notice 2004-30. In conducting your activities you used the
services of an individual who is permanently enjoined by a Federal district judge for promoting an
abusive contribution scheme similar to contributions to your organization. Your activities served
purposes other than charitable purposes and benefited private interests. As such you did not operate
exclusively for tax-exempt purposes as is required for an organization to be described in section
501(c)(3) of the Code. Because you operated in a manner materially different than you represented in
your exemption application, this revocation is effective retroactively to the year in which you began
accepting the referenced non-cash contributions.

You're required to file federal income tax returns on Forms 1120, U.S. Corporation Income Tax Return. Mail
your form to the appropriate Internal Revenue Service Center per the form's instructions. You can get forms
and instructions by visiting our website at www.irs.gov/forms-pubs or by calling 800-TAX-FORM

(800-829-3676).

We'll make this letter and the proposed adverse determination letter available for public inspection under
Section 6110 of the Code after deleting certain identifying information. We provided to you, in a separate
mailing, Notice 437, Notice of Intention to Disclose. Please review the Notice 437 and the documents attached
that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in Notice

437.

Letter 1371 (Rev. 12-2017).
Catalog Number 40683R

If you decide to contest this determination, you can file an action for declaratory judgment under the provisions
of Section 7428 of the Code in either:

* The United States Tax Court,
* The United States Court of Federal Claims, or

* The United States District Court for the District of Columbia

- You must file a petition or complaint in one of these three courts within 90 days from the date we mailed
this determination letter to you. Contact the clerk of the appropriate court for rules and the appropriate
forms for filing petitions for declaratory judgment. You can write to the courts at the following

addresses:
¢ United States Tax ¢ US Court of Federal ¢ US District Court for the District of
Court 400 Second Claims 717 Madison Columbia
Street, NW Washington, Place, NW Washington, ¢ 333 Constitution Avenue, NW
DC 20217 DC 20005 Washington, DC 20001

Note: We will not delay processing income tax returns and assessing any taxes due even if you file a petition for
declaratory judgment under Section 7428 of the Code.

Please refer to the enclosed Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status, for
more information about the Appeals process.

You also have the right to contact the Taxpayer Advocate Service (TAS). 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 877-777-4778.

TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process. TAS
cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a

petition in a United States Court.

If you have questions, contact the person at the top of this letter.

Sincerely,

Appeals Team Manager

Enclosures:
Publication 892

cc: E

Letter 1371 (Rev. 12-2017)
Catalog Number 40683R

Date:

‘7G Department of the Treasury
SoH) Internal Revenue Service October 2, 2018
IRS Tax Exempt and Government Entities Taxpayer Identification Number.

Exempt Organizations Examinations

Form:
990 Return
Tax Year(s) Ended:
20XX, 20XX
Person to Contact:

Employee ID:
Telephone:
Fax:
Manager's Contact Information:

Employee ID:

Telephone:
Response Due Date:

November 1, 20XX

CERTIFIED MAIL — Return Receipt Requested

Dear

Why you’re receiving this letter
We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we

propose to revoke your tax-exempt status as an organization described in Internal Revenue
Code (IRC) Section 501(c)(3).

If you agree
If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and

return it to the contact person shown at the top of this letter. We'll issue a final adverse letter
determining that you aren't an organization described in IRC Section 501(c)(3) for the periods

above.

After we issue the final adverse determination letter, we'll announce that your organization is no
longer eligible to receive tax deductible contributions under IRC Section 170.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this

letter.

2. Send any information you want us to consider.

3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or
send additional information as stated in 1 and 2, above, you'll still be able to file a protest
with IRS Appeals Office after the meeting or after we consider the information.

The IRS Appeals Office is independent of the Exempt Organizations division and
resolves most disputes informally. If you file a protest, the auditing agent may ask you to
sign a consent to extend the period of limitations for assessing tax. This is to allow the

Letter 3618 (Rev. 9-2017)
Catalog Number 34809F

IRS Appeals Office enough time to consider your case. For your protest to be valid, it
must contain certain specific information, including a statement of the facts, applicable
law, and arguments in support of your position. For specific information needed for a

valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-

Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process,
generally doesn’t apply now that we've issued this letter.

4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt
Government Entities) if you feel the issue hasn't been addressed in published precedent

or has been treated inconsistently by the IRS.

If you’re considering requesting technical advice, contact the person shown at the top of
this letter. If you disagree with the technical advice decision, you will be able to appeal
to the IRS Appeals Office, as explained above. A decision made in a technical advice
memorandum, however, generally is final and binding on Appeals.

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 adverse determination letter.

Contacting the Taxpayer Advocate Office is a taxpayer right

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 877-777-4778.

For additional information
You can get any of the forms and publications mentioned in this letter by visiting our website at

www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676). '

If you have questions, you can contact the person shown at the top of this letter.

Sincerely,

Maria Hooke
Director, EO Examinations

Enclosures:
Form 886-A
Form 6018

2 Letter 3618 (Rev. 9-2017)
Catalog Number 34809F


Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX
Issues

1. Whether ( ) exempt status under

Internal Revenue Code (IRC) § 501(c)(3) should be revoked for failure to operate
exclusively in furtherance of an exempt purpose.

2. Whether exempt status should be revoked retroactively to January 1, 20XX, the first
date failed to qualify for exempt status.

Background

was formed by on April 28, 20XX in for the primary purpose of
providing assistance to individuals who live in poverty and are unable to provide for themselves
and their family.

Although located in ; is also registered with Secretary of State as a
Domestic Limited Liability Company. is the registered agent. See Exhibit 1.
On August 19, 20XX, filed Form 1023, Application for Recognition of Exemption

under Section 501(c)(3) of the Internal Revenue Code, seeking federal tax-exempt status under
IRC § 501(c)(3).

In subsequent correspondences (letters dated March 1 and 12, 20XX), advised the
IRS that he hoped in the future to have received donner (sic) advised funds from various

individuals and/or organizations.

In the letter dated June 28, 20XX, the IRS recognizes as a tax-exempt entity described
under IRC §§ 501(c)(3) and 170(b)(1(A)(vi), effective April 28, 20XX.

is operated on a calendar year basis. sole activity is receiving donation of LLC
ownership interest and cash from the same donors who contributed the LLC interest, and
distributing the cash contributions to other charities.

Board of Directors

board of directors comprised of the following:

e , director and president
° , director and treasurer
° , director and secretary
and are husband and wife. runs daily activities.
signs all acknowledgement letter after receiving LLC interest donation. also signs
check and makes deposit. maintains the books and records.

