IRS revokes a self-declared 501(c)(3)'s exemption for funneling contractor donations into cash grants to individual homeowners (private benefit)

Plain-English summary

An organization that called itself a nonprofit public benefit corporation obtained
streamlined 501(c)(3) recognition in 2016 by filing Form 1023-EZ and attesting that it
was organized and operated exclusively for charitable purposes. On audit, the IRS found
it ran a program that gave small cash grants (mostly loaded onto prepaid gift cards) to
individual homeowners who paid for their own energy- and water-efficient home
improvements, working through a network of vetted contractors. Most of the
organization's money came from those same contractors, with one contractor acting as the
primary donor, and its website featured a "project calculator" that recast a homeowner's
otherwise non-deductible improvement as a purported charitable contribution.

The IRS concluded the organization flunked both prongs of the exemption test. It failed
the organizational test because its articles and bylaws did not limit its purposes to
501(c)(3) purposes. It failed the operational test because the real beneficiaries were
select individual homeowners and a for-profit contractor, not a charitable class, so more
than an insubstantial part of its activities served private, not public, interests. Citing
Rev. Rul. 2006-27, Rev. Rul. 67-367, American Campaign Academy, and Giving Hearts,
the IRS revoked the exemption effective January 1 of the first year under examination.
Contributions are no longer deductible under IRC § 170, and the organization must file
Form 1120 going forward. The takeaway: an "environmental" or "conservation" label does not
make a program charitable when it primarily subsidizes specific homeowners and the
businesses that serve them.

Ruling snapshot

• Question: Should the organization's 501(c)(3) exemption be revoked for failing the organizational and operational tests where it grants funds to designated homeowners and is funded largely by the contractors who benefit?
• Outcome: Revocation (exemption revoked effective January 1 of the first exam year; contributions no longer deductible under § 170)
• Key authorities: IRC §§ 501(c)(3), 170, 7428; Treas. Reg. § 1.501(c)(3)-1(a), (b), (c); Rev. Rul. 2006-27; Rev. Rul. 67-367; American Campaign Academy v. Commissioner, 92 T.C. 1053; Giving Hearts, Inc. v. Commissioner, T.C. Memo 2019-94

Full text (IRS public release)

Transcriber's note: The text below is a proofread OCR transcription of the scanned
release, which comprises the final adverse determination letter, the proposed-revocation
cover letter (Letter 3618), and a 13-page Form 886-A (Explanation of Items). The
repeating Form 886-A header/footer furniture has been replaced with [Page N] markers,
and obvious OCR misreads have been corrected where the intended word is unambiguous;
wording is otherwise verbatim, so some minor scanning artifacts remain. The IRS redacted
names, dates, dollar amounts, and other identifying details before release, so figures and
identities appear as gaps in the original.

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
1100 Commerce Street, MC 4920DAL
Dallas, TX 75242

aes

TAX EXEMPT AND

GOVERNMENT ENTITIES
DIVISION

Dato:

Number: 202216020 January 6, 2021

Release Date: 4/22/2022 Taxpayer ID Number:
Form:
Tax Period(s) Ending:
Person to Contact:
Identification Number:
Telephone Number:

UIL: 501.03-00

’ CERTIFIED MAIL — Return Receipt Requested
LAST DAY FOR FILING A PETITION WITH THE TAX COURT:

Dear

This is a final determination that you do not qualify for exemption from federal income tax
under Internal Revenue Code (IRC) Section 501(a)} as an organization described in IRC

Section 501({c)(3), effective January 1,20 . Your determination letter dated September 26,
20 ~=is revoked.

Our adverse determination as lo your exempt status was made for the following reasons’

Organizations described in IRC Section 501(c)(3) of the Code and exempt
under Section 501{a) must be both organized and operated exclusively for
exempt purposes. You have not demonstrated that you are operated
exclusively for charitable, educational, or other exempt purposes within the
meaning of Section 501(c)(3). An organization will not be so regarded if more
than an insubstantial part of its activities is not in furtherance of an exempt
purpose. You have not established that you have operated exclusively for an
exempt purpose.

As such, you failed fo meet the requirements of IRC Section 501{c)(3) and Treasury
Regulations Section 1.501(c)(3)-1{a), in that you have not established that you were
organized and operated exclusively for exempt purposes and that no part of your earnings
inured to the benefit of private shareholders or individuals.

