IRS revokes 501(c)(3) status of an "education" charity that ran a commercial travel-package auction business

View official IRS release (PDF)

Plain-English summary

A group recognized as a 501(c)(3) educational charity said its mission was to
train other nonprofits on how to run better fundraising events. In practice, the
IRS found, its money came almost entirely from selling luxury travel packages
that those nonprofits auctioned off at galas: the charity assembled the trips,
collected the winning bidder's full payment, kept a fixed per-package fee, and
remitted the rest to the host organization. The IRS treated that as a commercial
travel-tour business, not education, applying the unrelated-business rules for
travel tours (Treas. Reg. § 1.513-7) and the principle that a single substantial
non-exempt purpose defeats exemption (Better Business Bureau v. United States).
Because essentially all of the organization's revenue came from this activity,
and because it was carrying on the very same business its for-profit predecessor
had run, the IRS revoked the exemption effective the start of the audited short
year. Contributions are no longer deductible, and the organization must file
corporate income tax returns.

Ruling snapshot

• Question: Is an organization operated exclusively for exempt purposes under 501(c)(3) when nearly all of its revenue comes from assembling and selling travel packages that other charities auction at fundraising events?
• Outcome: Revocation (final adverse determination under Letter 6337)
• Key authorities: IRC § 501(c)(3); IRC § 513(c); Treas. Reg. §§ 1.501(c)(3)-1(a), (c), (d)(3)(i), (e)(1); Treas. Reg. §§ 1.513-1(b), 1.513-7(a)-(b); Rev. Rul. 77-366; Rev. Rul. 67-327; Better Business Bureau of Washington D.C., Inc. v. United States, 326 U.S. 279 (1945)

Full text (IRS public release)

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities

Date: January 20, 2022
Taxpayer ID number:
Form:
Tax periods ended:
Person to contact:
Name:
ID number:
Telephone:
Fax:
Release Number: 202245006
Release Date: 11/11/2022
UIL: 501.03-00

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 IRC Section 501(c)(3) and exempt under IRC Section 501(a) must be both organized and operated
exclusively for exempt purposes. You have not demonstrated that you are organized exclusively for charitable,
educational, or other exempt purposes within the meaning of IRC Section 501(c)(3). You have also failed to
demonstrate that you are operated exclusively for charitable, educational, or other exempt purposes within the
meaning of IRC Section 501(c)(3).

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,

Sean E. O'Reilly
Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

Letter 6337 (12-2020)
Catalog Number 74808E

Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities

Date: October 13, 2021
Taxpayer ID number:
Form:
Tax periods ended:
Person to contact:
Name:
ID number:
Telephone:
Fax:
Manager's contact information:
Name:
ID number:
Telephone:
Response due date:

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 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

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

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).

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

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

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

ISSUES
Whether (the Organization) qualifies for exemption from federal
income tax under Internal Revenue Code (IRC) Section (Sec.) 501(c)(3).

FACTS
Formation
The Organization was incorporated as a not-for-profit corporation on using the
generic electronic Articles of Incorporation ( provided by the state. Article III of the stated the
Organization's purpose as: "To provide education and business counseling support to not for profit
organizations and other lawful activities." The generic didn't include the requisite purpose and
dissolution clauses or the requisite language restricting private inurement or political activity.

Application for Recognition of Exemption
On a Form , Streamlined Application for Recognition of Exemption Under
Section 501(c)(3) of the Internal Revenue Code, was submitted for the Organization.

The Form listed as the President/Director, as the
Secretary/Director, and as the Treasurer/Director. The Form listed
as the signer with the box checked stating, "I declare under penalty of perjury that I am authorized to
sign this application on behalf of the above organization and that I have examined this application, and to
the best of my knowledge, it is true, correct, and complete."

Other pertinent information listed on the Form is as follows:

• The box to attest that the Organization had completed the Form Eligibility Worksheet in the
  current instructions, was eligible to apply for exemption using Form , and had read and
  understood the requirements to be exempt under section 501(c)(3) was checked in the affirmative.
• Part II, Organizational Structure, listed the following:
  1. The date of incorporation was listed as
  2. The state of incorporation was listed as
  3. All boxes were checked in the affirmative, attesting that the Organization's organizing
  documents met the following requirements:
• were sufficient as necessary for a corporation;
• limited its purpose to one or more exempt purposes within section 501(c)(3);
• didn't expressly empower it to engage, otherwise than an insubstantial part of its
  activities, in activities that in themselves are not in furtherance of one or more exempt
  purposes; and
• contained the dissolution provision under section 501(c)(3) or relied on the operation of
  State law in the state in which it was formed for its dissolution provision.
• Part II, Your Specific Activities, listed the following:
  1. The box for "Education" was checked, attesting that the Organization was organized and
  operated exclusively for that purpose.
  2. The box under item No. 3 was checked, attesting to, among other things, that the
  Organization had not conducted and would not conduct activities that

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

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

• furthered non-exempt purposes more than insubstantially; and

• were organized and operated for the primary purpose of conducting a trade or business
  that is not related to its exempt purpose.
  3. Boxes 4 through 11 were all checked "No," indicating, among other things, that the
  Organization wouldn't pay compensation to any of its offices, directors, or trustees, and that
  it wouldn't have unrelated business gross income of more than $ in a tax year.

• Under Part IV, Foundation Classification, the box was checked to attest that the Organization
  normally receives more than one-third of its support from a combination of gifts, grants,
  contributions, membership fees, and gross receipts (from permitted sources) from activities related
  to its exempt functions and normally receives not more than one-third of its support from investment
  income and unrelated business taxable income.

Exemption
On the Organization received recognition of exemption under IRC Sec. 501(c)(3) as a
public charity, effective

Financials Per Form (Confirmed During Examination)

For the Short Year Ended ( months)
Revenue:
Program Service Revenue ("Auction Income")
Investment Income
Total Revenue
Expenses:
Grants and Other Assistance
Compensation of Current Officers, Directors, etc.
Other Salaries and Wages
Payroll Taxes
Legal
Accounting
Other Fees for Service
Office Expenses
Information Technology
Occupancy
Travel
Depreciation, Depletion, and Amortization
Insurance
Cost of items
Outside Services
Postage and Delivery
Telephone
All Other Expenses
Total Expenses

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

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

Assets: BOY EOY
Cash — non-interest-bearing $ $
Land, Buildings, Equip. (less Accumulated Depreciation) $ $
Total Assets $ $
Liabilities:
Accounts Payable and Accrued Expenses $ $
Other Liabilities ("Donor Travel Deposits") $ $
Total Liabilities $ $