Catalog Number 20810W Page 1 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX
Neither nor received compensation from for their services. However,
emails exchange between and (discussed later under section
About ) show that compensated personally for assisting
with his charitable scheme.
In an email dated March 4, 20XX from to wrote “... Also; how
do | treat the $0 advance for the LLC in that you sent me. Was that a gift or do you
send a 1099 or what? Today is our appointment with Tax preparers.”
replied, “ : Just have your CPA add $0 to the income section of your return.
Should not be an issue. Thx.”
In another email dated October 20, 20XX from to wrote “

Also, sometime back you mentioned that you would try to find some compensation for my work
here. | am just wondering is that’s still a possibility or not.”

On October 21, 20XX, replied as follows, “.../ will send you something this year
personally for all you do as well. Yes, send me financial asap and | will get the return done.”

followed up with an email dated December 21, 20XX as follows, “.../ will send you a
check for $0 for year end. Take a few hundred dollars and fund the — account. You keep the

rest. Okay??
Filed Form 990

filed Form 990 for the tax years 20XX and 20XX and reported the following:

Assets 20XX 20XX
Cash 0 0
Investment — LLC interest ) 0
Total 0 0

- disclosed during an interview on February 8, 20XX that has only one bank

account maintained at _ which is also reflected in general ledger.
Emails exchange between ; and show that also maintain a checking
account ( ) located in did not disclose
the existence of the account. The account also did not appear on
books and records.
In an email dated October 20, 20XX from to , wrote,
“...Another item: Should | close the in ? It’s taking $0 a month for

inactivity. You gave me $0 when we opened the account but it’s been idle since then.”

Catalog Number 20810W Page 2 www.irs.gov Form 886-A (Rev. 5-2017)


Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX
Revenue 20XX 20XX
Cash contributions - 0
Non-cash contribution 0) 0
LLC income 0 0
Total income 0 )
Cash contributions represent contributions and distributions from the LLCs and donors who
donated LLC interest to . In 20XX, received $0 cash contributions/distributions from
the LLC. Instead of separately reporting the cash on the return, combined it with non-cash
contributions.
Most donors instruct to distribute the cash to other charities. The donors fill out a

“Disbursement Request Form”. On this form, the donors list other charities they wanted to
receive their distribution and amount. The donors then send the form along with a check to
to cover the contribution plus administrative fee.

deposits the check into its checking account. then issues a check to each charity
listed on the form and retains 0% of cash received for administrative fee. stated that
the fee is for processing (receiving and disbursing) the donor’s cash. The fee totaled $0 and $0

for the tax years 20XX and 20XX respectively.

LLC income represents share of income such as interest, dividends, royalties, and rental
income allocated by the LLCs. The amounts were reported on Schedule K-1.

Expenses 20XX 20XX
Grants to other charities 0 0
Other expenses 0 0
Total 0 0

Grants to other charities equated to 0.00 and 0.00 percent of total revenue for the tax years
20XX and 20XX respectively.

Preparation of Form 990

states that he prepares return Form 990 with the help of his team. However,
emails exchange between . and show that prepared the
return. For example, in an email dated July 28, 20XX from to '
, and at , wrote,
“The return will be due in 2 weeks.

! need K-1s for all LLC utilizing as the charity.

Catalog Number 20810W Page 3 www.irs.gov Form 886-A (Rev. 5-2017)


Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX
Once | have this, | can complete the return. No problem.
Please advise. Thx. ,
In an email dated November 9, 20XX from to , wrote “
: Attached is the 990 and Please print both and sign. Also attached is a detail for

Schedule R which should be attached to the Federal 990 only. Once you have these signed,
then mail the returns with the statute extension attached to both state and fed returns. Mail to
the following. Let me know if you have any questions. Blessing!

The address for mailing is:

The Fed 990 mailing address is:
Department of Treasury Internal Revenue Service Center Ogden, UT 84201-0027”
does not have a Form 990-T filing requirement and has not filed that form.

Donated LLCs Interest

received substantial non-cash contributions in the form of LLC ownership interest from
various donors. Since 20XX, received ownership interest donation in the following LLCs.
discloses that the donors were referred to by financial planners, CPAs, attorneys, and
members of his team.

LLC LLC

Catalog Number 20810W Page 4 www.irs.gov Form 886-A (Rev. 5-2017)


_ i Schedule number
Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX

Operating Agreement shows that the donor assigned his/her

ownership interest in to in 20XX.
and are owned by the same donor.
; , and

are owned by the same donor.
Membership interest in ; , , and

‘was transferred from (discussed later in the report).
Per Secretary of State, is listed as their registered agent for ;

, ; , and .

The original shareholder in '
donated 0 percent of his/her interest in the LLC to.
During the audit, provided the following for

1. Statement of Assets and Liabilities (balance sheet)

2. Bank statement from April 20XX to January 20XX for checking account #

maintained at
The Statement of Assets and Liabilities shows owns 0 percent of
, valued at $0

The bank statements show ; had $0 in its account. The only activity in this

account was a purchase of checks for $0. There was no deposit into this account. The account
was closed on January 30, 20XX and the $0 was transferred to an unknown account.

did not provide Profit & Loss Statement (or similar) for ‘, explains
that since bank service charges were the only activity, no financial statements were created.

provided Statement of Assets and Liabilities for , ;
. The Statement of Assets and Liabilities shows that ,
each holds 0 shares in

The value of 0 shares is $0 million.

Catalog Number 20810W Page 5 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX
states that no bank account was opened for : ; 1
in 20XX because they were received late in 20XX.
In the letter dated April 19, 20XX, revised the amount of LLC interest received in 20XX
from $0 to $0.
20XX 20XX
LLC Amount LLC Amount
0 0
0 0
0 0
0 0
0 0
0 0
6) 0
0 0
0 0
0 0
Total 0 0
0
Total 0

How LLC Ownership Interest is Donated to

The process begins with the donors creating a donor-advised account or donor-advised fund
with by filling out a Donor Application and paid initial set-up fee, ranging from $0 to $0.
The donors provide their information and name their donor-advised account.

The donors then assign their ownership interest in their LLC to by executing a gift
assignment agreement called Gift Assignment of Membership Interest (Gift Assignment). The
Gift Assignment specify either the number of preferred non-voting membership units or
percentage of non-voting membership interest to be assigned to . The Gift Assignment also ~
requires to agree to the terms and conditions of the Operating Agreement.

Upon accepting the LLC interest, signs the Acknowledgment of Assignment of
_Membership Units (Acknowledgment) on behalf of ._ In most case, the Acknowledgment
specifically requires to read and understand Section 7.8 of the Operating Agreement.

