Exemption revoked over family fundraising benefits and deficient governing documents

Plain-English summary

A membership organization used fundraising programs to support activities for participating families. It credited fundraising work to family accounts that could offset trip and other program costs, so benefits depended on each family's participation. The IRS concluded that this arrangement caused the organization's earnings to benefit insiders and served substantial private interests. It also found that the organization's purpose, powers, and dissolution provisions did not satisfy the section 501(c)(3) organizational test, and that its financial records were inadequate. The IRS revoked the exemption, treated program benefits as taxable income to participating parents under section 61, and stated that the organization was subject to quid pro quo disclosure rules and related penalties.

Ruling snapshot

• Question: Could a membership organization retain section 501(c)(3) status while allocating fundraising proceeds to participating families and using deficient governing provisions?
• Outcome: Revocation
• Key authorities: IRC §§ 61, 170, 501(c)(3), 6115, and 6714; Treas. Reg. § 1.501(c)(3)-1

Full text (IRS public release)

Internal Revenue Service
Tax Exempt and Government Entities

IRS Taxpayer ID number:

Form:

Department of the Treasury Date: December 7, 2021

Tax periods ended:

Release Number: 202243013 Person to contact:
Release Date: 10/28/2022 Name:

} ; ID number:
UIL Code: 501.03-00 Telephone:

Fax:
CERTIFIED MAIL - RETURN RECEIPT REQUESTED

Why we are sending you this letter
This is a final determination that you don’t 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

. Your determination letter dated , is revoked.

Our adverse determination as to your exempt status was made for the following reasons: Organizations
described in Section 501(c)(3) of the Internal Revenue Code and exempt from tax under Section 501(a) must be
both organized and operated exclusively for exempt purposes. You have failed to produce documents or
otherwise establish that you are operated exclusively for exempt purposes and that no part of your net earnings
inures to the benefit of private shareholders or individuals. Furthermore, you fail the organizational test for
exemption because your articles of incorporation do not limit your activities to one or more exempt purposes
and your dissolution clause does not ensure that assets will be dedicated exclusively to Section 501(c)(3)

purposes.

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.

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

What you must do if you disagree with this determination
If you want to contest our final determination, you have 90 days from the date this determination letter was

mailed to you to file a petition or complaint in one of the three federal courts listed below.

How to file your action for declaratory judgment

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.

Please contact the clerk of the appropriate court for rules and the appropriate forms for filing an action for
declaratory judgment by referring to the enclosed Publication 892, How to Appeal an IRS Determination on
Tax-Exempt Status. You may write to the courts at the following addresses:

United States Tax Court U.S. Court of Federal Claims U.S. District Court for the District of Columbia
400 Second Street, NW 717 Madison Place, NW 333 Constitution Ave., N.W.
Washington, DC 20217 Washington, DC 20439 Washington, DC 20001

Letter 6337 (12-2020)
Catalog Number 74808E

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).

Information about the IRS Taxpayer Advocate Service

The IRS office whose phone number appears at the top of the notice can best address and access your tax
information and help get you answers. However, you may be eligible for free help from the Taxpayer Advocate
Service (TAS) if you can't resolve your tax problem with the IRS, or you believe an IRS procedure just isn't
working as it should. TAS is an independent organization within the IRS that helps taxpayers and protects
taxpayer rights. Contact your local Taxpayer Advocate Office at:

Or call TAS at 877-777-4778. For more information about TAS and your rights under the Taxpayer Bill of Rights,
go to taxpayeradvocate.irs.gov. Do not send your federal court pleading to the TAS address listed above. Use
the applicable federal court address provided earlier in the letter. Contacting TAS does not extend the time to
file an action for declaratory judgment.

Where you can find more information
Enclosed are Publication 1, Your Rights as a Taxpayer, and Publication 594, The IRS Collection Process, for
more comprehensive information.

Find tax forms or publications by visiting www.irs.gov/forms or calling 800-TAX-FORM (800-829-3676).
If you have questions, you can call the person shown at the top of this letter.

If you prefer to write, use the address shown at the top of this letter. Include your telephone number, the best
time to call, and a copy of this letter.

Keep the original letter for your records.