Contributions to your organization are no longer deductible under IRC Section 170.

1

; Organizations that are not exempt under IRC 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 IRC Section 7428 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 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, NW
Washington, DC 20217

U. S. Court of Federal Claims
717 Madison Place, NW
Washington, DC 20005

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

Processing of income tax returns and assessments of any taxes due will not be delayed if you
file a petition for declaratory judgment under IRC Section 7428.

We'll notify the appropriate state officials (as permitted by law) of our determination that you
aren't an organization described in IRC Section 501(c)(3).

You may be eligible for help from 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 1-877-777-4778.

Taxpayer Advocate assistance can’t be used as substitute for established IRS procedures,
formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or
technically correct tax determination, nor extend the time fixed by law that you have to file a
petition in Court. The Taxpayer Advocate can, however, see that a tax matter that may not have
been resolved through normal channels gets prompt and proper handling.

You can get any of the forms or publications mentioned in this letter by calling 800-TAX-FORM
(800-829-3676) or visiting our website at www.irs.gov/forms-pubs.

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,
Enclosures: —
Publication 892 hon J, Kitbag >
Sean E. O'Reilly

Director, Exempt Organizations Examinations
2

Department of the Treasury Date:
Internal Revenue Service July 2, 2020
Tax Exempt and Government Entities Taxpayer ID number:

Form:

Tax periods ended:

Person to contact’

ID number:
Telephone:
Fax:

Manager's contact information:

CERTLFLED MAIL — Return Receipt Requested ID number:
Telephone:

Response due date:

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’ Il 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 | 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 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.

Hf 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. taxpayetadvocate. its gov ot call 877-777-4778.

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,
for Sean E. O’Reilly
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A, Form 6018
Publication 892, Publication 3498

issues
Should {the Organization) exemption from Federal income tax under

Internal Revenue Code (IRC) section 501(c)(3) be revoked for failing to meet the organizational and operational tests
of Treas. Reg. section 1.501(c)(3)-1(a) by not limiting its purposes in its organizing documents to, and operating
exclusively for, 501(c)(3) exempt purposes?

Facts

Formation

The Organization was incorporated in the state of on July 5,20 =. Article Ill of the Articles of Incorporation
state that this corporation is a “nonprofit public benefit corporation”, and state its specific purpose to be:

The specific purpose of this corporation is to advancement [sic] of renewable and sustainable home energy
products and practices fo aid in the reduction of homelessness, and conservation of precious natural resources.

The Organization’s Bylaws, Article Il, state that its purpose is set forth in the Articles of Incorporation and further state:
...whose mission is to increase awareness and educate the public about ways fo conserve valuable natural
resources, and also to provide assistance fo eligibility [sic] homeowners who may wish to make improvements that
conserve resources...

Application for Recognition of Exemption

The Organization submitted Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section

501(c)(3) of the Internal Revenue Code, in September of 2016. The following boxes on the Form 1023-EZ were

checked:

Part Il Box 5 — attesting that the organizing document limits the Organization’s purposes to one or more exempt
purposes within section 501(c)(3).

Part ll BoxS attesting that the organizing document does not expressly empower the Organization to engage,
otherwise than as an insubstantial part of its activities, in activities themselves that are not in furtherance of one or
more exempt purposes.

Part Ill Box 2 - Charitable — attesting that the Organization is organized and operated exclusively to further the
purposes indicated.

Exemption

On September 21,20 the Organization received recognition of exemption under IRC section 501(c)(3) as a public
charity, effective July 5, 20

Financials

The Organization filed Forms 990-N postcard return for its tax years ended December 31,20 and December 31,
20 __, indicating its Gross Receipts for each year were less than $

[Page 1]

The Organization maintained its financial information on a spread sheet labeled “Bank Activity” that was prepared
from its bank statements. Following is a summary of the Organization’s financial information based on the documents
provided:

As of December 34, 20

Revenue:

Donations $
Grants: 3 )
Expenses:

Bank Fees 3 )

Check Fees 3 )

Promo Supplies S( )

Web Costs S }
Total Expenses $( '
Assets:

Cash $ $
Liabilities: $ 0 $ 0

As of December 31,

Revenue:

Donations $

Grants 3( )
Expenses:

Bank Fees 3 )
Gae x}

Total Expenses $( )
Assets: .