Section 7.8 states, “7.8 Maintenance of a Tax Exempt Member. In the event a gift of
Membership Units is made to an organization which holds tax exempt status, the Company shall
retain the right to reclaim any or all Membership Units of such Member and transfer them to an
alternate tax exempt organization, in good standing and which holds a similar mission, in the
event the Member's tax exempt status is revoked, audited, or otherwise jeopardized, in the
determination, and at the absolute and unquestionable discretion, of a majority in interest of the

Catalog Number 20810W Page 6 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX

Common Members. A gift of Membership Units of the Company to such tax exempt organization
shall be deemed null and void unless this retained right is specifically communicated to, with
reference to this Section 7.8 of the Agreement, expressly acknowledged, and agreed to, by the
receiving tax exempt organization. Notwithstanding any provision to the contrary herein,
under no circumstance shall any tax-exempt Member of the Company be liable for any
debt of the Company.”

Separately from signing the Acknowledgment, also signs the Operating Agreement

agreeing to its terms, conditions, and provisions. further signs the Schedule of
Allocation (Exhibit B) agreeing to the allocation set forth in Schedule of Allocation.

Review of Operating Agreement

provides Operating Agreement for the LLCs. The Operating Agreements reveal the
following ownership information, including profit and loss allocation.

Donor’s Donor's 's ’s Authorized | Authorized

common | preferred | common | preferred | Authorized common preferred | capital | profit loss
LLC units units units units units units units % % %

0 - 0 0 0 0 8) 0% 0% 0%
0% 0% 0%
. 0 0 ° 0% 0% 0%
0 0 0 0 0 0% 0% 0%
0 0 0 0 0 0 0% 0% 0%
0 0 0 0 0 0% 0% 0%
0 0 0 0 0 0% 0% 0%
0 0 0 0 0 0 0% 0% 0%
0 0 0 0 0 0 0 0% 0% 0%
0 0 0 0 0 0 0% 0% 0%
0% 0% 0%
0% 0% 0%

Operating Agreement not provided

0% 0% 0%

No shares info 0 00 0 0% 0%
0 - - 0 0 0 0 0% 0%
0% 0%
0 - - 0 0 0 0% 0%

- - 0 0 0 0 0% 0%

Operating agreement not provided.
0 - - 0 0 0 0 0% 0%

- 0 0 0 0 0% 0%

Catalog Number 20810W Page 7 www.irs.gov Form 886-A (Rev. 5-2017)

0%
0%
0%
0%
0%

0%
0%


Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX
0) 0 - 0 0 0 0% 0% 0%
0 0 - 0 0 0 0% 0% 0%
0 - 0 0 0 0% 0% 0%
See note 0 0 0 0% 0% 0%
0 - - ) 0) ) 0) 0% 0% 0%
No shares info 0 0 0 0% 0% 0%
0 - - 0) 0 0 0) 0% 0% 0%
is the owner of 0% 0% 0%
0 0 - 0 0) 0 0 0% 0% 0%
0 - 0 0 0 0 0% 0% 0%

The units owned by a member determine the member's capital and profit percentage. For
example, if a member owns 0 units of 0 units issued, he/she owns 0 percent of capital and profit
interest in the company. Article 5.3 of most Operating Agreement. The Operating Agreements
reveal the following notable provisions:

e Majority interest means the interest of the Common Members holding greater than 0 percent
of the total interest held by the Common Members. Article 1.16

e Preferred Member means the holder of nonvoting units. Article 1.30

e Preferred Return (Article 1.31) means with regard to a Preferred Member, starting on date
Capital Contribution is made, an annual amount equal to the lesser of:

o 0 percent of the Company's net pre-tax profit or

o 0 percent, or other agreed percentage, of the Net Asset Value (NAV) of the
unrecovered Capital Account Balance of such Preferred Member, as such balance
may change from time to time, and only in the year Company generates positive net
revenue, or

o 0 percent of the Company's net revenue (gross revenues minus cost of goods sold =
net revenues), to be calculated on an annual basis or

o Any other calculation as may be agreed upon unanimously by and between the
Members from time to time.

e Preferred Allocation Account (Article 1.28) means a separate account maintained for each
Preferred Member which is increased by (i) the amount of net profits allocable to the
Preferred Member in each fiscal year and reduced by any amount credited to the Preferred
Distribution Account along with any interest earned on such amount and (ii) interest on the
Preferred Distribution Account. The balance of this account shall be distributed to the
Preferred Member's Capital Account at the end of the current year:

Catalog Number 20810W Page 8 www.irs.gov Form 886-A (Rev. 5-2017)


Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 ‘Year/Period ended
digits) 20XX, 20XX

Preferred Allocation Account =

Beginning Balance

(+) Preferred Return (annual)

(+) Other allocated net profits

(+) Interest earned on Preferred Distribution Account

(-) Amount credited to the Preferred Distribution Account
Ending Balance _ Preferred Member's Capital Account

e Preferred Distribution Account (Article 1.29) means a separate account maintained for each
Preferred Member which is increased by (i) the amount of the Preferred Return credited to
such Preferred Member and (ii) interest on the balance of such account. The balance of this
account shall be distributed to the Preferred Member by 12/31 of the following fiscal year:

Preferred Distribution Account =

Beginning Balance
(+) Preferred Return (annual)
(+) interest earned on Preferred Distribution Account

Ending Balance _ Distribution to be Paid to Preferred Member by Dec. 31st of following

Fiscal Year

e Supermajority interest means a Member or Members holding among them at least 80

percent of all voting rights. Article 1.37

e The Manager, in most cases is the same as the donor, has exclusive management duties.
The Manager has exclusive authority, discretion, power, and control to manage the
business. Article 4.1. With respect to certain transactions, the Manager must obtain written
consent or affirmative vote of Members holding supermajority interest. Article 4.4

e Preferred shareholder has no voting right or consent right. Article 5.5

e Article 6.2 (c) — Notwithstanding anything to the contrary herein, unless otherwise agreed
upon under the Schedule of Allocations attached hereto and incorporated herein as

Exhibit B, and to the extent permitted by all applicable law:

o For all activity considered active, resulting income (or loss) shall be allocated to the
Common Members in proportion to each such Common Member’s Membership

interest;

o Deductions related to income, expenses, and losses, shall be allocated to the
Common Members in proportion to each such Common Member's Membership
Interest, except that no such deductions shall be allocated to any tax-exempt Member;

o The profit of all activities, including royalty income, not considered active shall be

allocated as follows:

> To the extent a preferred member is a tax-exempt organization, one hundred
percent (100%) to such preferred member, or as otherwise agreed as identified

in Exhibit B

Catalog Number 20810W Page 9 www.irs.gov

‘Form 886-A (Rev. 5-2017)


Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit


(May 2017) Explanations of Items

Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX

> To the extent a tax-exempt preferred member is allocated less than one hundred
percent (100%), remaining profits shall be allocated to the other Members
according to their respective Membership Interest held, or as otherwise agreed

as identified in Exhibit B; and,
o Amortization expenses shall be allocated to the Common Members in proportion to

each such Common Member’s Membership Interest.

in most cases, the allocation set forth in the Schedule of Allocation is the same as Article 6.2(c).

e Article 6.3 — Net Losses — except as specifically provided elsewhere in this Agreement, net
losses shall be allocated as follows:

o first, to Common Members who have positive capital account balance in proportion
to their respective capital account balances until such capital account balances are

reduced to zero, and
o second, to Preferred Members in proportion to their respective ownership of non-

voting units

e The Manager shall cause the Company (LLC) to distribute net operating cash flow on a
quarterly basis or at such other time as the Manager reasonably determine. However,
subject to Section 6.7 (Return of Distributions), neither the Company nor the Manager shall
be liable for the making of distributions in accordance with the provision of this section.