For the Year Ended
Revenue:
Program Service Revenue (" Income") $
Investment Income $
Total Revenue $
Expenses:
Grants and Other Assistance $
Compensation of Current Officers, Directors, etc. $
Other Salaries and Wages $
Other Employee Benefits $
Payroll Taxes $
Legal $
Accounting $
Other Fees for Service $
Office Expenses $
Information Technology $
Occupancy $
Travel $
Depreciation, Depletion, and Amortization $
Insurance $
Cost of Items $
Proceeds Shared $
Contract Labor $
Postage and Delivery $
All Other Expenses $
Total Expenses $
Assets: BOY EOY
Cash — non-interest-bearing $ $
Savings and Temporary Cash Investments $ $
Land, Buildings, Equip. (less Accumulated Depreciation) $ $
Total Assets $ $

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

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

Liabilities:
Accounts Payable and Accrued Expense $ $
Other Liabilities (" ") $ $
Total Liabilities $ $

Examination

On , the Revenue Agent (Examiner) issued an initial contact letter, Information Document
Request (IDR), and Publication 1 to inform the Organization of the examination and request an Initial
Interview via conference call on

In response to the initial contact letter, the Organization's Chief Operations Officer, (the
COO), called to explain that the Organization's co-founders, and , had just returned
home from the hospital after suffering from COVID-19 and requested a delay of the Initial Interview.

The Initial Interview was rescheduled and was finally held on via conference call with
the , the COO (the Organization's main point of contact), the Organization's CPA/POA,
(the POA), and the Organization's lawyer, , who is not currently a POA for the
Organization.

Initial Interview and Exit Interview
The following information was provided during the Initial Interview and a follow-up call with the COO and
the POA, which served as the Exit Interview:

History
For over years, the had careers in as and . During that time,
due to their , they were often asked to emcee at fundraising events for various nonprofit
organization. In doing so, they began to realize the need for education in many of these organizations
regarding their general business operations, and, more specifically, with their fundraising events. As
they began to use their experience as educators and in media to educate nonprofit organizations on how
to improve their fundraising events and how to use the media to help their cause, they began to realize
this was something they wanted to do on a more permanent basis.

Timeline

In , gave up job in to work with nonprofits full time, purportedly as an unpaid
volunteer, while kept job in to support them. At some point prior to that time,
was asked to step in on an emergency basis as an at a fundraising event. Since acting
as an in the state of requires a license, obtained license in

In , incorporated ( ). The stated that
they incorporated as a for-profit entity because they didn't know how to become a nonprofit at the time.
They contend that always operated as a nonprofit in the same manner that the Organization
does. (Based on a review of Forms information and the Organization's Forms , the
Examiner noted that the entities appeared to be operated in the same manner in that entities

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

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

received the majority of their income from " Income," which is income derived from the "sale" of
packages prepared by s, and now by the Organization, for other tax-
exempt entities to use as items at their fundraising events.)

In , left job and joined full time. They also incorporated the Organization as
a nonprofit corporation that year (as previously noted and discussed above). They stated they
were both able to work as unpaid volunteers using funds they'd saved up from previous
employment until those funds ran out in late

In late /early , stated that responded to an internet advertisement from a "
, CPA" in order to apply for tax-exempt status. According to , never spoke to
, but to a who answered call and requested some information. Apparently, paid the
required fee, because shortly thereafter, on , they received the final determination
letter from the IRS granting the Organization tax exemption under IRC 501(c)(3) as a public charity with
an effective date of (as previously noted and discussed above).

Application for Recognition of Exemption

Upon hearing explanation regarding how the Organization obtained its tax exemption, the
Examiner asked if the , the COO, the POA, or the Organization's lawyer were aware that
office had applied for tax exemption on behalf of the Organization using a Form
application. They were not. As such, the Examiner explained that based on review of and
the Organization's historical revenue and assets it appears the Organization wasn't eligible to apply for
tax exemption using Form . also explained that the Form application listed the
Organization's date of incorporation as and its state of incorporation as

The and the COO were genuinely surprised when they received this information. They had all
stressed their displeasure with how the application transaction was conducted and the difficulty in
obtaining any follow up information from " , CPA" even before receiving this information from
the Examiner. The COO explained that she had tried on numerous occasions to get a copy of the
application form and any supporting documentation, but the CPA's office, which is still in business and
advertising in the same manner, told that they don't keep that information on file. As such, the
and the COO weren't aware that the Organization had applied for tax exemption using a Form
. (Subsequent to the interview, the COO faxed over the information from the CPA's website, for
CPA PC", with comments and highlighted areas provided by )

Activities

The Organization provides education and training for other tax-exempt organizations, most of which are
501(c)(3) tax-exempt organizations, and assists in handling silent and live for those
organizations. As the Organization grew and evolved it adjusted its training program and now has a
training facility located within its new office building. It also created curriculum to help other tax-exempt
organizations become more sustaining. Due to COVID-19 and the restrictions it's presented, however,
the Organization has been conducting virtual and "hybrid" events and has also created a to help
with the training sessions and . The Organization began hiring employees in or and
hired independent contractors prior to that time.

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

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

In order to obtain a better understanding of the Organization's activities, during the follow-up call/Exit
Interview with the COO and POA the Examiner asked what percentage of time the Organization devoted
to education. The COO responded that it was around %. The POA explained, though, that
income and expenses aren't bifurcated between education/training activities and other activities
including . Since the Organization doesn't charge for any of the training and education it
provides, it doesn't maintain a mechanism to accurately represent these services in its income and
expenses. Instead, the Organization considers the revenue it receives from preparing and providing
as items for fundraising events conducted by other tax-exempt
organizations as Program Service Revenue related to the Organization's tax-exempt purpose in that the
revenue is used to carry on its operations. The Organization's fee for providing these as
items is $ regardless of the cost or size of the trip. The COO noted, however, that this fee is
only received by the Organization for that are actually sold at

Further explanation regarding the sale of the sold at revealed that the Organization is
responsible for completing the entire financial transaction with the individual who purchases the . In
other words, the individual with the winning bid for of the being offered at pays the full
amount of that winning bid directly to the Organization. Then the Organization performs the necessary
accounting to determine the hosting organization's portion of the proceeds and subsequently remits that
amount to that organization. (The Examiner noted that this was demonstrated by the copies of the
" Closeout Report" letter packages provided in response to the initial IDR. Each "
Closeout Report" letter package contained an " Reconciliation Report" that showed the basic
accounting performed by the Organization — the "Minimum" amount for each sold, the "
Price" for that , and the resultant "Gross Return" for that . As explained, the "Minimum" amount
included the expected cost of the and the $ fee charged by the Organization. This amount was
subtracted from the " " the sold for and the remaining "Gross Return" amount
represented the portion of the proceeds being remitted to the hosting organization.)