Cash $ * $
Liabilities: $ 0 $ 0

*Per spread sheet

Based on the above figures, the Organization had a Form 990-£2Z filing requirement for tax years 20 and20 as
its Gross Receipts exceeded $50,000 in each year.

Website

The Organization maintains a website at . The website contains information on the
Organization's purpose and activities. Review of the website in June of 20 showed:

[Page 2]

Home page identifies the 501(c)(3) charitable purpose as the conservation of precious natural resources and the
movement away from reliance on fossil fuels. Public awareness campaigns to provide the information and tools
necessary to make informed choices to reduce individual carbon footprint, conserve precious potable water
sources and provide positive financial returns (money and resource saving guides).

are small one-time cash grants to eligible homeowners who agree to invest in material system
and energy or water-saving improvements:

e Grants range from § - Fi based on type of project and anticipated resource savings

+ Illomeowners meeting certain criteria who complete a pre approved green hore project within a set tne
period may apply online for a grant.

¢ Grant Advisors review applications and project details. Award Committee decides who gets a grant. Once
approved and projects are verified, grants are mailed directiy to the homeowner.

e The Organization verifies and background checks their recommended and approved contractors before
allowing them to participate on behalf of their clients. Contractor committee vets and approves contractors
— currently have over approved contractors.

Asks viewers how much they want fo save and links to the “ *

e Calculates tax savings on the project (currently updated for the 2018 Tax Cut & Job Act rates and CA

State tax tables). .
e Includes a charity admin fee that is % of the amount donated ($ } to reach the total "charitabie
contribution” of $ as shown on the website’s example.

e Tells viewers they will save thousands of dollars from renewable home rebates and discounts that are
offered exclusively through the Organization and its partners.

Examination

In May of 20, the Revenue Agent (Examiner) issued an initial contact letter, Information Document Request (IDR)
and Publication 1, to notify the Organization of the examination.

The Organization's Director contacted the Examiner as requested and stated that the Organization does not have
electronic accounting records but uses bank statements and a spread sheet. He stated there has been very little
activity but he would go through the IDR and provide the spread sheets and anything else that is easily faxable no
later than one week prior to the appointment.

The Organization subsequently faxed its financial documents as well as documents relating to its application for
exemption, including:

* Copy of unsigned Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the
internal Revenue Code
« Communication from Legalzoom.com pertaining to the application:

e Requests for detailed descriptions of purpose, activities and budget information and indicated the
Organization intended to apply for exemption as a private foundation; some of the requested
information was included.

e Included a notice that only creates the application based on responses received — it
does not submit the application to the IRS.

« Articles of Incorporation

[Page 3]

e Bylaws of the Organization

e Two-page document describing the Organization's activities, which appear to mirror information contained on
the Organization's website.

Examiner analyzed the financial data and determined that deposits for a total of $ were identified as
contributions, $ of disbursements were identified as grants, and a balance of $ had yet to be
disbursed as of

Initial Appolntment
[he Orqanization’s Director provided the tallowing Information at the meeting’
Organization’s Activities:

Environmental conservation organization focusing on incentivizing individual homeowners to improve their
home energy usage away from fossil fuels and towards green energy and water preservation.

The EO provides ranging from $ -§ (or approximately - % of the total cost of an
improvement project) to eligible HOs who submit an application and required documentation.

Partner with contractor/construction firms to encourage HOs fo invest in themselves — contractors go out and
get bids on jobs — wanted to get them to tell the HOs that the EO gives grants. EO operaies tfrough a network
of ¢ vho were vetted by financing companies | and ) involved in
the Act — a siate sponsored effort to encourage

The contractors had to meet
environmental criteria and the vetting verified licenses, insurance, bonds and that ail were ‘
( were excluded).

' EQ contacted approximately —_ of the contractors on the list - idea was for the contractors with potential clients
‘on-the-fence’ about doing a project to use the possibility of a grant from the EO as an incentive to do the

improvements. No ofher means of outreach to HOs by the EO, but EO operated a website that can be found by
online search.

HO submitted an on-line application including a description of the home improvement project, the contractor
signed off on a completion certificate and the EO transferred the grant money. The first grant paid by the EO

was by check, subsequent grants were by cards purchased through an on-line gift card provider.
The reason for using the cards was to identify and track purchases and deliveries of the grants to
the HOs.