Article 6.4
e Transfer of membership interest is restricted. Article 7.1

e All transfers must be approved by the Manager and all Members. Article 7.2

e Restrictions do not apply to transfers:
o To the Company
o To a trust for the benefit of Member
o By inter vivo gift or by testamentary transfer to any spouse, parent, sibling, in-law,
child, or grand-child of the Member or charitable remainder trust, or donor-advised
family foundation; or.
o To any Affiliate (as defined in Article 1.2) of the Member. Article 7.3.

« In case of transfer to a third party, the Company as the first right to purchase the
membership interest from the member. Article 7.4

e Any transfer of membership units made involuntarily, except for those pursuant to Section
7.8, shall be deemed null and void and not be recognized by the Manager and the
transferee shall have no rights associated with the ownerships of such units.

e Maintenance of tax exempt member. Article 7.8. See complete description above.

Catalog Number 20810W Page 10 www.irs.gov Form 886-A (Rev. 5-2017)


Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX

e Provisions in LLC Agreement of , ; ;
and , are essentially identical. In particular, Article 8.1 of LLC’s
Agreement provides that the Manager has sole discretion in determining the timing and
amount of distribution of cash flow and net proceeds. No less than 0 percent of net cash
flow and net proceeds shall be distributed each year beginning in the third year of the
Company’s existence. The Manager’s determination regarding whether or not to make
distribution in excess of necessary distribution and the amount of distribution to be made
shall be final and binding on all members.

LLCs Cash Distributions to

Schedule K-1 shows the following cash distributions from the LLCs to

20XX
LLC 20XX
re) 0
0 0
0 0

- 0
- 0
- 0
0 -
- 0
0
- 0
0 0
- 0
0 0
0 -
0 0
- 0
- 0
- 0
- 0
0 -
- 0

Catalog Number 20810W Page 11 www.irs.gov Form 886-A (Rev. 5-2017)


Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX
0 0
Form 8283
During the audit, provided Forms 8283, Noncash Charitable Contributions, for donors who
contributed LLC membership units to in 20XX and 20XX. Form 8283 is required when the

amount of deduction for all noncash gifts is more than $0.

appraised the value of LLC ownership units for charitable contribution deduction
purposes and signed all Form 8283.

About

On April 3, 20XX, the United States of America, Plaintiff, filed a Complaint for Permanent
Injunction and Other Relief against , Defendant. Per the complaint.

1. From 19XX to the present, (“ ”) has organized,
promoted, and operated an elaborate—and bogus—charitable giving tax scheme
throughout the United States. Through this scheme, creates an entity for
each scheme participant and advises them to transfer assets to the new entity.
then causes the participants to purportedly “donate” or “assign” an interest in
these entities to charities that controls. then “appraises” the
purportedly donated interests in a manner that fails to comply with the law and
generally accepted appraisal standards. Finally, prepares the federal
income tax return documents to claim the bogus charitable contribution

deductions.

2. This entire tax scheme occurs only on paper. Participants never actually transfer
or donate anything to purported charities. In some egregious instances,
participants claim bogus charitable deductions for nonexistent, fictional assets
that fabricates.

3. Regardless of the purported form, advises scheme participants to take
unwarranted tax deductions for charitable donations that knows were
never made, and, in some instances, for assets that did not exist. sells this
scheme to the clients of financial planners and Certified Public Accountants by
misrepresenting his experience, his credentials, and the merits of his charitable
giving tax scheme. In return, scheme participants pay substantial fees to
based on the purported value of the assets initially transferred to the entities.

Catalog Number 20810W Page 12 www.irs.gov Form 886-A (Rev. 5-2017)


Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX

4. charitable giving tax scheme has harmed the United States by depriving

the government of tax revenue. The IRS has identified specific transactions that,

through 20XX, cost the United States Treasury more than $0 lost tax

revenue. And while the IRS has assessed and will continue to assess scheme
participants with significant tax liabilities, it will likely never fully recover the
monies bilked from the Treasury.

5. The United States brings this Complaint pursuant to 26 U.S.C. §§ 7402, 7407,
and 7408 to enjoin and all persons and entities in active concert or
participation with from, among other things, directly or indirectly:

a. Making or furnishing or causing another person to make or furnish a
statement with respect to the allowability of any deduction or credit, the
excludability of any income, or the securing of any other tax benefit, or
otherwise providing tax advice, in exchange for compensation;

b. Preparing (or assisting others in preparing) appraisals in connection with any
federal tax matter;

c. Acting as federal tax return preparers, or filing, assisting in, or directing the
preparation or filing of federal tax returns, amended returns, or other related
documents or forms for any person or entity other than his own tax returns;
and

d. Organizing or assisting in the organization of a partnership or other entity,
any investment plan or arrangement, or any other plan or arrangement
concerning charitable contribution deductions.

The United States also seeks to disgorge the ill-gotten gains that derived
from this bogus charitable giving tax scheme.

Bogus Charities

Since 19XX, has established at least three purported charities in
(1) (" "); (2)

( "); and (3) C”)
(collectively, the “Bogus Charities”). controlled all three purported charities

and operated them in the same manner.

According to their respective Articles of Incorporation, the Bogus Charities were
purportedly organized for charitable purposes. submitted a Form 1023,
Application for Recognition of Exemption Under Section 501(c)(3) of the Internal
Revenue Code (“Tax Exempt Status Application”), on behalf of each of the
Bogus Charities. The IRS granted the Bogus Charities tax exempt status based
on the Tax Exempt Status Applications that submitted.