The POA offered the following example to further demonstrate how revenue is received and booked by
the Organization: Suppose the winning bid for a is $ and the expected cost for the is
$ Included in the "Minimum" for each trip as Cost of Goods Sold (COGS) is the $ fee
charged by the Organization. So for the example presented, $ is booked to Cash, $ to the
" " liability account (basically a reserve account used to pay for the when the
person winning the decides to ), the $ designated as COGS is booked to revenue,
and the remaining $ is booked to an account, which appears to be called " Client Payment,"
that eventually goes back to the hosting organization that held the fundraising event as their portion of
the proceeds from the sale.

With regard to the packages created for , the COO further explained that the
Organization had standard it provided for prior to . stated that in the
Organization added a few more , which, presumable, brought the total to at least standard .
The COO further explained that all of the are standard pre-planned and don't change, but that
the price for each trip changes from year to year. Since the aren't paid for until taken, the
Organization set up the " " reserve account in its Other Liabilities to hold the cash
for the expected cost of the trip until needed. When the is taken, it's paid for out of the "
" account and any increase or decrease in price hits the Organization's Current Year General
Ledger.

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

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

Articles of Incorporation ( )/Bylaws

Since the Organization applied for tax exemption using Form , no or Bylaws were required or
provided. Further, since the Form application stated the Organization was incorporated in , the
Examiner wasn't able to obtain the or Bylaws on the website since it isn't a jurisdiction that
provides this service.

As noted above, the Examiner had previously obtained the generic electronic dated
from the Department of State's website, but these provided little information. As such, the
Examiner requested the Organization's and Bylaws in the initial IDR.

In response, the Organization provided the "Amended and Restated Articles of Incorporation," signed and
dated , which included the appropriate language, including purpose and dissolution
clauses, for a 501(c)(3) entity. Also attached were the generic electronic filed with the
Secretary of State on . When asked whether the were the only the Organization
had, or has, the COO responded that the only prior to the request from the Examiner were the generic
electronic

The response also included Bylaws which are in order but weren't signed and dated. The certification date
included in the Bylaws is listed as , but since the copy submitted wasn't signed and dated
it's unclear if these Bylaws were in effect prior to submission to the Examiner.

( )
As previously stated, was incorporated in . The entity is still listed as being active on the
Department of State's website and lists and as co-founders and
as the COO. When asked about the relationship between the entities during the Initial
Interview, the explained this was how they conducted business prior to the Organization receiving its
tax-exempt status. They, along with the COO, reiterated their belief that operated as a nonprofit
in exactly the same manner that the Organization now operates.

When asked about tax returns filed for , stated that the last tax return was filed for the
tax year and that it wasn't marked final, which was confirmed by the Organization's lawyer,
. explained that he began having major health issues around that time, which continue
to the present date, and, as such, never got around to dissolving . During a previous discussion
with the COO, she stated that the reason was still in existence is that it holds certain licenses and
couldn't be dissolved for that reason, but this wasn't mentioned in the Initial Interview discussion.

In a letter from the POA to the COO, dated , he stated that didn't have any
operations in and didn't file a tax return for that period. The basically contend that
became the new tax-exempt Organization. In fact, all in attendance at the Initial Interview seemed to agree
that became, or was rolled into, the Organization and that ceased operations beginning
in with all previous operations being assumed by the Organization. This is further demonstrated by
the fact that all of the Organization's employment tax filings, including Forms W-2 and 1099-MISC, were
filed using name and EIN, which appears to be how it was done in the years prior to incorporating
the Organization.

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

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

A review of Form for the tax year ended revealed ordinary business
income for the year of $ on sales of $ . It listed the entity's business activity as "Conduct
" and its product or service as "Fundraising ." was listed as the %
shareholder on his Schedule , which listed the $ as his "Ordinary business income (loss)" on
Line 1.

Also, in response to the initial IDR request for bank statements, the COO sent bank statements for
separate accounts, in the Organization's name and in name. In response to a question
regarding the bank accounts during the Initial Interview, she stated that all accounts were being
used by the Organization, which the and the POA confirmed. (The Examiner noted during the
examination of the Organization's bank statements that all bank accounts were comingled with
transfers to and from the separate accounts and that the amounts from all bank accounts were used to
determine cash assets for the Organization's Form for the short tax year ended )

In response to the request for the Organization's bank statements, which was included in the initial
IDR for the tax year ended , the Organization provided bank statements; the
bank statements for the bank accounts corresponding to the bank accounts provided in the request for
the Organization's bank accounts and accounts in the name of . A review and analysis of the
bank accounts revealed that all accounts were comingled
with transfers to and from the separate accounts and that the amounts from all bank accounts were
used to determine cash assets for the Organization's Form for the tax year ended

The Examiner reviewed the Department of State website and discovered that
. was formed by President and Secretary,
as a not-for-profit corporation on
and is still active, listing the same address as that of the Organization and currently listing as
as Co-President, and as Vice President and Chief
Operations Officer. Further review provided no indication that applied
for or received tax-exempt status from the IRS or that it had any activity prior to

The Examiner discussed the relationship between the Organization and
Inc. with the COO and issued IDR 3 requesting a detailed description and/or explanation of the entity
. to include a discussion of the relationship between the Organization
and the entity. The IDR also requested the same information, if any, for any entities other than the
Organization, , and , that might
have been formed prior to or during the tax year ended that are related in any way to
the Organization.

The response to the IDR indicated that there were no entities other than the listed that are related to
the Organization and provided the following explanation:

The relationship of the ( ) and the
( ) is as follows.

, a not-for-profit corporation ( a not-for-profit
corporation), ( )
is a not-for-profit foundation which donates all funds it receives over its operating costs
to other, service-providing not-for-profit organizations. The vast majority of the organizations

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

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

receiving those donated funds are recognized by the IRS as 501c3 charitable organizations.

obtains the funds it donates to those service-providing 501c3 nonprofits by supplying
for those 501c3 nonprofits to sell at their typical annual fundraising dinners, black-tie
galas, etc. supplies those through . provides and manages and
for awards only. It does not sell or otherwise provide any or
for anything other than nonprofit organizations. It does not deal in the for-profit travel business
in any way.

Statutes requires that those be supplied by a state
licensed travel agency. That requirement can be confirmed at the State of Legislature
website:

In order to provide the in accordance with the law, established and incorporated
and has remained in good standing ever since. That can be confirmed by accessing
the official State of Department of State, website at:

The validity required licensure under license number can be verified at the
website:
by entering the name " "

is also licensed by and registered with the . A
copy of the website's confirmation of licensure is reproduced below.

(Note that the image of the " website's confirmation of licensure" isn't included here, but
the Examiner noted that license number was issued on , expiring , to
as a " " registered as a " ")

After reviewing the response, the Examiner asked the COO how the Organization met the
requirement to be licensed as a prior to . provided the following response:
, I would like to follow up with a further explanation for the establishment of
which was licensed in the State of in

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

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

You received a written explanation from , our founder as to the licensing requirements for
offering ; however, did not expound on the necessity and background for obtaining it.
First and foremost, we ONLY book of the that are won at of our nonprofit
partners events.

