IRS revokes 501(c)(3) status of a residential youth program for inurement to its director and destroyed records

Plain-English summary

A charity ran a residential program for youth with difficult behaviors, offering mentoring, outdoor activities, farm work, and counseling. The IRS revoked its 501(c)(3) exemption on two grounds. First, private inurement: the founder, who was president and executive director and had complete financial control, owned the real estate and vehicles the charity used and was paid rent with no written lease, charged personal and business expenses to the charity's credit cards without receipts, and took a "loan" from the charity for personal expenses that was never documented or repaid. Second, recordkeeping failure: after the program closed, the director destroyed all of the organization's records, so the charity could not substantiate that its spending served exempt purposes rather than private benefit. Because a 501(c)(3) may not let its earnings inure to insiders and must keep adequate records under sections 6001 and 6033, the IRS revoked the exemption. The organization must file corporate income tax returns for the years it operated.

Ruling snapshot

• Question: Should a 501(c)(3) lose exemption where its controlling insider received rent, credit-card benefits, and an undocumented loan, and the organization destroyed the records needed to prove exempt operation?
• Outcome: Revocation (final adverse determination under Letter 6337) for inurement and failure to maintain records
• Key authorities: IRC § 501(c)(3); Treas. Reg. § 1.501(c)(3)-1(c)(1), (c)(2); IRC §§ 6001, 6033; Treas. Reg. §§ 1.6001-1, 1.6033-1(h)(2); Rev. Rul. 59-95; IRC § 7428

Full text (IRS public release)

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

Date: February 1, 2022
Taxpayer ID number:
Form:
Number: 202246011
Release Date: 11/18/2022
Tax periods ended:
Person to contact:
Name:
ID number:
Telephone:
Fax:
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 15, 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: November 15, 2021

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 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.

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

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.

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,

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 Schedule number or exhibit Explanations of Items Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended

ISSUES
Whether the 501(c)(3) status of (" ") should be
revoked due to inurement to insiders and failure to maintain records per sections 6001 and 6033 of the Internal Revenue Code.

FACTS

is currently classified as a publicly supported organization
described under IRC section 501(c)(3) and 509(a)(2). The IRS issued a determination letter on , with an effective date of . Neither the tax-exempt nor foundation status have changed since its original ruling in

The Form states that President and his wife formed a
for with difficult behaviors as a place where can send their
away from negative influences, to receive mentoring, learn new skills and receive counseling.

Activities for include outdoor work, swimming, hiking, camping, fishing, horseback riding, biking, sledding, and skiing, woodworking, maintenance, and community service. The also help with the work of the , by participating in animal care for the horses, cows, llamas, and other animals. Youth also take part in church activities.

The filed Form , Return of Organization Exempt from Income Tax, for tax years
, and . The Form showed as Executive
Director/BOD Director. The Form listed him as an officer, key employee and highest compensated employee. compensation for hours a week is
$ per year.

Schedule L Part II, Loans to/and from Interested Persons, shows that obtained a loan from the Organization approved by the Board of Directors for personal expenses. The balance due of the loan is $ on

Schedule L Part IV, Business Transactions Involving Interested Persons, lists related persons on the Board of Directors. and are siblings of

The Form shows that received rent of $ for the property
from the organization.

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

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

Part VII, Compensation of Officers, Directors, Key Employees, Highest Compensated Employees, lists ( ) officers: ; , , , and . out of officers are related: and are is a of

Part VIII, Statement of Revenue, shows school income as $ and other contributions as $ , for total revenue of $ . Part XI, Statement of Functional Expenses, shows total expenses as $

Internet research revealed that the had attracted the attention of the press and newspapers in . The newspaper published a series of articles devoted to " " education and

Several articles negatively reviewed the history and activities of the

1) programs for operate with no Oversight by
2) Former describe isolation, physical punishments,
By :
3) New troubled under investigation for false license claim by
The Secretary of State website shows that
domestic non-profit corporation, public benefit corporation without members was formed on
. Current entity status: involuntary dissolution. Inactive date was on due to failure to file an annual report. The last annual return was filed filings by filed on , and secured by for inventory, equipment and proceeds, general intangibles, etc. Registered Agents: .