Over the years, is listed on documents filed with the Secretary of
State’s Office as an officer, treasurer, director, incorporator, or registered agent
for the Bogus Charities. has also attempted to avoid IRS scrutiny by

Catalog Number 20810W Page 13 www.irs.gov Form 886-A (Rev. 5-2017)


Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX

affiliating his parents or other individuals with the Bogus Charities on filings with
the Secretary of State’s Office. At all times, however, controlled
the Bogus Charities and was the only true officer and director. The Bogus
Charities had no employees.

On May 16, 20XX, executed an agreement with the IRS on behalf of
retroactively revoking tax exempt status as of January 1, 20XX. The IRS
concluded, and did not dispute, that was not engaged primarily in

activities for exempt purposes, and its net earnings inured to the benefit of
private individuals—i.e., him and his family.

On 20XX, , on behalf of , Stipulated to an entry of judgment
against it in U.S. Tax Court for past due taxes for 20XX and 20XX. owed
taxes on its income because it was not a tax exempt entity.

On May 19, 20XX, executed agreements with the IRS on behalf of

and retroactively revoking and tax exempt status as of
January 1, 20XX and January 1, 20XX, respectively, because used

and as tools for promoting, organizing, and executing his charitable giving tax

scheme.

Bogus Charitable Transactions

Under the first step in scheme, creates a partnership or limited
liability company (the “Entity” or “Entities”) for scheme participants. Regardless of
their form, the Entities are holding companies that exist solely to facilitate

scheme. prepares and files all paperwork necessary to create the
Entities, including the partnership or LLC agreements.

Next, the scheme participants transfer “property” to the newly formed Entities
using contractual documents prepared by . Some participants, at
direction, claim to transfer cash or real property to the Entities while others
purportedly transfer backdated promissory notes and fabricated intellectual

property. Over time, varied how he executed this scheme step, but the
variations were meaningless from both economic and federal income tax
perspectives.

then drafts the paperwork necessary to cause the scheme participants to
“donate” or “assign” an interest in the newly-created Entities to one of the three

Bogus Charities.

Some participants purport to donate a % non-controlling interest in their Entity,

while others a 0% interest. In some cases, misrepresents the “transaction”
to the participants, telling such participants that they were “contributing” a 0%
non-controlling interest, when, in fact, completed the transactional

paperwork to show a 0% “contribution.”

Catalog Number 20810W Page 14 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX

then causes the Bogus Charities to send contemporaneous written
acknowledgments of the purported contributions to the scheme participants.

appraises each “contribution” to facilitate the bogus charitable deductions.
Not only are the appraisals baseless, but is prohibited by law from
providing them.

completes, signs, and provides to each scheme participant IRS Forms
8283, Noncash Charitable Contributions (“Form 8283"), which are necessary to
claim a non cash charitable contribution of more than $0. sends the
scheme participants the following instructions: “Please find IRS Form 8283 which
has been completed and signed. Please attach the Form 8283 with your [tax
year] Form 1040. After you have done this, then simply file the Return. . . . Use
the value of the gift on Form 8283 (page 2 Part I) as a DEDUCTION on
SCHEDULE A — ITEMIZED DEDUCTION — CHARITABLE CONTRIBUTION.”

In following instructions, the scheme participants then attach the
prepared Form 8283 to their personal federal income tax returns to claim
unwarranted charitable deductions. The Forms 8283 are based entirely on the
bogus appraisals that prepares to facilitate this scheme.

On paper, it appears that the participants donate something of value to the
Bogus Charities. repeatedly advises the scheme participants to take
actions to give his scheme substance. This was mere window dressing, however,
designed to disguise tax shelter. In reality, the scheme participants retain
complete control over their Entities and their Entities’ assets and continue to use
the purportedly donated assets as if nothing ever happened.

After executing the “transaction,” the Bogus Charities do not take dominion or
control over the Entities or their assets. The Bogus Charities are simply vehicles
through which executes his elaborate charitable giving tax scheme.

told potential participants that they could establish Donor Advised Funds
(‘DAFs”) through the Bogus Charities, but this was a false statement.

To establish a DAF, the Bogus Charities were required to take control of the
purportedly contributed Entity interests. As explained throughout this Complaint,
the scheme participants never gave up control of the purportedly contributed
assets, which knew. If scheme participants actually wanted to make a
donation to a charity through a Bogus Charity— which many participants did not
do— required them to send to him a “Disbursement Request Form” along
with a check made out to one of the Bogus Charities. These “Disbursement
Request Forms” merely gave the appearance of a valid DAF, but a valid DAF
would never have required an additional check from the participant. This process

Catalog Number 20810W Page 15 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX

shows that the Bogus Charities never had dominion or control over any of the
purported contributions.

Some participants in tax scheme, upon advice and with his
assistance, have taken out substantial loans from their respective Entities even
after transferring their ownership interest to one of the Bogus Charities. These
loans are made on beneficial terms and sometimes go unpaid. testified in
a deposition that most participants borrowed their Entities’ assets or used
the assets as collateral for some other purpose.

Consequently, participants in scheme receive a large income tax
deduction and still get the use and enjoyment of the assets that generated the

deduction.

Because each of scheme participants claimed non-cash charitable
contributions of over $0 on their tax returns based on the purported donation of
their Entity interests to the Bogus Charities, they were required to obtain qualified
appraisals of the purportedly donated Entity interests from “qualified appraisers.”

in reality, performs the appraisals for the scheme participants. does
not tell scheme participants that he is the appraiser prior to performing the
appraisals. completed and signed the Form 8283 for each of the
participants, which based entirely on the bogus appraisals he prepared.

often listed the following credentials on the Form 8283 after his signature:

claims that he “implemented and consulted on over 0 charitable plans in
States encompassing $: since 19XX [and] performed over 0 qualified
appraisals of closely-held businesses since 20XX."

The appraisals uses in his tax scheme are bogus because is
excluded by law from preparing appraisals in connection with this scheme, the
appraisals are not qualified appraisals within the definition of the Internal
Revenue Code, and the appraisals are based on unreliable methods.

profits from his scheme by charging a percentage fee based on the value
of the purportedly donated assets. His standard fee is “O% of net assets
transferred [to the Bogus Charities] up to but not in excess of $0, plus 0% of net
assets transferred which exceed $0.”

Examples of Charitable Giving Scheme

sold his charitable giving tax scheme to based Participant 1 through
Participant 1’s financial planner. Participant 1 claimed a $0 charitable contribution
deduction on his 20XX federal income tax return. charged $0 for

Participant 1 to participate in this scheme.

Catalog Number 20810W Page 16 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
. re
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX
Participant 1 decided to participate in charitable giving tax scheme in
April 20XX. used an existing LLC and illegally backdated every document

he prepared for Participant 1 so that Participant 1 could claim a charitable
deduction on his 20XX federal income tax return.