Sources of Funding:

Paid a grant writer $ for an initial -month arrangement to write grants to other organizations supporting
environmental conservation. If successful, the arrangement would be extended another months and the grant
writer was to receive a percentage of the grants received. it was not successful as no grants were received
and the arrangement was terminated.

The EO had relationships with several individuals that resulted in donations. donations were received in
2c :

[Page 4]

e ¢ from a contractor who identified the specific HO who was to receive the grant. This was a
who requested the grant be provided to his client. [he contractor did
not want to give the client a discount. (Contractor is no longer in business).
e ¢ { separate donations) from , one of the contractors from the vetting,
who is owner of ’. This was a general donation to the EO and specific HO
recipients were not identified. The donor only needed write-offs in 2C

The 2078 Tax Cuts and Jobs Act has changed the incentive to donate — in 2018 there were no donations as
everyone takes the standard deduction rather than itemize.

Partnered with (per thelr website} online donations. There have been no donations
through

Changes in Operations / Future Plans:

During the discussion of 501(c)(3) charitable activities, the Director stated that the organization has begun
discussion with to include energy efficient components so that the recipients of the
housing don’t lose their homes because they can’t afford to pay the energy bills, or do without heating etc.

Organization is working on ways to get funding — since the 2018 tax act donations have dropped since there is
no tax deduction since most people take the standard deduction.

Project Calculator on Organization’s Website:
it was a calculation to show HOs investing in their home how to lower their utility bill,

When questioned further about what looked like a calculator to show the project cost as a charitable
contribution, the Director explained:

The page was put up in the early stages of the EOs operations and the Director didn’t realize that it was
still up. He said he should remove it.

The ideu was thut the HOs would be the donorg — tell re HOs that they could nuke a donation to the EO,
the EO makes a grant to the contractor for the work and they save energy. !he Director spoke with a non-
profit attorney who said that this is not permissible — undue benefit to the HO and they can’t deduct
contribution, it must be decreased by the value of what they got. The Director said that they had never
gotten any donations from HOs.

made the donations and only one of them specified who the HO beneficiary was fo be.
As the donations came from contractors (businesses) they would have just deducted the payrnents as a
marketing expense or some other expense. The 3 donation from ” was
not made based on this calculator and that other than the £ donation in . 0 donations were
made specifying a HO recipient.

Application for Exemption, Form 1023-EZ submitted v. Form 1023 provided for examination:
He thought the follow-up questions from had actually come from the IRS and further said that

he did not submit an application, but that had and he assumed it was the one that he had provided
for the examination — he said that was what had been in his file.

[Page 5]

The Organization provided additional documents:

Donor receipts identifying two individuals, for $ and $ each.

e Grant Fulfillment Activity spread sheet — same spread sheet as the books previously provided but excluding
some minor disbursements.

e Spread sheet of clients containing a brief description of the home improvement planned or completed, and
the associated job costs and grant amount.

Summary of the Organization’s account with card provider
ATM receipt for the $ deposit and correspondence from related to the same
Review of lie docuinenls showed lhalof Individual grant applications only were disbursed In 20, and gift

cards shown as grants were used by the Organization.

Based on the Director's narrative and review of the documents provided, the examination was expanded into the

subsequent year to determine whether additional contributions and grants were made and if so, whether they were for
a 501(c)(3) exempt purpose.

Subsequent Information Document Requests (IDRs):

IDR-02 TY 2C

e Second request for copies of the deposited items. Documents provided confirmed the donations previously
identified, and the designation of the recipient of the $ deposit. Also included a check to which
is not a donation.

e Included a summary of the initial interview and requested that the Organization review and respond if any of the
responses were not correctly stated. The Organization has not provided a response.

« The Organization fails the Public Support Test for public charities as it is not publicly supported as more than
of its contributions are not from the general public, but from a limited number of donors.