The facility of the organization was located at
. Internet research and description provided by show that there were ( ) buildings, an apartment, and a shop on the parcel. The buildings were used as living quarters for , classroom facilities, living quarters for staff, kitchen, etc. Also, the had other separate buildings — barns, tents, corrals for cows and horses.

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

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

Per the facility was foreclosed and the bank took ownership officially in The property located at that also related to the and its owners was sold on

Communication history with

On Agent mailed Letter 3611, Exempt Organization Initial Appointment - No Prior Contact, Information Document Request # 0001 ("IDR") and Publication 1, Your Rights as a Taxpayer, to the address on file ( ).

On Agent called the by telephone numbers #
, with no response, phones were disconnected or busy.

Agent called # for at
. The telephone seemed to be working, but nobody picked up and it did not provide an option to leave a voicemail.

On Agent prepared and mailed Letter 3164-E, Third Party Contact, to the along with Form 9814, Request for Mail/Shipping Service, with a tracking number.

Agent checked the tracking number from previous Form 9814 sent with Letter 3611 and IDR

0001. UPS record shows that Letter 3611 and IDR # 0001 were received on

. UPS proof of delivery states that "letter was received by customer"

Agent mailed Form 4759, Address Information Request - Postal Tracer, to the local Postmaster, USPS office in

On Agent received a response from the Postmaster in . The
forwarding address for
. This address belonged to , the Officer and of

On Agent sent Letter 5077-D, TE/GE Information Document Request Delinquency Notice - Pre-Summons, along with the IDR # 0001 to the new address provided by the Postmaster with a tracking number.

On Agent mailed Form 2039, Summons, with attachment to the bank and notified by certified mail.

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

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

On Agent received a return notification (received ) that
received the summons.

On Agent received a response for summons from with
statements, checks, etc. for the calendar year ending

On Agent collected certified mail received by IRS Seattle post of duty on
. It was the certified letter mailed by the Agent previously on to the to its address in . It was returned to sender unclaimed. The post office marked that they could not forward the mail.

On , Agent sent Letter 3618, 30-day Letter - Proposed Revocation of Exempt Status under IRC section 501(c)(3), with attachments to addresses: and

On received a voicemail from and called him back.
stated that was foreclosed and "the bank got it".
had closed the and not going to reopen it. confirmed a new address

On the signed form by was received. The statute was
extended until .

On Agent received documents in response to IDR # 001 ( file,
, bank reconciliations, statements, etc.) from the accounting firm.

On , Agent conducted a phone interview with , President.
stated that the was closed in or . The were
sent home, remaining funds in the bank were used to pay mortgage, utilities in attempt to sell . Furniture was donated to other facilities, appliances to churches. A vehicle was given away to the church on the Indian reservation.

Agent issued an IDR # 0002 for to review the interview notes and IDR # 0003 to clarify some issues and verify that the expenses claimed are substantiated with receipts.

In response to IDR # 0003 received on stated that
"does not have an office any longer and with all of the personal records that did exist I chose to destroy all records after twenty years of keeping records and not having adequate space to store them". responded to the questions as he could remember and recall.

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

Below is the information from Form and the Adjusted Trial Balance provided by the accounting firm in response to IDR # 0001. Amounts reported per return and Adjusted Trial Balance:

The monthly for the calendar year of was $ per month,
plus a incidental allowance account of $ each month. Also, guardians of the agreed to pay the upon admission a -time (non-refundable) processing fee of $ . Depending on the date of admission, the initial payment was prorated as dollars ($ ) per day. See Addendum 1.

Per , the , with average per
month.

The adjusted trial balance reflects adjustments made to the different accounts. See Addendum 2.