Sincerely, +
Fo -) * ‘.
Sean E. O'Reilly
Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

ce:

Letter 6337 (12-2020)
Catalog Number 74808E

Department of the Treasury
Internal Revenue Service

Date:

September 14, 2020
Taxpayer ID number:

IRS Tax Exempt and Government Entities

Form:
Tax periods ended:

Person to contact:
Name:
ID number:
Telephone:
Fax:
Address:

Manager’s contact information:
Name:
ID number:

Telephone:
Response due date:

October 14, 2020

CERTIFIED MAIL — Return Receipt Requested

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 [ENTER CODE
SECTION] 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.

Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

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.

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).

2 Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

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

Sincerely,

Sean E. O’Reilly
Director, Exempt Organizations
Examinations

Enclosures:
Form 886-A
Form 6018

3 Letter 3618 (Rev. 8-2019)
Catalog Number 34809F

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

or exhibitt

Explanations of Items

Name of taxpayer Tax Identification Number (/ast 4 digits) | Year/Period ended
ISSUE:

1. Whether the (“ ”) is an applicable tax-
   exempt organization under Section 501(c)(3) of the Internal Revenue Code (“the Code”)
2. Whether the Benefits are taxable to participating parents under Code Section 61,
   of the Code
   FACT:
   The applied for Federal exemption described under IRC Section 501(c)(3). It formed on
   . The determination letter granted the exemption under Section IRC 509
   (a)(2) as an organization that normally receives more than - % of its support from contributions,

membership fees, and gross receipts from activities related to its exempt functions and no more than

• % of its support from gross investment income, and unrelated business taxable income.
  However, > Form , Short Form Return of Organization Exempt From Income Tax
  for tax years ended , and. , specifically, the Schedule A shows the Public
  Status as IRC 170(b)(1)(A)(vi), an n organization that normal received a substantial part of its support
  from government unit or a from the general public with public support calculated as %. These
  returns are not consistent with the determination letter originally granted to the organization

The provides financial support for the at
The is a membership organization. Common with most volunteer organizations,
only a minority of > members provides most of the work required.

members receive additional benefits based on the hours they work as volunteers at
fundraisers which is calculated and documented in the “Shares Program Benefits.” Once volunteers
earned their , those shares are used at the discretion of the family that earned the hours.

During the year under audit, , the at
had while only paid for the memberships. The cannot require fees
paid for participant pursuant to which “...prohibits a enrolled in a from
being required to pay a pupil fee, as defined, for participant in an educational activity.” The

used “the term voluntary donations” as “membership fees’ to be a member.

The original Articles of the Incorporation in stated that the ’ purpose was to
promote personal interest and educational development in the as individuals and as a
group, to promote interest in the activities and to promote incentives through financial aids
through fund-raising activities. It is a organization where all matters brought for
a vote shall be determined by a simple majority of members present. All amendments to the By
Laws shall be determined by a majority vote of members presents.

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

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

Explanations of Items or exhibitt

Name of taxpayer Tax Identification Number (/ast 4 digits) | Year/Period ended

Its original By Laws, Article 14, stated that ” Upon the dissolution, abandonment or winding up of

this corporation, the assets remaining after payment or provision for payment of its debts and

liabilities of this corporation shall be distributed nonprofit fund, foundation or corporation or

corporation which is organized and operated exclusively for educational purposes and which has

established its tax exempt status under Section 501(c)(3) of the Internal Revenue Code and under
Revenue and Taxation Code.”

An amendment to the laws adopted on revised the organization’s purpose of the

to state that it shall finance and promote the at

and Membership and shall be open to any “interested adult” whose dues are current. In

addition, The Article of Dissolution stated that “...in the event of dissolution, disbandment,
inactivation, or other termination of this , the funds and properties of the
in excess of its liabilities shall be disposed of in accordance with the decision of the existing active
membership, consistent with integrity and good judgment, by a majority vote of the members present
a duty called general membership meeting”.

The raises money through the following programs:

1. Memberships: sell memberships to interested . Memberships have additional
   benefits such as eligibility for , for extracurricular ;
   discounts, free program T shirts($ _ value), and free prizes for Family . Memberships
   cover two types: costs$ . costs$ _— (includes tickets to
   dinner dance auction and ). required members to volunteer at least
   hours at the games per quarter.

2. Selling 7 : sells cards at the every

night. This activity is crucial for asitraises of the annual budget. The
organization has an arrangement with a company named .
will provide volunteers to sell to players and received $ per week.
revenue total is $ plus tips. will allocate a portion of this revenue to the
earned volunteers into their “ Account.” This can be used to offset the cost of
and extracurricular experience (trips). This arrangement allows some families
to cover the entire cost of the by regularly volunteering at

3. In additions, raised funds through the following programs: a dinner dance,

; ,a dinner, , sales of , etc. These
activities provide to volunteers similar to the selling of to players.
One of the ’ biggest yearly events is organizing extracurricular trips. For the year in audit,
ending , organized a _ to on , for days by bus.