IDR-03 TY 20

e To verify compliance with reporting requirements, requested contracts, and workpapers or schedules to show how
the numbers were determined for the books:

e The Organization had no contracts and the information provided for the accounting records, deposits and
disbursements provided the requested information.

e To verify the financial records match operations, requested accounting books, bank statements, copies of
deposited and disbursed items, and donor receipts. The Organization provided its books, bank statements and
deposited items:

e The same contractor who made the $ donationin TY 20, of
contributed another $ in 20

e A donation and subsequent grant were made that fit the scenario described by the Organization's Director
when explaining the “project calculator’:

[Page 6]

donation via on 10/10/20 = (less ) followed by a grant two days later:

Donation
Grant
fee to the Organization ( % of $ donated)

[illegible]

The donation was identified as from on the Organization's original books, but as “TBD-No
detail’ on the corrected books

The donation receipt identifies the donor as

The | statements iclentify the payor as

The bank statements show the grant as an ACH payment to

A donation of $ identified the donor as on the original books, but as
on the corrected books:
e The donation receipt identifies the donor as
e The copy of the deposited check states “HVAC Unit” in the memo section.
e There is no evidence of a grant in 20

A donation of $ identified the donor as on both the original and corrected books, the
donation receipt and the copy of the deposited item, which stated “20 Donation” in the memo section.
e The donation was made at the end of the year with no subsequent grants made that year.

The Organization fails the Public Support Test for public charities as it is not publicly supported as more
than of its contributions are not from the general public, but from a limited number of donors.

e To verify grants/expenses, requested all grant applications and related documentation, and source documents for
expenses:

The Organization provided the following documents:

Bank Summary (books)
Corrected Bank Summary
Report
account summary
account summary

Review of the documents showed:

° ofthe applicants received grants in 20 __, in amounts ranging from $ to $ each.
e All grants were paid using cards, with the following exceptions:
e § grant noted above
e § of cards were issued to the Organization rather than a HO
« § of cards were issued to , the contractor who was the
primary donorin 20 and who also donated in
« The card purchases were shown as aggregate charges to a credit card paid by electronic

payments on the bank statements.

[Page 7]

IDR-04 TY 20

e Requested an explanation of why gift cards were purchased and delivered to the Organization rather than to grant
recipients, and substantiation of the exempt purpose use of those gift cards:

« The Organization responded that “some cards were used for fundraising purposes to meet and host donor
candidates in order to spend additional time explaining and presenting our mission and making donation
solicitations. No donor candidates were provided any of these cards. Rather, they were used to cover
meeting, travel, meal and incidental expenses related to managing the organization, courting donors or
engaging in corporate stralegy meetings.”

e No source documents for the exempt purpose use were provided.

IDR-05 TY 20 = & 20

e Requested two specific credit card statements in order to reconcile the card purchases to the credit
card charges/payments shown in the bank statements:

e The credit card statements provided allowed Examiner to verify one of the credit card payments tied to the
prepaid cards, but the second credit card statement had insufficient details to do so.

e Requested an explanation for why gift cards were purchased and delivered to the Organization rather than to
grant recipients, and substantiation of the exempt purpose use of those gift card:

e The organization’s response was the same as to IDR-04 above.
e Requested detailed prepaid gift card account statements for a select sample of grants:

e Verified that the grantees shown received the grants indicated — the gift cards were delivered as shown.
e Requested the source documents for a select sample of grants (included in the above gift card purchases):

e Source documents showed that the same contractor, , was the contractor on all the
sampled transactions. This contractor was the primary donorin 20 and also contributed in 20

e Ag grant to was provided as part of a grant incentive program where the gift
cards were offered as an incentive to encourage prospective grant recipients to receive environmentally
friendly project improvement estimates.

e The$ disbursement to shown as a grant in the Organization's books and
records:

e The Organization's Director explained that he believed this was a refund to the contractor for a
donation made either late in the prior year or early in the current year for which funds were not
available until just prior to the disbursement.

e No documentation or other substantiation of restricted donations was provided to indicate there
was a right to a future refund.

e Analysis of the donations and grants from January 1,20 through October 10,20 from this
donor and all grants during that time ~— excluding the $ from another donor specifically

[Page 8]

™ “ or exnids

earmarked for his client ~ shows that substantially all funds donated by the contractor had been
used for grants. Thus, there were no donations to refund.

e The transactions fit the scenario described by the Organization’s Director in the initial interview
when explaining the purpose of the “project calculator’ — converting a non-deductible home
improvement into a deductible charitable contribution.