Table 1 Income on Form and the Adjusted Trial Balance for the year ending Description Per Form (Statement of Functional Expenses, Part IX) Per Profit & Loss Statement Contributions $ $ Program revenue: income $ $ Investment income $ $ Total revenue: $ $

The initial profit & loss statement had a difference of $ in school revenue between total income on Form ($ ) and profit & loss statement ($ ). The adjusted trial balance shows that the adjustments were made to reclassify $ of Uncategorized income to program revenue, business expenses of $ from rent expense, to zero out negative difference of $

Table 2 Expenses on Form and the Adjusted Trial Balance for the year ending Description (per Form , Statement of Revenue, Part VII; and Per Profit & Loss Statement) — line-item amounts redacted: Compensation of current officers, directors Other salaries and wages Payroll taxes Employee benefits Accounting Advertising and Promotions Office expenses Information technology Occupancy Travel Interest Insurance Groceries Contract services Client services Operational services Donations All other expenses Total expenses:

Depreciation claimed on Line 22, Part IX, Form is $ ; it matches the adjustment for depreciation on the adjusted trial balance.

Table 3 Assets on Form and the Adjusted Trial Balance for the year ending Description Per Form (Balance Sheet, Part X) Balance Sheet Statement Cash $ $ Savings $ $ Accounts receivables $ $ Loans from current and former officers $ Land, buildings, and equipment less accumulation $ Total assets: $ $

The initial balance sheet showed accounts receivables amount of $ as negative number. Adjusted trial balance zeroed out the negative $ , thus removing it from the balance sheet.

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

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

Table 4 Liabilities on Form and the Adjusted Trial Balance for the year ending Description Per Form (Balance Sheet, Part X) Balance Sheet Statement Accounts Payable, Accrued Expenses (payroll plus credit cards) $ $ Mortgages, Notes Payable (Secured) $ $ Notes, Loans Payable (Unsecured) - Total liabilities: $ $

The amounts of liabilities on Form and the balance sheet match. Accounts payables (current liabilities) include credit card charges and payroll liabilities ($ of credit cards plus $ of payroll liabilities). Total credit cards line on the balance sheet shows a total amount of $ . This includes credit card balances for (account - $ ) and ( - $ ; - $ ; total of $ )

Payroll liabilities with total amount of $ include balance for Form in amount of
$ ; state withholdings for $ , Unemployment - for $

Bank statements —

responded to the summons and provided bank statements and
checks for accounts that belong to

1) Basic Checking Account — main business account for the
organization. The payments were deposited into this account and operational organizational expenses were paid from this account.

Authorized representatives on the account:

Incoming deposits into the account total $ and outgoing withdrawals equal
$ for the calendar year

Table 5 Money movement on the account for the year ending
(Columns: Month | Balance-BOM | Deposits | Withdrawals | Balance-EOM; monthly amounts redacted) January February March April May June July August September October November December Total per Bank Stmts

Catalog Number 20810W Page 7 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

2) Checking/Savings account — mostly served as savings account for the organization.

Table 6 Money movement on the account for the year ending
(Columns: Month | Balance-BOM | Deposits | Withdrawals | Balance-EOM; monthly amounts redacted) January February March April May June July August September October November December Total per Bank Stmts

Authorized representatives on the account: .
The deposits of $ were transferred from checking account plus
accrued interest. Withdrawals include a transfer of $ to account and
$ withdrawal made by phone request by

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

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

Credit Cards -
During the interview with , stated that people —

• had the credit cards issued by The
  also had a debit card that was hardly used; and another credit card in case of emergency, for was issued to with $ credit limit. The balance sheet listed credit cards balances under current liabilities: Balance on card XXXX $ card XXXX $ card XXXX $ card XXXX $ Total: $

Agent reviewed the General Ledger and selected transactions for year for credit cards and . See Addendum 3.

Most of the transactions made by the credit cards are for the gas, restaurants, airfare tickets, retail stores, hardware stores, etc. The credit card bills were paid from the account

• property and equipment transactions

The at belonged to
He rented it out to the and received rent.