For a number of years, an individual worked with the as the "
" . is shown on all our payroll documents as a contracted employee. (You can see
this on the information previously provided to you.) owned own small and held the
necessary licenses and permits to book trips. The agreement was that she would book our at a
"net" rate, allowing to obtain the lowest price possible for the
thereby giving us the ability to provide a higher level of funding support to our nonprofit organizations.
The "net" price means was not entitled to accept commissions (which in lingo is considered
"gross" price.)

By about mid-year , we began to be suspicious of ( ) receiving unauthorized
commissions on our trips, entering into a scheme to defraud our organization with another employee on
our payroll ( ) by diverting funds, purchasing gift cards with our company
, and creating email accounts to cover tracks. began to secure the necessary
licenses and permits so that we could bring our bookings completely "in-house" and set up
as a result.

and were terminated . It took us nearly a year ( ) to
"unwind" all the crafty things the of them had done. We did bring the in-house. We
also filed a civil suit against both of them for the $ + theft as well as their taking our intellectual
property. (Training Materials).

I also wanted to let you know, in case it was not clear previously, we do not book the in advance.
The as you now know, fund our ability to educate and train the nonprofits we choose to support.
They also fund the causes of those organizations, too. But because the winner of any of our have
full years to decide when they want to , (and each includes ,
and other experiences) the funds must be held until the booking occurs. We payout
funds to the organizations we support within days of their event, so they have the necessary money
they need for their cause. The additional funds are held by us to cover the cost for the . We have
over that have to be fulfilled (booked) and that number increases each week. As we indicated
those funds are not funds - they are the funds necessary to fulfill the
obligation of the promised trip. The fluctuations in alone can cause us to lose money over that
period of years.

During Covid we felt it was the right thing to do to allow another year extension for anyone unable
to or fulfill their during the time allotted. We have no way of predicting rising costs in
but are beginning to see increases across the board in both
as a result of additional testing, cleaning protocols, etc., etc. Whereas the amount of our
cash may seem extreme to someone from the outside looking in - we still sweat knowing that we
will have enough to cover our basic costs and the promised

Please let me know if you have any questions about this.

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

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

Tax-Exempt Purpose

During a conference call on the COO and the POA explained they were struggling with how
to provide the necessary documentation to demonstrate the Organization was meeting its tax-exempt
purpose of education. As they explained, since the documentation was so voluminous they weren't sure
how best to provide the information. The Examiner discussed the options for obtaining the necessary
documentation and prepared IDR 4 to request the agreed upon information.

The following information was requested in the IDR as some of the items the Organization might provide to
demonstrate its tax-exempt purpose of education:

1. A document for each year under examination, possibly in calendar format, listing all of the
   conferences, seminars and other training sessions the organization provided for the year.

2. A brief explanation and/or list of the day-to-day operations of the organization and its employees as
   it relates to training and educational activities.

3. A small sample, possibly or from each year, of the "Thank You" notes you mentioned that
   the organization received from attendees of training and educational conferences or seminars,
   preferably from different types of training conferences or seminars and on different dates.

4. Any other document, or documents, you have or can prepare to help demonstrate that the
   overwhelming majority of the organization's activities are related to training and education verses
   the amount of time spent in assisting with and/or performing auction activities.

As noted in the IDR, this list of items was based on our discussion regarding the most efficient and
reasonable manner for the COO to provide documentation to demonstrate the Organization's tax-exempt
purpose and was not intended to be all inclusive. The COO was encouraged to provide any other
documentation she thought could be helpful in demonstrating the Organization's tax-exempt purpose of
education.

In response to the IDR, the COO provided a description of the process the Organization undertook to
evaluate tax-exempt organizations seeking training for and assistance with their fundraising events, which
included a discussion of the "Qualifying Calls" conducted with each organization, a list of the training
modules that were used during the and tax years, and a sample of some of the "Thank You"
notes the Organization had received from past attendees of its training and educational events. also
provided summarized calendars for each year that listed the entities the Organization had provided training
for and assisted with their fundraising events. As explained, the calendars had to be summarized to
meet the restrictions of faxing over the information and, as such, didn't list each training module separately.
Instead, the training modules were notated as "Education Module" with a corresponding date, but actually
represented several training modules that had been tailored for and delivered to each organization's key
personnel as necessary based on the information ascertained in the "Qualifying Call."

As noted in the response, the Qualifying Calls, which are led by one of the " Development
Directors or officers," are a required part of the process and are used as a diagnostic process to determine
if the organization seeking assistance qualifies to receive "sponsorship support" from the Organization. If
the organization seeking assistance is deemed qualified, it's moved "forward for review by a member of the
Board of Directors for consideration as a sponsored organization." The response
further stated "[T]he diagnostic process of the qualifying call is essential and provides significant
information to the Development Director and ultimately helps determine whether they will be

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

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

selected for support and the investment of in all the educational support materials needed to
actualize a successful event." As indicated, not all organizations seeking assistance qualify for
"sponsorship support" from the Organization, but, based on the response, all the organizations seeking
assistance were provided "educational advice and often educational tools" by the Development
Director on the Qualifying Call. The response further provided:

If an organization is approved for educational and event support a simple supply agreement is signed
between both parties to secure the event date on the calendar. Once signed, a call is set up
to discuss training needs and a schedule for training and who on behalf of their organization will be
participating in the training. Some training sessions must be truncated if an event is occurring within
days of involvement. Other organizations are able to take advantage of some of the
longer training programs that extend beyond the immediate needs of their fundraising goals.

The Examiner reviewed the list of training modules and noted by the names provided, as well as the
training module samples subsequently provided, that most of the training appeared to be related to how to
improve an organization's fundraising events.

Upon review of the summarized training calendars, the Examiner noted that each item listed indicated
multiple dates for training/education for each separate organization leading up to that particular
organization's fundraising event, but that no organization was listed as receiving training/education that
didn't subsequently hold a fundraising event for which it received assistance from the Organization.
Further, the Examiner noted that several organizations listed on the Organization's summarized
training calendar were also listed on the Organization's summarized training calendar.

LAW
Internal Revenue Code (IRC)

IRC Sec. 501(c)(3) exempts from federal 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.

IRC Sec. 513(c) provides that the term "trade or business" includes any activity which is carried on for the
production of income from the sale of goods or the performance of services. For purposes of the preceding
sentence, an activity does not lose identity as a trade or business merely because it is carried on within a
larger aggregate of similar activities or within a larger complex of other endeavors which may, or may not,
be related to the exempt purposes of the organization. Where an activity carried on for profit constitutes an
unrelated trade or business, no part of such trade or business shall be excluded from such classification
merely because it does not result in profit.

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

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

Treasury Regulations (Treas. Reg.)