IDR-06 TY 20 = and 20
« Second request for the credit card statement requested in IDR 05:

» The Organization provided the requested statement and the Examiner tied the payment ta the prapaid
card purchases, verifying their stated use.

e Requested confirmation that was the sole contractor on the projects for which grants were
provided in 20 and20_, and if not, to provide source documents for work completed by other contractors:

e The Organization confirmed that all “energy-efficient” grant awards were completed by the same vendor,

Law:
Internal Revenue Code (IRC):

IRC Sec. 501(c)(3) exempts from income tax entities 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. Reg.):

§1.501(c)(3)-1(a) of the Federal Tax Regulations states that in order to be exempt as an organization described in
section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes
specified in such section. lf an organization fails to meet either the organizational test or the operational test, it is not
exempt.

The organizing documents must include an acceptable purpose clause, Treas. Reg. §1.601(c){3) 1(b)(1)(a)(i)(a), and
may not include a powers clause which is too broad, Treas. Reg. §1.501(c)(3)-1(b)(1)(a)(i)(b). Defects in the
organizing document cannot be corrected by the organization’s actual operations or by reference to other documents,
Treas. Reg. §1.501(c)(3)-1(b)(1){iv).

Regulations §1.501(c)(3)-1(c) states 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 section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities
is not in furtherance of an exempt purpose.

[Page 9]

Revenue Rulings (Rev. Rul.):

Rev. Rul. 2006-27, 2006-1 C.B. 915 found that a nonprofit organization that helped low-income individuals and
families purchase homes does not qualify for exemption from Federal income tax under section 501(c)(3) of the Code
because it does not operate exclusively for charitable purposes. The organization knows the identity of the party
selling the home to the grant applicant and may also know the identities of other parties who may receive a financial
benefit from the sale. In substantially all of the cases in which the organization provides down payment assistance to
the buyer, the organization receives a payment from the seller. There is a direct correlation between the amount of
lhe down payment asgiglance and the amount of the heme sellers payment lo lhe organization The organization
does not conduct fundralsing campaigns to attract flnanclal support, Instead receiving most of its support from home
sellers and real estate related businesses that may benefit from the sale of homes to buyers wha recelve assistance
from the organization.

Rev. Rul. 67-367, 1967-2 C.B. 188 found that a nonprofit organization whose sole activity is the operation of a
“scholarship” plan for making payments to pre-selected, specifically named individuals does not qualify for exemption
from Federal income tax under section 501(c)(3) of the Code. An organization must serve a public rather than a
private interest; it must not be operated for the benefit of private interests such as designated individuals.

Court Cases:

In American Campaign Academy v. Commissioner of Internal Revenue, 92 T.C. 1053, the Court held that the
operation of a school to train individuals to fill responsible positions in campaigns of Republican candidates for political
office provided a private benefit to unrelated third parties who were not a charitable class. The benefits to the entities
and candidates of one specific political party were not incidental to the accomplishment of exempt purposes. The
Court sustained the Service’s denial of exemption under IRC section 501(c)(3) because more than an insubstantial
part of their activities was to provide private benefit to individuals. The Court found that private benefit includes an
“advantage, profit, fruit, privilege, gain, or interest, and that it is not limited to the organization’s insiders but includes
“disinterested” persons as well.

In Giving Hearts, Inc. v. Commissioner of Internal Revenue, T.C. Memo 2019-94 a non-profit corporation was not
operated exclusively for exempt purposes, and thus it was not entitled to federal income tax-exempt status; while the
corporation was organized for charitable purposes, focusing on funding local children's charities, it operated a
sponsorship prograin lhal, by deeigh aud effecl, permitted for profil businesses lo invoke ile nate as parl of &
telemarketing pitch intended, first and foremost, to generate sales leads and revenues, as participating businesses
would be obliged to make a charitable contribution only when a potential customer agreed to an in-home product
demonstration.

Government’s Positon:

It is the Government’s position that the organization does not qualify for exemption under IRC section 501(c)(3) as it
fails both the organizational and operational tests of Treas. Reg. §1.501(c)(3)-1(a).

The organization submitted Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section
501(c)(3) of the internal Revenue Code. Exemption was granted based on attestation by the Organization that its
organizing document limits its purposes to one or more exempt 501(c)(3) purposes, that it does not expressly
empower it to engage, otherwise than as an insubstantial part of its activities, in activities themselves that are not in
furtherance of one or more exempt purposes, and that the Organization is organized and operated exclusively to
further the purpose indicated, which the Organization stated as “charitable”.