Per ’ cost analysis, each participant’s cost is $ . Thetrip included about _ paying

students and _ paying . On day andday , the was on travel status by

bus. On day , The performed at at . On day ,day ,andday , The

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

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

Explanations of Items or exhibitt

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

group enjoyed sight-seeing at , , a dinner at , anda
. Only members could use a discount of § and to offset
the cost of the

The asserted a disclaimer under the membership application and donation solicitations as
following: “Please note that you or your is [sic] not required to purchase, donate, or
contribute any of [sic] item or monetary donations associated with participating in the

. However, if you voluntarily decided to purchase, donate, or contribute any item or
monetary donation associated with the participant in the and provide
them to the Director, the item or monetary donation will be shared equally amount [sic] all the
members of the program in order for each recipient [sic] to have the opportunity to participate. In

additionally, [sic] the will be organizing fundraising events in which
you and/or your will have the option to participate or help raise money to support the
. It is not mandatory that you and your participate in any fund-

raising events as a condition of participant in the

The disclaimer is added as a result of the investigation of potential violation of
, where the , received high volume of uniform complaints regarding the imposition of
student fees and/or improper fundraising efforts.

The instructed during the annual fundraising event that “all donations
are tax deductible and any donations over$ will receive a letter.”

Its Membership Form indicated fees for various of programs and membership types (
and ). collected total fees and called it as “Donation”
The did not provide a written disclosure statement to donors of a quid pro quo

contribution in excess of $ . A quid pro quo contribution is a payment made to a charity by a donor
partly as a contribution and partly for goods or services provided to the donor by the charity. Per Section
6115, the required substantiation written disclosure must:

1. Inform the donor that the amount of the contribution that is deductible for federal income tax
   purposes is limited to the excess of any money (and the value of any property other than money)
   contributed by the donor over the value of goods or services provided by the charity and

2. Provide the donor with a good faith estimate of the value of the goods or services that the donor
   received.

A penalty is imposed on a charity that does not make the required disclosure in connection with a quid pro
quo contribution of more than$ . Per Section 6714, the penalty is$ per contribution, not to exceed

$ per fund raising event or mailing. During the year under audit, you have in the program,
where _ have paid memberships. There is no documentation to show you provided disclosure statements to

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

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

Explanations of Items or exhibitt

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
donors. In addition, the claimed it received $ in donations from to
provide volunteers to each night.

The provided a function and program that allows to have a discretionary pool of funding
to enhance their experience in the program. The money in the can be used to pay
for things like, food provided at , extra T shirts, , etc.

Share Programs Policy:

1. Reserved Funds are the result of money earned through a variety of fund-raising activities which
   are reserved for an individual family. These reserved funds are available to the family to use for
   the trips and other specified activities.

2. Reserved Funds are recorded as a family total. Distribution among family members is left to the
   discretion of the family

3. Funds cannot be transferred from one family to another

4. Funds are held for a family for use by when they enter the program

5. Unused fund revert to the General Fund.

6. The may designate part or all the profits of specific fund raisers as eligible for the

share program

7. Distribution to individual share accounts is based on the profits of the activity of the level of
   individual participation as determined by the

Shares Program:

1. Shares are the result of working or contributing to the . Shares are accumulated by
   family and recorded as hours of credits. Shares cannot be transferred from one family to
   another

2. As the end of each quarter a dollar value is given to each share

3. Once the share value for the quarter has been set and authenticated by the treasurer, it is not
   changed as the result of subsequent corrections to shares accumulated

4. The share value can be adjusted to reflect subsequent corrections to the net profit earned
   for the quarter.

Script Shares Program:

The purchase at a discounted rate. This is the “Cost”

Individuals purchase from the at the face value of the . This is the “Value”

The difference between the cost and the value is the “Margin”. The Margin is divided into Margin
Shares according to % individual buyer, % Share Agent,and % .

Margin shares are recorded and accumulated by family. At the end of each quarter, a dollar value is
given to a Margin Share based on the number of margin shares accumulated and the net

profit for the quarter.

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

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

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

Dollar values are added to the family’s share.