On April 10, 20XX, and Participant 1 completed an LLC Agreement to
transfer an LLC that had previous established in 20XX to Participant 1.
backdated the LLC Agreement to December 29, 20XX.

Then, drafted a promissory note through which Participant 1 promised to
pay his LLC $0. backdated the promissory note to December 31, 20XX.
The promissory note was not secured by any collateral and charged a 0%
interest rate on outstanding balances in 20XX and 0% on any outstanding
balances thereafter.

also drafted an assignment agreement through which Participant 1
purported to assign 0% of his LLC to backdated the assignment
agreement as well to December 31, 20XX.

Despite executing the assignment agreement, Participant 1 believed, based on
misrepresentations, that Participant 1 only assigned a non-controlling LLC
interest to

On April 17, 20XX, Participant 1 opened a bank account in the LLC’s name.
Participant 1 was the only person with signature authority over this account.
Participant 1 never gave or anyone at control over the account.

Later in 20XX, Participant 1 transferred $0 to the LLC’s bank account to “repay”
the bogus note’s principal. Participant 1 did not pay any interest.

then prepared an appraisal report backdated to January 31, 20XX—more
than two months prior to the transfer of the LLC to Participant 1—in which
“appraised” Participant 1’s purported gift of LLC units to at $0.

backdated appraisal does not describe or analyze the LLC’s only

asset— the promissory note. Rather, applied his standard 0% discount for
lack of control, despite stating that owned 0% of Participant 1’s LLC, and a
0% discount for lack of marketability. provided no meaningful explanation

for these discounts.

then prepared an IRS Form 8283 so that Participant 1 could claim a $0
charitable contribution for the purported donation to on his 20XX federal
income tax return.

Catalog Number 20810W Page 17 www.irs.gov Form 886-A (Rev. 5-2017)


Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX
The IRS audited Participant 1’s tax return and disallowed the $0 charitable

contribution.

In January 20XX, after the IRS initiated the audit of Participant 1’s 20XX tax

return, Participant 1 made four charitable distributions totaling $0 to —_—. In order
to do so, Participant 1 completed “Disbursement Request Form,” but also
sent a check to in that amount.

Additional information can be found ~.. _.

and His Bogus Charities’ Connections to

and his Bogus Charities’ connections to include, but are not limited to:
e Per Secretary of State, is the registered agent for

e Membership units in ; ' ,
were transferred from ( )to . is one of the
Bogus Entities formed and controlled by

e is the registered agent for . i, ; ;
, and

e Form 8283 provided by shows that appraised the value of LLCs for all
donors who donated their ownership interest to

e Emails exchange between . and show involved with
. Below are some of the emails exchange.

In an email dated September 19, 20XX from to and at
, wrote, “ : Thx. Please check K-1. It has ’s

name personally with a zero K-1. Need K-1 for this LLC.

Here are the clients who have LLCs with K-1s to the charities. Please send these to me
asap. | need ALL of these before | can prepare the and returns. You have sent
some but not all of these to date. Thx! ”

The clients listed in his email were donors who donated LLC interest to
is , one of bogus charities.
In an email dated April 4, 20XX from to wrote, “

We did finally get the large deal closed | told you about earlier this year.

/ will be sending you the 8283 form to sign this week for the gift.

Catalog Number 20810W Page 18 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX

Will get everything else later but we need to get this formed [sic] signed so that client/donor
can prepare his tax return.

This gift will be around $0. Nice case.

Thx for your assistance as always! Hope to have some more this year.

God Bless!
The deal discussed in this email is

In an email dated November 10, 20XX from to wrote, “
| will be working at office next week and part of that will be having them call the

clients and having them contribute dollars to
Will keep you posted. God Bless!!”

In an email dated November 10, 20XX from to wrote, “
| will FAX you a request from Secretary of State to submit a Business Entity Report

by December 31°. Also: FYI; the bank there is charging the account $0 a month for
inactivity. Maybe another deposit will forestall any further charge.”

Law

IRC § 501(c)(3) exempts from income tax 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 (Treas. Regs.) § 1.501(c)(3)-1(a)(1) provides 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.

Treas. Regs. § 1.501(c)(3)-1(a)(2) provides that, the term exempt purpose or purposes, as used
in this section, means any purpose or purposes specified in section 501(c)(3), as defined and

elaborated in paragraph (d) of this section.

Treas. Reg. § 1.501(c)(3)—1(c)(1) provides that an organization will be regarded as operated
exclusively for one or more exempt purposes only if it engages primarily in activities which

Catalog Number 20810W Page 19 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX

accomplish one or more of such exempt purposes specified in § 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.

The existence of a substantial nonexempt purpose, regardless of the number or importance of
exempt purposes, will cause failure of the operational test. Better Business Bureau of
Washington, D.C. v. U.S., 326 U.S. 279 (1945).

Notice 2004-30

The Internal Revenue Service and the Treasury Department are aware of a type of transaction,
described below, in which S corporation shareholders attempt to transfer the incidence of
taxation on S corporation income by purportedly donating S corporation nonvoting stock to an
exempt organization, while retaining the economic benefits associated with that stock. This
notice alerts taxpayers and their representatives that these transactions are tax avoidance
transactions and identifies these transactions, and substantially similar transactions, as listed
transactions for purposes of § 1.6011-4(b)(2) of the Income Tax Regulations and §§ 301.6111-
2(b)(2) and 301.6112-1(b)(2) of the Procedure and Administration Regulations. This notice also
alerts parties involved with these transactions to certain responsibilities that may arise from their

involvement with these transactions.

FACTS

In a typical transaction, an S corporation, its shareholders, and an organization exempt from tax
under § 501(a) and described in either § 501(c)(3) or § 401(a) of the Internal Revenue Code
(such as a tax-qualified retirement plan maintained by a state or local government) (the exempt
party) undertake the following steps. An S corporation issues, pro rata to each of its
shareholders (the original shareholders), nonvoting stock and warrants that are exercisable into
nonvoting stock. For example, the S corporation issues nonvoting stock in a ratio of 0 shares for
every share of voting stock and warrants in a ratio of 0 warrants for every share of nonvoting
stock. Thus, if the S corporation has 0 shares of voting stock outstanding, the S corporation
would issue 0 shares of nonvoting stock and warrants exercisable into 0 shares of nonvoting
stock to the original shareholders. The warrants may be exercised at any time over a period of
years. The strike price on the warrants is set at a price that is at least equal to 0 percent of the
purported fair market value of the newly issued nonvoting stock on the date the warrants are
granted. For this purpose, the fair market value of the nonvoting stock is claimed to be
substantially reduced because of the existence of the warrants.