[Page 10]

Organizational Test

Examination of the Organization’s Articles of Incorporation and its Bylaws show that it does not limit itself to 501(c)(3)
purposes and expressly empower it to engage, other than as an insubstantial part of its activities, in activities that are
not in furtherance of an exempt purpose:

The Articles of Incorporation state the Organization’s purpose “is to advancement [sic] of renewable and
sustainable home energy products and practices to aid in the reduction of homelessness, and conservation of
precious natural resources”. The Bylaws slaty ils purpose “is fo increase awareness and educate the public about
ways to conserve valuable natural resources, and also to provide assistance to eligibility [sic] homeowners
who may wish to make improvements that conserve resources...”.

The advancement of sustainable home energy products and practices and providing assistance to eligible
homeowners who wish to make energy-efficient home improvements are not 501(c)(3) purposes; thus, the

Organization has not limited itself to engaging in and furthering only 501(c)(3) purposes and has failed the
organizational test.

Operational Test

Treas. Reg. §1.501(c)(3)-1(c) states 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 section 501(c)(3). An organization will not be so regarded if more than an insubstantial part of its activities
is not in furtherance of an exempt purpose. IRC section 501(c)(3) exempt purposes include religious, charitable,
scientific, testing for public safety, literary or educational purposes, or to foster national or international amateur sports
competitions, or for the prevention of cruelty to children or animals. The Organization attested to being operated
exclusively for charitable 501(c)(3) purposes.

Common to all definitions of charitable is the concept of broad public benefit. As such, charitable purposes include
relief of the poor and stressed, erection or maintenance of public buildings, lessening of the burdens of government,
promotion of social welfare, and promotion of health. Recipients of charitable activities generally are of a charitable
class, such as the poor, elderly, handicapped, distressed or youth, or must be large or indefinite enough that providing
aid to its members benefits the community as a whole. Even if the recipients were of a charitable class, the
organization “would bear the burden of proviriy thal ils activities benefiled tnemmbers of the class in a non-select
manner”. American Campaign Academy, 92 1.C.

Examination of its activities shows that the Organization is engaged in providing grants to designated homeowners
engaged in energy-efficient home improvements ostensibly for purposes of preserving the environment.
Environmental preservation is not one of the stated 501(c)(3) exempt purposes - to qualify as a charitable activity it
must have a significant and direct impact on the environment for the benefit of the public, outweighing any commercial
or private benefits. IRC section 501(c)(3) allows no part of the net earnings of an exempt organization to inure to the
benefit of any private shareholder or individual.

The Organization’s position is that any benefit to individual homeowners is secondary to the greater benefit to the
public at large in the form of a cleaner environment. Yet the examination shows that the primary beneficiaries of the
Organization’s grants are select individuals, with any benefit to the public at large incidental. The homeowner clients
are not a charitable class, nor are they large or indefinite enough that providing aid to them benefits the community as
awhole. Payments to pre-selected, specifically named individuals disqualifies an organization from exemption, Rev.
Rul. 67-367.

[Page 11]

The Organization has confirmed that all the energy-efficient grant awards were completed by the same contractor.
This contractor Is a priinary donor. Evidence also suggests lhal additional donors are Involved In a cilent relationship
with this same contractor and may be contributing the cost of their home improvements to the Organization, that then
pays the same to the contractor as a grant, less an administrative fee. An organization that received substantially all of
its funding from sellers or other businesses that stood to benefit from the transactions the organization facilitated was
denied exemption because it was not operated exclusively for charitable purposes, Rev. Rul. 2006-27.

The examination clearly shows that while environmental conservation may be a purpose of the Organization, it is not
the primary purpose, private benefit is The donar/contractor benefits by increased business and his homeowner
clients benefit fram a reduction in their home improvement costs. In American Campaign Academy, 92 T.C., the
Court upheld (lie Service's revocation of exempt slalus because more thal an insubstantial part of ihe organizations
activities was to provide private benefit to individuals. The Court found that private benefit includes an “advantage,
profit, fruit, privilege, gain, or interest, and that it is not limited to the organization's insiders but includes “disinterested”
persons as well. In Giving Hearts, inc,.7.C. Memo 2019-94, the Court upheld revocation of exempt status of an

organization, that although engaged in charitable activities, was primarily engaged in generating sales leads (and
ultimately revenues).