Treas. Reg. Sec. 1.501(c)(3)-1(a)(1) 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. If an organization fails to meet either the organizational test or the
operational test, it is not exempt.

Treas. Reg. Sec. 1.501(c)(3)-1(c)(1) 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.

Treas. Reg. Sec. 1.501(c)(3)-1(d)(3)(i) provides that the term educational, as used in section 501(c)(3),
relates to:
(a) The instruction or training of the individual for the purpose of improving or developing his
capabilities; or
(b) The instruction of the public on subjects useful to the individual and beneficial to the community.

Treas. Reg. Sec. 1.501(c)(3)-1(e)(1) states that an organization may meet the requirements of section
501(c)(3) although it operates a trade or business as a substantial part of its activities, if the operation of
such trade or business is in furtherance of the organization's exempt purpose or purposes and if the
organization is not organized or operated for the primary purpose of carrying on an unrelated trade or
business, as defined in section 513. In determining the existence or nonexistence of such primary
purpose, all the circumstances must be considered, including the size and extent of the trade or business
and the size and extent of the activities which are in furtherance of one or more exempt purposes. An
organization which is organized and operated for the primary purpose of carrying on an unrelated trade or
business is not exempt under section 501(c)(3) even though it has certain religious purposes, its property is
held in common, and its profits do not inure to the benefit of individual members of the organization.

Treas. Reg. Sec. 1.513-1(b) states that the primary objective of adoption of the unrelated business income
tax was to eliminate a source of unfair competition by placing the unrelated business activities of certain
exempt organizations upon the same tax basis as the nonexempt business endeavors with which they
compete. On the other hand, where an activity does not possess the characteristics of a trade or business
within the meaning of section 162, such as when an organization sends out low-cost articles incidental to
the solicitation of charitable contributions, the unrelated business income tax does not apply since the
organization is not in competition with taxable organizations. However, in general, any activity of a section
511 organization which is carried on for the production of income and which otherwise possesses the
characteristics required to constitute trade or business within the meaning of section 162 — and which, in
addition, is not substantially related to the performance of exempt functions — presents sufficient likelihood
of unfair competition to be within the policy of the tax. Accordingly, for purposes of section 513 the term
trade or business has the same meaning it has in section 162, and generally includes any activity carried
on for the production of income from the sale of goods or performance of services. Thus, the term trade or
business in section 513 is not limited to integrated aggregates of assets, activities and good will which
comprise businesses for the purposes of certain other provisions of the Internal Revenue Code. Activities
of producing or distributing goods or performing services from which a particular amount of gross income is
derived do not lose identity as trade or business merely because they are carried on within a larger

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

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

aggregate of similar activities or within a larger complex of other endeavors which may, or may not, be
related to the exempt purposes of the organization. Thus, for example, the regular sale of pharmaceutical
supplies to the general public by a hospital pharmacy does not lose identity as trade or business merely
because the pharmacy also furnishes supplies to the hospital and patients of the hospital in accordance
with its exempt purposes or in compliance with the terms of section 513(a)(2). Similarly, activities of
soliciting, selling, and publishing commercial advertising do not lose identity as a trade or business even
though the advertising is published in an exempt organization periodical which contains editorial matter
related to the exempt purposes of the organization. However, where an activity carried on for the
production of income constitutes an unrelated trade or business, no part of such trade or business shall be
excluded from such classification merely because it does not result in profit.

Treas. Reg. Sec. 1.513-7(a) provides that travel tour activities that constitute a trade or business, as
defined in section 1.513-1(b), and that are not substantially related to the purposes for which exemption
has been granted to the organization constitute an unrelated trade or business with respect to that
organization. Whether travel tour activities conducted by an organization are substantially related to the
organization's exempt purpose is determined by looking at all relevant facts and circumstances, including,
but not limited to, how a travel tour is developed, promoted and operated. Section 513(c) and section
1.513-1(b) also apply to travel tour activity. Application of the rules of section 513(c) and section 1.513-1(b)
may result in different treatment for individual tours within an organization's travel tour program.

Treas. Reg. Sec. 1.513-7(b) states that the provisions of this section are illustrated by the following
examples. In all of these examples, the travel tours are priced to produce a profit for the exempt
organization. The examples are as follows:

Example 1.

O, a university alumni association, is exempt from federal income tax under section 501(a) as an
educational organization described in section 501(c)(3). As part of its activities, O operates a travel tour
program. The program is open to all current members of O and their guests. O works with travel
agencies to schedule approximately 10 tours annually to various destinations around the world.
Members of O pay $x to the organizing travel agency to participate in a tour. The travel agency pays O
a per person fee for each participant. Although the literature advertising the tours encourages O's
members to continue their lifelong learning by joining the tours, and a faculty member of O's related
university frequently joins the tour as a guest of the alumni association, none of the tours includes any
scheduled instruction or curriculum related to the destinations being visited. The travel tours made
available to O's members do not contribute importantly to the accomplishment of O's educational
purpose. Rather, O's program is designed to generate revenues for O by regularly offering its members
travel services. Accordingly, O's tour program is an unrelated trade or business within the meaning of
section 513(a).

Example 2.

N is an organization formed for the purpose of educating individuals about the geography and culture of
the United States. It is exempt from federal income tax under section 501(a) as an educational and
cultural organization described in section 501(c)(3). N engages in a number of activities to accomplish
its purposes, including offering courses and publishing periodicals and books. As one of its activities, N
conducts study tours to national parks and other locations within the United States. The study tours are
conducted by teachers and other personnel certified by the Board of Education of the State of P. The

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

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

tours are directed toward students enrolled in degree programs at educational institutions in P, as
reflected in the promotional materials, but are open to all who agree to participate in the required study
program. Each tour's study program consists of instruction on subjects related to the location being
visited on the tour. During the tour, or — hours per day are devoted to organized study, preparation
of reports, lectures, instruction and recitation by the students. Each tour group brings along a library of
material related to the subject being studied on the tour. Examinations are given at the end of each tour
and the P State Board of Education awards academic credit for tour participation. Because the tours
offered by N include a substantial amount of required study, lectures, report preparation, examinations
and qualify for academic credit, the tours are substantially related to N's educational purpose.
Accordingly, N's tour program is not an unrelated trade or business within the meaning of section
513(a).

Example 3.

R is a section 501(c)(4) social welfare organization devoted to advocacy on a particular issue. On a
regular basis throughout the year, R organizes travel tours for its members to . While in ,
the members follow a schedule according to which they spend substantially all of their time
during normal business hours over several days attending meetings with legislators and government
officials and receiving briefings on policy developments related to the issue that is R's focus. Members
do have some time on their own in the evenings to engage in recreational or social activities of their own
choosing. Bringing members to to participate in advocacy on behalf of the organization and
learn about developments relating to the organization's principal focus is substantially related to R's
social welfare purpose. Therefore, R's operation of the travel tours does not constitute an unrelated
trade or business within the meaning of section 513(a).