Other Fund-Raising events: , , Banquet, , etc.
During the audit, we learned that the ’ internal control policy and procedures are weak. In addition,
the have oversight over the bookkeeper’s roles. The bookkeeper served as a representative under a

Form 8821, Tax Information Authorization and was terminated from both roles during the examination.
were not able to provide reconciliation of bank statement or reconciliation of their accounting.
were not able to provide general ledger accounts grouping that flows tothe Form __, Return of

Organization Exempt from Income Tax. failed to give adequate explanation and documentation for

the adjusted journal entry of $ in prior years as a book correction. Its records and explanation are

inadequate.

LAW

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

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

Regulation § 1.501(c)(3)-1(c)(2) provides that an organization is not operated exclusively for one or more
exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or
individuals.

To meet the organization test, in general, the organization’s governing instruments must include an
acceptable clause (Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i)(a), not include a powers clause which is too
broad (Treas. Reg. Section 1.501(c)(3)-1(b)(1)(i)(b), include a dissolution clause in most cases (Treas. Reg.
section 1.501(c)(3)-1(b)(4)).

Distribution of assets on dissolution clause: An organization is not organized exclusively for one or more
exempt purposes unless its assets are dedicated to an exempt purpose. An organization's assets will be
considered dedicated to an exempt purpose, for example, if, upon dissolution, such assets would, by reason
of a provision in the organization's articles or by operation of law, be distributed for one or more exempt

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

Department of the Treasury — internal Revenue Service Schedule number
Form 886-A

Explanations of Items or exhibitt

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

purposes, or to the federal government, or to a state or local government, for a public purpose, or would be
distributed by a court to another organization to be used in such manner as in the judgment of the court will
best accomplish the general purposes for which the dissolved organization was organized. However, an
organization does not meet the organizational test if its articles or the law of the state in which it was created
provide that its assets would, upon dissolution, be distributed to its members or shareholders

Reg. 1.501(c)(3)-1(d)(1)(ii) states that an organization is not organized or operated exclusively for exempt
purpose unless it serves a public rather than a private interest. The regulation places the burden of proof on
the organization to demonstrate that it is not organized or operated for the benefit of private interests such as
designated individuals or persons controlled directly or indirectly by such private interests.

Reg. 1.501(c)(3)-1(c)(1) indicates that an organization will not be exempt under IRC 501(c)(3) if more than
an unsubstantial part of its activities is not in furtherance of an exempt purpose. Thus, an organization
whose operations result in a private benefit that is more than insubstantial, will not be considered as serving
as exempt purposes. This private benefit prohibitions applies to all kinds of persons and groups, not just to
those” insiders” subject to the strictest inurement proscription. This private benefit prohibition is broader in
scope and overlaps the private inurement restriction to some extent, as in its coverage of “insider”. Each
proscription must be individually satisfied by organization seeking recognition of exemption under IRC 501

(c)(3).

Section 61 of the Code defines Gross Income to mean all income from whatever source derived,
including (but not limited to) “compensation for services, including fees, commissions, fringe benefits,
and similar items.”

Section 6115 provides that charities must provide timely written disclosure statements to contributors
who make payments described as “quid pro quo” contribution in excess of $75. Also, Section 170(f)(8)
(A) provides that no deduction will be allowed under IRC 170 for a contribution of $250 or more
(whether in cash or property) unless the contributor had a contemporaneous written acknowledgment
from the charity substantiating the contribution. Charity must meet these two requirements

A “quid pro quo” contribution is defined as a payment made partly as a contribution and partly as
payment for good or services provided to the contributor. Contribution is defined as a payment in excess
of the fair market value of the goods or services received is a contribution depends on the intend of the
donor.

Section 6714 imposed penalty to an organization failed to meet the disclosure requirement of Section
6115 with respect to a quid pro quo contribution, such organization shall pay a penalty of $10 for each
contribution in respect of which the organization fails to make the required disclosure, except that the
total penalty shall not exceed $5,000.