Taxpayer's Position:

The Organization provided its written position at the initial appointment, and subsequently by fax:

! would like to submit the following information to the audit file for deliberations and research into the 501(c)3 status of
our tax-exempt organization.

Position

A point was made during the data gathering, interview and fact finding portion of the current audit that a determination
about whether the primary activities of our organization benefitted the public good and/or any one of a set of pre-
identified charitable classes.

This point was further clarified to mean that any one individual receiving a benefit may not necessarily qualify under
the public good or designated class definition.

To help clarify our primary mission and activities, the public good is served every time we are able to decrease the
volume and rate of water depletion fram our reservoirs when a homeowner elects to spend thousands of dollars of
his/her own funds to replace water inefficient landscaping with drought tolerant landscaping. The waiter savings

physically, directly and measurably contributes to the available water resources for all citizenry — not just the
homeowner.

This same argument is made for investments in solar power and dirty power saving appliances. Every time a
homeowner uses personal funds to actively produce clean energy or reduce the consumption of polluting energy the
public benefits directly. We benefit in the form of lower carbon emissions, reduced energy bills (by limiting the need to
invest in additional polluting forms of power or importing dirty power from out-of-state sources). If every homeowner
invested in solar power and water reduction projects the entire public would see direct and measurable benefits and
wouid not have directly paid for any of it. Only the homeowner can choose fo improve their property in a way that
benefits us all.

In fact, our primary activities of offering grant support to homeowners fo encourage such investment on their part
directly benefits all of us by conserving and preserving resources that we all equally rely on, use and consume. The

[Page 12]

resources we help protect and preserve are available to the public as a whole, and not limited to special categories of
consumers

strongly feels it is necessary to look at the entire activity that we encourage. Namely,
we get homeowners to invest their own doilars for the benefit of resource preservation that benefits the public at large.
lf's not enough io simply consider a smal! grant as a benefit when there is also a substantial cost that must be borne
by the homeowner in advance. This cost is often between - the amount of the grant provided.

That means that any perceived benefit derived from grant support by must firs be preceded bya - x cost
borne solely and exclusively by the homeowner. Grants are only awarded in cases where the project qualifies to
protect preserve and conserve plecious tatulal eSources as well as jeduce reliance oi fossil fuels and the
subsequent pollution they emit. These grants are, themselves, only awarded once a homeowner can demonstrate
that they have first invested in and completed a project that would serve fo protect public resources.

contends that a homeowner who incurs of dollars of cost, resulting in a communal resource benefit to
the public, does not, in fact, enjoy an exclusive benefit that the public is denied. In fact, we should all be encouraging
and thanking these conscientious homeowners for their personal invesiment (and in many cases indebtedness) in
support of our commonly enjoyed resources and environmental health.

We strongly believe there is little offsetting benefit to receive a grant from when where must first be incurred a
substantial - x cost. The “benefit? of incurring this cost that really benefits us all comes not from the miniscule

reimbursement grant that follows, but only in the form of good environmental stewardship that helps protect our
society and citizenry.

Please be sure to keep in mind that grant support is nof a simple one-to-one benefit for a homeowner, but is, in
fact, only a smal! portion of the overall cost, largely borne by individuals, that helps drive behavioral change, and, thus,
society-wide improvement.

Conclusion:

The Organization does not qualify for exemption from Federal income tax for it failed to substantiate that it is
organized and operated exclusively for one or more exempt purposes, resulting in its failure to comply with the
requirements of IRC Sec, 501(c)(3) and Treas. Reg. Sec.'l.50'1(c)(3)-'I(c).

It is the Government's position that the Organization failed to organize and operate exclusively to accomplish one or
more of such exempt purposes specified in IRC Sec. 501{c)(3). Because the Organization was not organized and
operated exclusively for the exempt purpose under IRC Sec. 501(c)(3), its Federal tax-exempt status under such
section should be revoked effective January 1,20 . The Organization is liable for filing Form 1120, U.S. Corporation
income Tax Return, for the tax year ended December 31, 20 and all years thereafter.

[Page 13]