Example 4.

S is a membership organization formed to foster cultural unity and to educate X Americans about X,
their country of origin. It is exempt from federal income tax under section 501(a) and is described in
section 501(c)(3) as an educational and cultural organization. Membership in S is open to all Americans
interested in the X heritage. As part of its activities, S sponsors a program of travel tours to X. The
tours are divided into two categories. Category A tours are trips to X that are designed to immerse
participants in the X history, culture and language. Substantially all of the daily itinerary includes
scheduled instruction on the X language, history and cultural heritage, and visits to destinations selected
because of their historical or cultural significance or because of instructional resources they offer.
Category B tours are also trips to X, but rather than offering scheduled instruction, participants are given
the option of taking guided tours of various X locations included in their itinerary. Other than the optional
guided tours, Category B tours offer no instruction or curriculum. Destinations of principally recreational
interest, rather than historical or cultural interest, are regularly included on Category B tour itineraries.
Based on the facts and circumstances, sponsoring Category A tours is an activity substantially related to
S's exempt purposes, and does not constitute an unrelated trade or business within the meaning of
section 513(a). However, sponsoring Category B tours does not contribute importantly to S's
accomplishment of its exempt purposes and, thus, constitutes an unrelated trade or business within the
meaning of section 513(a).

Example 5.
T is a scientific organization engaged in environmental research. T is exempt from federal income tax
under section 501(a) as an organization described in section 501(c)(3). T is engaged in a long term

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

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

study of how agricultural pesticide and fertilizer use affects the populations of various bird species. T
collects data at several bases located in an important agricultural region of country U. The minutes of
a meeting of T's Board of Directors state that, after study, the Board has determined that non-scientists
can reliably perform needed data collection in the field, under supervision of T's biologists. The Board
minutes reflect that the Board approved offering one-week trips to T's bases in U, where participants will
assist T's biologists in collecting data for the study. Tour participants collect data during the same hours
as T's biologists. Normally, data collection occurs during the early morning and evening hours, although
the work schedule varies by season. Each base has rustic accommodations and few amenities, but
country U is renowned for its beautiful scenery and abundant wildlife. T promotes the trips in its
newsletter and on its Internet site and through various conservation organizations. The promotional
materials describe the work schedule and emphasize the valuable contribution made by trip participants
to T's research activities. Based on the facts and circumstances, sponsoring trips to T's bases in
country U is an activity substantially related to T's exempt purpose, and, thus, does not constitute an
unrelated trade or business within the meaning of section 513(a).

Example 6.
V is an educational organization devoted to the study of ancient history and cultures and is exempt from
federal income tax under section 501(a) as an organization described in section 501(c)(3). In
connection with its educational activities, V conducts archaeological expeditions around the world,
including in the Y region of country Z. In cooperation with the of Z, V recently
presented an exhibit on ancient civilizations of the Y region of Z, including artifacts from the collection of
the Z . V instituted a program of travel tours to V's archaeological sites located in the
Y region. The tours were initially proposed by V staff members as a means of educating the public
about ongoing field research conducted by V. V engaged a travel agency to handle logistics such as
accommodations and transportation arrangements. In preparation for the tours, V developed
educational materials relating to each archaeological site to be visited on the tour, describing in detail
the layout of the site, the methods used by V's researchers in exploring the site, the discoveries made at
the site, and their historical significance. V also arranged special guided tours of its exhibit on the Y
region for individuals registered for the travel tours. archaeologists from V (both of whom had
participated in prior archaeological expeditions in the Y region) accompanied the tours. These experts
led guided tours of each site and explained the significance of the sites to tour participants. At several of
the sites, tour participants also met with a working team of archaeologists from V and the
of Z, who shared their experiences. V prepared promotional materials describing the
educational nature of the tours, including the daily trips to V's archaeological sites and the educational
background of the tour leaders, and providing a recommended reading list. The promotional materials
do not refer to any particular recreational or sightseeing activities. Based on the facts and
circumstances, sponsoring trips to the Y region is an activity substantially related to V's exempt
purposes. The scheduled activities, which include tours of archaeological sites led by experts, are part
of a coordinated educational program designed to educate tour participants about the ancient history of
the Y region of Z and V's ongoing field research. Therefore, V's tour program does not constitute an
unrelated trade or business within the meaning of section 513(a).

Example 7.

W is an educational organization devoted to the study of the performing arts and is exempt from federal
income tax under section 501(a) as an organization described in section 501(c)(3). In connection with
its educational activities, W presents public performances of musical and theatrical works. Individuals

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

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

become members of W by making an annual contribution to W of $ . Each year, W offers members an
opportunity to travel as a group to one or more major cities in the United States or abroad. In each city,
tour participants are provided tickets to attend a public performance of a play, concert or dance program
each evening. W also arranges a sightseeing tour of each city and provides evening receptions for tour
participants. W views its tour program as an important means to develop and strengthen bonds between
W and its members, and to increase their financial and volunteer support of W. W engaged a travel
agency to handle logistics such as accommodations and transportation arrangements. No educational
materials are prepared by W or provided to tour participants in connection with the tours. Apart from
attendance at the evening cultural events, the tours offer no scheduled instruction, organized study or
group discussion. Although several members of W's administrative staff accompany each tour group,
their role is to facilitate member interaction. The staff members have no special expertise in the
performing arts and play no educational role in the tours. W prepared promotional materials describing
the sightseeing opportunities on the tours and emphasizing the opportunity for members to socialize
informally and interact with one another and with W staff members, while pursuing shared interests.
Although W's tour program may foster goodwill among W members, it does not contribute importantly to
W's educational purposes. W's tour program is primarily social and recreational in nature. The
scheduled activities, which include sightseeing and attendance at various cultural events, are not part of
a coordinated educational program. Therefore, W's tour program is an unrelated trade or business
within the meaning of section 513(a).

Revenue Rulings (Rev. Rul.)

Rev. Rul. 77-366 held that an organization formed to conduct winter-time ocean cruises that included
activities to further religious and educational purposes in addition to substantial social and recreational
activities didn't qualify for exemption under section 501(c)(3). The Rev. Rul. further states that "the
extensive amount of time, energy, and other resources which are regularly devoted to the conduct of social
and recreational activities, together with the manner in which such activities are scheduled in relation to
other cruise programs... demonstrate that the organization's conduct of such social and recreational
activities serve substantial independent purposes of a noncharitable nature."

Rev. Rul. 67-327 held that a nonprofit organization formed for the purpose of arranging group tours for
students and faculty of a university to allow them to travel abroad and which has no other activities is not
entitled to exemption from federal income tax under section 501(c)(3). As further stated in the Rev. Rul.,
"[T]he arranging of group tours is not in itself the instruction or training of the individual for the purpose of
improving or developing his capabilities. In view of the organization's stated purpose and activities, it does
not qualify for tax exemption under section 501(c)(3) of the Code."