ANALYSIS:

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

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

Explanations of Items or exhibitt

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

Your governing instrument does not meet the organization test required under purpose clause, power clause,
and dissolution clause

Purpose Clause: You do not meet the requirement
Your Original Article of Incorporation stated the following:

a. The specific and primary purpose are to promote personal interest and development in
the Members as individual as a group, to promote interest in the activities and to promote
incentive through financial ads

Or

a. To operate a community organization for purposes

b. The general purpose and powers are to have and exercise all rights and powers conferred on
nonprofit corporation under the laws of , including the power of contract, rent, buy or sell

personal or real property; provided, however, that this corporation shall not, except to an
insubstantial degree, engage in any activities or exercise any powers that are not in furtherance of the
primary purpose of this corporation”

Your purpose clause is too broad as it does not limit the organization’s purpose to one or more purpose
specified in IRC section 501(c)(3). To promote personal interest and educational development in the
activities and to promote incentive through financial aids are too broad because they are not necessary
within the status of IRC Section 501 (c) (3).

Power Clause:

Your Article of Incorporation states that “The general purpose and powers are to have and exercise all rights
and powers conferred on nonprofit corporation under the laws of , including the power of contract,
rent, buy or sell personal or real property; provided, however, that this corporation shall not, except to an
insubstantial degree, engage in any activities or exercise any powers that are not in furtherance of the
primary purpose of this corporation”

In addition, you do not have a power clause that will not allow your organization to carry on any activities
not permitted by an organization exempt from federal income tax under section 501(c)(3) of the Internal
Revenue Code. Since the primary purpose of this corporation are too broad and not within the status of
section IRC 501(c)(3) of the Code, hence your’s power clause does not meet the organization test.

Dissolution Clause:

Your amended by laws, approved on , Article _, state that “ in the event of dissolution,
disbandment, inactivation, or other termination of this , the funds and properties of the

in excess of its liabilities shall be disposed of in accordance with the decision of the existing active
membership, consistent with integrity and good judgment, by a majority vote of the members present a duty
called general membership meeting,”

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

Depart f the Treasury — Internal Revenue Service Schedule number
Form 886-A partment of the Treasury

Explanations of Items or exhibitt

Name of taxpayer Tax Identification Number (/ast 4 digits) | Year/Period ended

There is no provision in the amendment that requires that the shall distribute its net assets for one
or more exempt purposes within the meaning of section 501(c)(3) of the Code.

Hence, your dissolution clause does not meet the organization test.

Organizations seeking exemption under IRC 501(c)(3) are subject to the inurement provision and the

prohibitions regarding operating for private benefits purpose rather than public purposes contained in Reg.
1.501 (a)-1(d)(1)(ii).

Your parent- members of the are in position to have such control over the activities of the
club. They must be considered “insiders” for the purpose of determining whether there is inurement of
income. The requirement that each participates in the activities in direct proportion to
the benefits they expect to receive causes a direct benefit to flow to the . In fact, the earnings of the
organizations are being used directly and specifically to pay for benefits to specific individuals rather than to
a whole.

Inurement of income is strictly forbidden under IRC 501(c)(3) without regard to the amount involved.
Because the financing arrangements of club have the effect of permitting the earnings of the organization to
inure to the benefit of specific insiders (the controlled parents’ members and their children). Your
organization can not qualify for exemption under this Section.

You have a difficulty that most parents will not volunteer or raise funds to support its purposes. Hence the
burden will fall on the remaining members who will choose to participate in fund-raising
activities. For this reason, you created the to give “additional benefits to

who participated in the Shares Program Benefits. This solution seems to favor

However, this solution triggers the inurement/private interest prohibitions under the IRC 501(c)(3) of the
Code.

In addition, this private interest is substantial in nature as you open accounts for
critical programs: ; ; , ; , etc. The

program is your biggest money maker hence you require members to volunteer from
hours per quarter. You earned about $ —_— per week or $ for weeks plus tips. A Portion of this
income is allocated to who participated in the fundraising event.

Hence, who earned benefits from participating from fundraising programs are subject
to IRC Gross income Section 61 (unless the income is excluded from other Code Section). We do not see
any exclusion to exempt earned income from the Family Shared Benefits. Hence, the income is taxable to
the participants.

Your organization operates in such a manner to defeat recognition of exemption by
crossing the line of these inurement/ private interest prohibitions.

CONCLUSION:

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

• i Schedule number
  Form 886-A Department of the Treasury Internal Revenue Service or exhibitt
  Explanations of Items

Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

1. You do not qualify under Section 501(c)(3) of the Code as you failed both the organization test and
   operational test.

2. Benefits in each program is taxable under Code Section 61 to the participated

In addition, your records are inadequate. You are subject to the quid pro quo donation disclosure
requirement and the applicable penalties under Section 6115 and Section 6714.

Catalog Number 20810W Page 9 www.irs.gov Form 886-A (Rev. 5-2017)