Shortly after the issuance of the nonvoting stock and the warrants, the original shareholders
donate the nonvoting stock to the exempt party. The parties to the transaction claim that, after
the donation of the nonvoting stock, the exempt party owns 0 percent of the stock of the S
corporation. The parties further claim that any taxable income allocated on the nonvoting stock
to the exempt party is not subject to tax on unrelated business income (UBIT) under §§ 511
through 514 (or the exempt party has offsetting UBIT net operating losses). The original
shareholders might also claim a charitable contribution deduction under § 170 for the donation

Catalog Number 20810W Page 20 www.irs.gov Form 886-A (Rev. 5-2017)


Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX

of the nonvoting stock to the exempt party. In some variations of this transaction, the S
corporation may issue nonvoting stock directly to the exempt party.

Pursuant to one or more agreements (typically redemption agreements, rights of first refusal,
put agreements, or pledge agreements) entered into as part of the transaction, the exempt party
can require the S corporation or the original shareholders to purchase the exempt party’s
nonvoting stock for an amount equal to the fair market value of the stock as of the date the
shares are presented for repurchase. In some cases, the S corporation or the original
shareholders guarantee that the exempt party will receive the fair market value of the nonvoting
stock as of the date the stock was given to the exempt party if that amount is greater than the
fair market value on the repurchase date.

Because they own 0 percent of the voting stock of the S corporation, the original shareholders
have the power to determine the amount and timing of any distributions made with respect to
the voting and nonvoting stock. The original shareholders exercise that power to cause the S
corporation to limit or suspend distributions to its shareholders while the exempt party
purportedly owns the nonvoting stock. For tax purposes, however, during that period, 0 percent
of the S corporation’s income is allocated to the exempt party and 0 percent of the S
corporation’s income is allocated to the original shareholders. The transaction is structured for
the original shareholders to exercise the warrants and dilute the shares of nonvoting stock held
by the exempt party, or for the S corporation or the original shareholders to purchase the
nonvoting stock from the exempt party at a value that is substantially reduced by reason of the
existence of the warrants. In either event, the exempt party will receive a share of the total
economic benefit of stock ownership that is substantially lower than the share of the S
corporation income allocated to the exempt party.

DISCUSSION

The transaction described in this notice is designed to artificially shift the incidence of taxation
on S corporation income away from taxable shareholders to the exempt party. In this manner,
the original shareholders attempt to avoid paying income tax on most of the S corporation's
income over a period of time.

The Service intends to challenge the purported tax benefits from this transaction based on the
application of various theories, including judicial doctrines such as substance over form. Under
appropriate facts and circumstances, the Service also may argue that the existence of the
warrants results in a violation of the single class of stock

requirement of § 1361(b)(1)(D), thus terminating the corporation’s status as an S
corporation. See, e.g., §§ 1.1361-1(1)(4)(ii) and (iii).

Transactions that are the same as, or substantially similar to, the transaction described in this
notice are identified as “listed transactions” for purposes of §§ 1.6011-4(b)(2), 301.6111-2(b)(2),
and 301.6112-1(b)(2) effective April 1, 20XX, the date this notice was released to the public.
Independent of their classification as listed transactions, transactions that are the same as, or
substantially similar to, the transaction described in this notice may already be subject to the

Catalog Number 20810W Page 21 www.irs.gov Form 886-A (Rev. 5-2017)


Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX

disclosure requirements of § 6011 (§ 1.6011-4), the tax shelter registration requirements of §
6111 (§ 301.6111-1T and § 301.6111-2), or the list maintenance requirements of § 6112 (§
301.6112-1). Under the authority of §1.6011-4(c)(3)(i)(A), the exempt party in the listed
transaction described in this notice will also be treated as a participant in the transaction
(whether or not otherwise a participant). The exempt party will be treated as participating in the
transaction for the taxable year of the purported donation, the taxable year of the reacquisition,
and all intervening taxable years. Pending further review and possible additional guidance, this
notice does not apply to any investment in employer securities, as defined in § 409(l), by an
employee stock ownership plan subject to the requirements of § 409(p).

Persons who are required to register these tax shelters under § 6111 but have failed to do so
may be subject to the penalty under § 6707(a). Persons who are required to maintain lists of
investors under § 6112 but have failed to do so (or who fail to provide those lists when
requested by the Service) may be subject to the penalty under § 6708(a). In addition, the
Service may impose penalties on parties involved in these transactions or substantially similar
transactions, including the accuracy-related penalty under § 6662.

The Service and the Treasury Department recognize that some taxpayers may have filed tax
returns taking the position that they were entitled to the purported tax benefits of the type of
transaction described in this notice. These taxpayers should take appropriate corrective action
and ensure that their transactions are disclosed properly.

Taxpayer's Position

position is not known.

Government’s Position

Issue 1

Treas. Regs. § 1.501(c)(3)-1(a)(1) provides in order to be exempt under IRC § 501(c)(3), an
organization must be both organized and operated exclusively for one or more of the purposes
specified in IRC § 501(c)(3).

Treas. Reg. § 1.501(c)(3)—1(c)(1) provides that an organization will be regarded as operated
exclusively for one or more exempt purposes only if it engages primarily in activities which
accomplish one or more of such exempt purposes specified in § 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. See also Better Business Bureau of Washington, D.C. v. U.S.

The facts shows that more than an insubstantial part of activities are not in furtherance of
an exempt purpose. These activities included:

1. Participating in the S Corporation Tax Shelter scheme.
2. Operating as a vehicle to assist carrying out his abusive charitable scheme.

Catalog Number 20810W Page 22 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX
These two activities disqualify from exempt status under IRC § 501(c)(3).

Discussion of the activities above

1. is a participant in the S Corporation Tax Shelter scheme.

Transactions that are the same or substantially similar to those described in Notice 2004-30 are
designed to artificially shift the incidence of taxation on S corporation income away from taxable
shareholders to the exempt party. In this manner, the original shareholders attempt to avoid
paying income tax on most of the S corporation’s income over a period of time. The shifting of
taxation away from the taxable shareholders is possible due to the exempt party generally does
not pay tax on its income. Since inception, has not paid any tax on its income. Notice
2004-30 designated these type of transactions as listed transactions.

In determining whether the donations of non-voting LLC membership units to are the same
or substantially similar to Notice 2004-30, the provisions in the Operating Agreements and other
relevant facts are examined. These provisions include:

i. The original shareholders donated nonvoting membership units to
ii. | The original shareholders retain control of the LLC via their holdings of voting

membership units and exclusive management rights.
ii. | The original shareholders have the power to determine the amount and timing of any

distributions. Although the Operating Agreement requires annual distributions, in
practice, some LLCs have not made a distribution to

iv. is allocated 0 percent or more of the profit, while the original shareholders are
allocated 100 percent of the loss.
v. The LLCs have the first right to purchase nonvoting membership units. With the

original shareholders owning all of voting units and their exclusive management right,
they can issue additional share to dilute the share of nonvoting stock held by

Discussion of the above factors

i. | The original shareholders donated nonvoting membership units to

~ Similar to Notice 2004-30, the original shareholders donated nonvoting membership units to
, while retaining voting membership units. As the holder of nonvoting membership units,
has no voting right and consent right. Article 5.5.