Form , Schedule L, Part IV, Business Transactions Involving Interested Persons, disclosed rent of $ paid to , Executive Director.

In response to IDR # 0001 received on , the accounting firm stated that "all real estate and equipment used by the organization was owned by the executive director,
. The organization made the loan payments on the real estate and equipment on behalf. The organization also paid the real estate taxes associated with the property, as well as miscellaneous vehicle expenses for the vehicles. These payments were reported as rent expense for the organization, and as rental income to on personal income tax return. There was no formal rental agreement for this arrangement. The amounts included in rents are listed below for a total expense of $

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

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

1) Real estate loan payments = $
2) Real estate tax payments = $
3) Equipment loan payments = $
4) Miscellaneous vehicle expense payments = $

During the interview confirmed that the facility was on name
and received the rental payments from the organization. All the payments for the mortgage, real estate taxes, insurance, etc. were made from the business account

During the interview said that the owned vehicles:
. Also, owned vehicles registered in
his name. stated that he used vehicles mostly for the business of the organization and partly for the personal use.

The paid the credit loans for the vehicles and equipment owned by The payments were made from the business account to , and were included into the rental payment to

Credit organization Amount per General Ledger $
$
Total: $

Other miscellaneous equipment was also included into the rental payment and paid from the business account.

— personal loan

Schedule L Part II Loans to/and from Interested Persons shows that obtained a loan from the Organization approved by the Board of Directors for personal expenses. Balance due of the loan is $

Adjusted trial balance shows $ with adjustment of $ that was reclassified to account (Loan Receivable — for personal expenses paid by the organization.

In his response to IDR # 0003 said that "used a personal credit card for many years to purchase many different things for the and we paid that card off and

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

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

for some reason this was noted as a loan I am not sure why". did not have a written agreement.

LAW

IRC § 501(c)(3) exempts from Federal income tax corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or 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 and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office.

An organization is "operated exclusively" for one or more exempt purposes only if it engages primarily in activities that accomplish one or more exempt purposes specified in section 501(c)(3), and not more than an insubstantial part of its activities further a non- exempt purpose. See section 1.501(c)(3)-1(c)(1).

An organization is not operated exclusively for exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. Section 1.501(c)(3)- 1(c)(2).

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

IRC § 6033(a)(1) provides, except as provided in IRC § 6033(a)(2), every organization exempt from tax under section 501(a) shall file an annual return, stating specifically the items of gross income, receipts and disbursements, and such other information for the purposes of carrying out the internal revenue laws as the Secretary may by forms or regulations prescribe, and keep such records, render under oath such statements, make such other returns, and comply with such rules and regulations as the Secretary may from time to time prescribe.

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

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

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

such tax. Such organization shall also keep such books and records as are required to substantiate the information required by IRC § 6033.

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

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

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

Government's Position:

1. Failure to maintain records

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

Taxpayer did not have records to substantiate its expenses. stated that destroyed all the records since he did not have an adequate storage to keep them after closed the organization. Taxpayer is therefore unable to show that it was engaged primarily in activities that accomplish one or more exempt purposes specified in section 501(c)(3), rather than being engaged in activities that further a non-exempt purpose.

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

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

Gross deposits per bank statements for the checking account is
$ . Gross receipts per Form /Adjusted trial balance is $ . The
difference of $ was unexplained.
Gross receipts per Form Gross deposits per bank statements Difference
$ $ $

2. Inurement

Furthermore, the has failed to establish that its earnings did not inure have inured, in substantial part, to the benefit of , Executive Director, or other insiders. An organization is not operated exclusively for exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals. Section 1.501(c)(3)- 1(c)(2). was in a position of complete financial control during the years under examination. Because of this control, was able to use the credit card and its cash to pay expenses that appear more personal in nature, and has not provided records to show the business or exempt purpose.

The analysis of the General Ledger transactions revealed some questionable expenses.