Court Cases

In Better Business Bureau of Washington D.C., Inc. v. United States, 326 U.S. 279, 66 S. Ct. 112, 90 L. Ed.
67, 1945 C.B. 375 (1945), the Supreme Court held that the presence of a single non-exempt purpose, if
substantial in nature, will destroy the exemption regardless of the number or importance of truly exempt
purposes.

In Greater United Navajo Development Enterprises v. Commissioner, 74 T.C. 69 (1980), the court held that
the developer's most substantial activity and primary source of revenue was the leasing of oil well drilling

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

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

equipment for profit; therefore, it wasn't operated exclusively for exempt purposes within the meaning of
section 501(c). In short, the destination of the business income to a charitable purpose couldn't transform
a non-exempt business into an exempt activity.

In Make a Joyful Noise, Inc. v. Commissioner, T.C. Memo 1989-4, the court held that an organization
formed to operate bingo games for other exempt organizations didn't qualify for exemption under section
501(c)(3) because the services were characteristic of a commercial business.

GOVERNMENT'S POSITION

It is the Government's position that the Organization does not qualify for exemption under IRC Sec.
501(c)(3).

Under IRC Sec. 501(c)(3), an entity organized and operated exclusively for educational purposes may be
exempted from federal income tax if no part of its net earnings inures to the benefit of any private
shareholder or individual, if no substantial part of its activities are in carrying on propaganda, or otherwise
attempting, to influence legislation (except as otherwise provided in subsection (h)), and if it doesn't
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.

Under Treas. Reg. Sec. 1.501(c)(3)-1(a), 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.

Under Treas. Reg. Sec. 1.501(c)(3)-1(c), 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 IRC Sec. 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.

Treas. Reg. Sec. 1.501(c)(3)-1(d)(3)(i) defines the term educational, as used in section 501(c)(3), as either
the instruction or training of the individual for the purpose of improving or developing his capabilities, or the
instruction of the public on subjects useful to the individual and beneficial to the community.

Under Treas. Reg. Sec. 1.501(c)(3)-1(e)(1), an organization may still meet the requirements of section
501(c)(3) even if it operates a trade or business as a substantial part of its activities, but only if the
operation of such trade or business is in furtherance of the organization's exempt purpose or purposes and
if the organization is not organized or operated for the primary purpose of carrying on an unrelated trade or
business, as defined in section 513. The Treas. Reg. further provides that in determining the existence or
nonexistence of such primary purpose, all the circumstances must be considered, including the size and
extent of the trade or business and the size and extent of the activities which are in furtherance of one or
more exempt purposes.

IRC Sec. 513(c) defines the term "trade or business" as any activity which is carried on for the production of
income from the sale of goods or the performance of services and further stipulates that an activity doesn't
lose its identity as a trade or business merely because it's carried on within a larger aggregate of similar

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

activities or within a larger complex of other endeavors which may, or may not, be related to the exempt
purposes of the organization. The Code section further states that where an activity carried on for profit
constitutes an unrelated trade or business, no part of such trade or business shall be excluded from such
classification merely because it doesn't result in profit.

Treas. Reg. Sec. 1.513-1(b) provides that the primary objective in adopting the unrelated business income
tax was to eliminate a source of unfair competition by placing the unrelated business activities of certain
exempt organizations upon the same tax basis as the nonexempt business endeavors with which they
compete.

Under Treas. Reg. Sec. 1.513-7(a), travel tour activities that constitute a trade or business, as defined in
section 1.513-1(b), and that are not substantially related to the purposes for which exemption has been
granted to the organization constitute an unrelated trade or business with respect to that organization. This
Treas. Reg. further stipulates that whether travel tour activities conducted by an organization are
substantially related to the organization's exempt purpose is determined by looking at all relevant facts and
circumstances, including, but not limited to, how a travel tour is developed, promoted and operated.

Treas. Reg. Sec. 1.513-7(b) lists seven examples, all of which are for travel tours priced to produce a profit
for the exempt organization. Of the examples listed, those that are most pertinent to the current case are
Examples 1, 4, and 7.

Example 1 describes a university alumni association exempt from federal income tax under section
501(a) as an educational organization described in section 501(c)(3) that operates a travel tour program
open to all current members and their guests as part of its activities. The organization works with
various travel agencies to schedule the tours and the members make payment directly to the travel
agency, which, in turn, pays the organization a per person fee for each participant. However, none of
the tours include any scheduled instruction or curriculum related to the destinations being visited, nor do
they contribute importantly to the accomplishment of the organization's educational purpose. Instead,
the travel tour program is designed to generate revenues for the organization. As such, the travel tour
program is an unrelated trade or business within the meaning of section 513(a).

Example 4 describes a membership organization formed to foster cultural unity and to educate a certain
ethnic group of Americans about their country of origin. The organization is exempt from federal income
tax under section 501(a) and is described in section 501(c)(3) as an educational and cultural
organization. As part of its activities, the organization sponsors a program of travel tours to the
members' country of origin. Category A tours are trips to the country of origin that are designed to
immerse participants in the country's history, culture and language. Substantially all of the daily itinerary
includes scheduled instruction on the country's language, history and cultural heritage, and visits to
destinations selected because of their historical or cultural significance or because of instructional
resources they offer. Category B tours are also trips to the country, but rather than offering scheduled
instruction, participants are given the option of taking guided tours of various locations included in their
itinerary. Other than the optional guided tours, Category B tours offer no instruction or curriculum.
Destinations of principally recreational interest, rather than historical or cultural interest, are regularly
included on Category B tour itineraries. Based on the facts and circumstances, sponsoring Category A
tours is an activity substantially related to the organization's exempt purposes and does not constitute
an unrelated trade or business within the meaning of section 513(a). However, sponsoring Category B

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

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

tours does not contribute importantly to the organization's accomplishment of its exempt purposes and,
thus, constitutes an unrelated trade or business within the meaning of section 513(a).