The only two exceptions were and . The original shareholder of
these two LLCs donated 0 voting membership units to , Which give 0 percent of
voting rights. Even in these two isolated cases, was powerless due to the Supermajority
rule set forth in Article 1.37. Supermajority interest means a Member or Members holding
among them at least 0 percent of all voting rights. With 0 percent of voting rights, lacks the
votes to override the decision of the original shareholder. Even in these two cases, Article 7.8
gives the donors the rights to take back the donated interest if was to be audited or its
exempt status is revoked.

Catalog Number 20810W Page 23 www.irs.gov Form 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX

ii. | The original shareholders retain control of the LLC via their holdings of voting
membership units and exclusive management rights.

Similar to Notice 2004-30, after the original shareholders donated nonvoting membership units
to , they still own O to 0 percent of voting membership units. Furthermore, Article 4.4. gives
the original shareholders exclusive management rights. Being the holder of voting units and
manager of the LLC allows the original shareholder to retain control of the LLC.

Furthermore, Article 7.8 gives the donors the rights to take back the donated interest if
was to be audited or its exempt status is revoked. This shows not only the original shareholders
retain control of the LLC, they also retain control of the ownership interest donated to

iii. | The original shareholders have the power to determine the amount and timing of any
distributions.

In Notice 2004-30, because they own 0 percent of voting stock of the S Corporation, the original
shareholders have the power to determine the amount and timing of any distributions.

In this case, the original shareholders, also Manager of the LLCs, have the power to determine
the amount and timing of distributions. Per the Operating Agreement, a preferred member only
receive a fixed percentage of the LLC's income as distribution. The distribution is the lesser of 0
percent of LLC income or 0 percent of their capital account balance. The distribution is to be
made by December 31 of the following fiscal year. See Preferred Return, Preferred Allocation,
and Preferred Distribution.

In practice, some LLCs did not make any distributions to in 20XX and 20XX.

In the case of ; ; , , and
, the Manager, who is also the original donor or his/her representative, has the sole

discretion in determining the amount and timing of distributions, which won't occur until the third
year of the LLC’s existence.

iv. _ is allocated 0 percent or more of the profit, while the original shareholders are
allocated 0 percent of the loss. The Special Allocation Provisions further allocate all
passive income to and all active income and deductions to the original shareholders.

In Notice 2004-30, 0 percent of the S Corporation income is allocated to the exempt party and
10 percent to the original shareholders.

It’s the same in this case. In many instances, regardless of percentage of membership
interest, Article 6.2(c) of the Operating Agreement and Schedule of Allocation allocate:

e 0 to 0 percent of income to , a preferred member
e all passive income to
e 0 to 0 percent of losses to the common members

Catalog Number 20810W Page 24 www.irs.gov Form 886-A (Rev. 5-2017)


Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX

e all active income, deductions, amortization expenses, and losses to the common
members

v. The LLCs have the first right to purchase nonvoting membership units.

In Notice 2004-30, the exempt party can require the S Corporation or the original shareholder to
purchase its nonvoting stocks.

Although there were no indications that warrants were issued in this case, the Operating
Agreement provides the LLC with the first option to repurchase nonvoting units. In these
LLCs, the donors, their spouse and/or family members are the sole holders of voting units. They
also act as the LLC’s manager. They have the power to issue additional shares to the LLC or
increase the authorized shares so they can issue additional preferred shares. Such issuance of
additional shares may dilute the value of those share already held by . Given has no
voting and consent rights, there’s nothing it can do to prevent the issuance of additional shares.

In summary, the facts show the transactions in this case are the same or substantially similar to
those described in Notice 2004-30. Therefore, it is concluded that was a participant in the
S-Corporation Tax Shelter scheme as described in Notice 2004-30.

2. acts as a vehicle of bogus charitable scheme.

As stipulated in _ charitable giving
scheme is designed to assist his wealthy clients improperly reducing their tax liability by taking
unwarranted charitable contribution deductions. scheme has harmed the United
States by depriving the government of tax revenue. The IRS has identified specific transactions
that, through 20XX, cost the United States Treasury more than $0 in lost tax revenue.

To facilitate his scheme, needed a charity described under IRC § 501(c)(3) to take the

bogus contributions, as contributions to such charity is tax deductible. In the beginning,
created his bogus charities ; , and so he could facilitate his scheme.

Once scheme was exposed, the IRS revoked , ,and —’s tax
exempt status, which agreed to. ©

then looked for other charity to carry on his scheme. ~ is that charity. Facts
connecting to scheme included, but are not limited to:

e Per Secretary of State, is the registered agent for

° prepared return Form 990.

e appraised the value of ownership interest for donors who donated their interest
to . signed all Form 8283.

Catalog Number 20810W Page 25 www.irs.gov Form 886-A (Rev. 5-2017)


Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
| Name of taxpayer Tax Identification Number (last 4 Year/Period ended
digits) 20XX, 20XX

° sought approval from on important matters such as closing the bank
account at ( ). The emails exchange show that gave
money to to open a checking account at under name.

e Emails exchange between . and , dating back to January 20XX. The
emails exchange involved matters ranging from preparation and filing of Form 990 to
closing a big deal that was facilitating for his client, the $0 i LLC interest
donation to

In conclusion, the facts show that was operated as a vehicle of bogus

charitable scheme.

The two activities discussed above were more than an insubstantial part of activities.

These two activities did not further one or more exempt purposes described in IRC § 501(c)(3).

Therefore, exempt status under IRC § 501(c)(3) should be revoked.

Issue 2

activities remain the same since inception. The Operating

Agreement shows began accepting LLC interest donation in 20XX. This shows that

became a participant in tax avoidance scheme in 20XX.

Therefore, it’s warranted to revoke exempt status retroactively to January 1, 20XX, the

first date it was determined was not operated to further its exempt purpose.

Conclusion

is not operated exclusively in furtherance of an exempt purpose described in IRC §
501(c)(3). Its exempt status should be revoked retroactively to January 1, 20XX. is
required to file Form 1120, U.S. Corporation Income Tax Return, for the tax years 20XX, 20XX,

and all future years.

Catalog Number 20810W Page 26 www.irs.gov Form 886-A (Rev. 5-2017)