Example 7 describes an educational organization devoted to the study of the performing arts that is
exempt from federal income tax under section 501(a) as an organization described in section 501(c)(3).
In connection with its educational activities, the organization presents public performances of musical
and theatrical works. Individuals become members by making an annual contribution to the
organization. Each year, the organization offers members an opportunity to travel as a group to one or
more major cities in the United States or abroad. In each city, tour participants are provided tickets to
attend a public performance of a play, concert or dance program each evening. The organization also
arranges a sightseeing tour of each city and provides evening receptions for tour participants and views
its tour program as an important means to develop and strengthen bonds between the organization and
its members, as well as a way to increase its financial and volunteer support of the organization. The
organization engaged a travel agency to handle logistics such as accommodations and transportation
arrangements. The organization doesn't prepare or provide educational materials to tour participants in
connection with the tours, and, apart from attendance at the evening cultural events, the tours offer no
scheduled instruction, organized study, or group discussion. Although several members of the
organization's administrative staff accompany each tour group, their role is to facilitate member
interaction. The staff members have no special expertise in the performing arts and play no educational
role in the tours. The organization prepared promotional materials describing the sightseeing
opportunities on the tours and emphasizing the opportunity for members to socialize informally and
interact with one another and with its staff members, while pursuing shared interests. Although the
organization's tour program may foster goodwill among its members, it doesn't contribute importantly to
the organization's educational purposes. The tour program is primarily social and recreational in nature.
The scheduled activities, which include sightseeing and attendance at various cultural events, are not
part of a coordinated educational program. Therefore, the organization's tour program is an unrelated
trade or business within the meaning of section 513(a).

In Rev. Rul. 77-366 an organization formed to conduct winter-time ocean cruises that included activities to
further religious and educational purposes in addition to substantial social and recreational activities didn't
qualify for exemption under section 501(c)(3). The Rev. Rul. further states that "the extensive amount of
time, energy, and other resources which are regularly devoted to the conduct of social and recreational
activities, together with the manner in which such activities are scheduled in relation to other cruise
programs... demonstrate that the organization's conduct of such social and recreational activities serve
substantial independent purposes of a noncharitable nature."

In Rev. Rul. 67-327 a nonprofit organization formed for the purpose of arranging group tours for students
and faculty of a university to allow them to travel abroad and which has no other activities is not
entitled to exemption from federal income tax under section 501(c)(3). As further stated in the Rev. Rul.,
"[T]he arranging of group tours is not in itself the instruction or training of the individual for the purpose of
improving or developing capabilities. In view of the organization's stated purpose and activities, it does
not qualify for tax exemption under section 501(c)(3) of the Code."

Based on the Supreme Court's decision in Better Business Bureau of Washington D.C., Inc. v. United
States, 326 U.S. 279, 66 S. Ct. 112, 90 L. Ed. 67, 1945 C.B. 375 (1945), even the presence of a single

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

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

non-exempt purpose, if substantial in nature, will destroy the exemption regardless of the number or
importance of truly exempt purposes.

Under the ruling of Greater United Navajo Development Enterprises v. Commissioner, 74 T.C. 69 (1980),
the court decided the developer's most substantial activity and primary source of revenue was the leasing
of oil well drilling equipment for profit, and, therefore, it wasn't operated exclusively for exempt purposes
within the meaning of section 501(c). Basically, the destination of the business income to a charitable
purpose couldn't transform a non-exempt business into an exempt activity.

The court decided in Make a Joyful Noise, Inc. v. Commissioner, T.C. Memo 1989-4 that an organization
formed to operate bingo games for other exempt organizations didn't qualify for exemption under section
501(c)(3) because the services were characteristic of a commercial business.

The examination of the Organization's activities, its books and records, and the facts and circumstances
surrounding the case revealed that the Organization's activities related to the fundraising
held for other tax-exempt entities, along with the revenue generated from the sale of the
packages it provided for these events, neither accomplish nor support its tax-exempt purpose of education.
Further, these activities represent more than an insubstantial part of the Organization's activities.

As stated by the Organization's co-founders, and , the Organization is carrying on the
same activities that its predecessor, . ), a for-profit entity,
carried on. As stated in the "Facts" section above, listed its business activity as "Conduct
" and its product or service as "Fundraising " on its last filed Form for the tax year
ended

Although, the contend that always operated as a nonprofit in the same manner that the
Organization does, the facts and circumstances don't support that argument. While it is true, as previously
explained, that the organizations appear to be operated in the same manner, was operated
for the purpose of earning revenue as a for-profit entity and not as a nonprofit organization. Since, as the
examination concluded, the Organization is, in fact, operating in the same manner as , it's
apparent that the Organization is performing an activity that doesn't further its tax-exempt purpose and is
substantial in nature.

Also, while the Examiner agrees that the Organization provides training and education to other tax-exempt
organizations, and that IRC Sec. 501(c)(3) and the Regulations thereunder do not preclude an organization
that receives tax exemption for the purpose of education under this Code section from being able to specify
the type and purpose of the education it provides, the examination clearly determined that the training and
education the Organization provides is merely a means to the end of providing for-profit fundraising for
other tax-exempt entities. Although there isn't necessarily anything wrong with providing these products
and services to other tax-exempt organizations and doing so provides a great service to increase the
fundraising efforts of these other tax-exempt organizations, the manner in which the Organization provides
these products and services, along with the way the Organization handles all of the related financial
transactions, is indicative of a commercial enterprise and not a tax-exempt purpose.

The Organization's activities related to preparing for and assisting with the fundraising events of other
entities, for which the Organization provides luxury packages as items and charges a fee of

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

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

$ for each package sold at , demonstrate characteristics of a commercial business that
doesn't further the Organization's tax-exempt purpose of education.

IRC Sec. 513(c) and Treas. Reg. Sections 1.513-1(b), 1.513-7(a), and 1.513-7(b), specifically Examples 1,
4 and 7, discuss what constitutes unrelated business income and how the unrelated business income
relative to the Organization impacts the case. Generally, organizations exempt from federal income tax are
allowed to engage in an insubstantial amount of unrelated business income transactions and maintain their
tax-exempt status by paying the associated unrelated business income tax. In the instant case, however,
as determined during the examination, the Organization derives all of its income from unrelated business
income transactions, specifically the fee of it charges for each of the packages sold at

Further, Rev. Rulings 77-366 and 67-327 provide similar fact patterns with the Organization whereby the
organizations described therein failed to qualify for exemption under section 501(c)(3). In Rev. Rul. 77-366
the failure was due to the substantial amount of social and recreational activities enjoyed by the tour group,
while Rev. Rul. 67-327 clearly states that "[T]he arranging of group tours is not in itself the instruction or
training of the individual for the purpose of improving or developing capabilities" when referring to
university student and faculty participants.

Therefore, based on the pertinent law and the court cases cited, the facts and circumstances of the case
demonstrate that the Organization does not qualify for exemption under IRC Sec. 501(c)(3).

TAXPAYER'S POSITION

The Examiner discussed findings with the COO and explained that the Government will be
recommending revocation of the Organization's exemption under Sec. 501(c)(3).

As previously stated, the Organization's co-founders and COO contend that the Organization meets the
requirements of a 501(c)(3) tax-exempt organization, so it's unclear if the Organization will accept the
recommended revocation or choose to appeal. The Organization is being solicited for its position at this
time.

CONCLUSION

The Organization does not qualify for exemption from federal income tax as it failed to substantiate that it is
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. 1.501(c)(3)-1(c).

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

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