The travel expenses of $ were claimed on Line 17, Travel, Part IX, Statement of Functional Expenses Form . It matches the Account amount of the adjusted trial balance after several adjustments made. Account Travel account consists of the following expenses (See Addendum 2):

Account 630 Travel Amount
Facilities and Equipment: Auto Expense $
Facilities and Equipment: Auto Expense: Gas $
Facilities and Equipment: Auto Expense: Maintenance $
Travel and Meetings: Conference, Convention $
Travel and Meetings: Lodging $
Operations: Meals $
Travel and Meetings: Travel $
Total: $

In response to IDR # 003 explained that travel expenses would "include airline tickets and baggage fees for and staff on many different occasions would go home for visits. Also, it would include fuel, motels, meals, car rentals and other expenses involved on those trips."

However, per the Agreement (See Addendum 1), financial obligations of the include payments for airline or other forms of commercial travel, travel to and from airports, medical visits, any appointments, weekly activities & super activities, incidental allowance expenditures of $ per month. The incidental allowance expenditures may include craft projects, school supplies, field trips, and family outings.

Per General Ledger the expenditures for gas - $ - were partly charged and paid from the checking account (check) and partly by credit card
, and .

Addendum 3 itemizes transactions for credit cards ( and ) used
by

The credit card charges include miscellaneous transactions for gas stations, supermarkets, hardware stores, restaurants, etc. such as , , ,
, , , , etc.
Total charges for credit card were $ with $
for the gas charges. Since there is no substantiation the Service can't determine how much of these gas expenses were used for the tax-exempt purposes and for personal use.

Per General Ledger and Adjusted Trial Balance the expenditures for restaurants and meals were partly charged and paid from the checking account (check) and partly by credit card , , and
. The total charges for the restaurants on the card make up $

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

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

Some of the meals indeed may have been bought for students on the way to the doctor's or other appointments, i.e. , , , etc. But other restaurants like , , ( ) appear more consistent with the purchasing patterns of adults, rather than . If some of the charges for the restaurants were indeed spent on the , then the charges for the "adult" restaurants are $ Also, the credit card has an Interest expense charge for amount of $ . This expense was included into the amount of $ on Line 20 Interest, Part IX, Statement of Functional expenses, Form

Table 7 Unsubstantiated personal expenses on the card XXXX6570 Unsubstantiated expenses on card Amount Gas charges $ Restaurants and meals $ Interest expense $ Total: $

The credit card used by shows miscellaneous transactions
for academic fees to and , interest expense, office
supplies, travel expenses, licenses and permits to Secretary of State, etc. with total charges of $

The total interest expense is $ ; it was included into $ on Line 20 Interest, Part IX, Statement of Functional expenses, Form . Per General Ledger and Adjusted Trial Balance Interest expense of $ includes interest charges on cards and ($ and $ ), ($ ), Bank of America ($ ), — Construction ($ ). Since the has not provided documentation to substantiate the expenses (receipts, invoices, etc), the Service can't determine if these expenses served the exempt purpose of the organization or were personal expenses of in everyday life and for property.

Table 8 credit cards — personal expenses
Payments Amount
Credit card $
Credit card $
Total: $

This $ of the personal expenses were not included into
compensation or rental payment and were not disclosed on Form . Actually, the amount for personal transactions may be higher but it's difficult to determine since the audit was conducted via correspondence due to COVID-19 restrictions and there were no source documents provided by the

Form discloses the following information in regard to

• Compensation - Form W-2 - $
• Rental payment - $
• Personal Loan balance - $

Form shows wages income of $ and rental income of $
claimed on Schedule E. Form was issued for $ for rents and
adjustment for $ was made per adjusted trial balance (see Addendum 2), total of
$

The balance of his personal loan on was $ after the $
adjustment was made on the account Loan Receivable — to reclassify personal expenses to employee loan (see Addendum 2). There was no written agreement between and about the terms of the loan, payment schedule, etc. There is no substantiation that the personal loan was paid back to the organization.

Accordingly, it is the Service's position that the organization has failed to demonstrate that it was operated exclusively for exempt purposes for the tax year ended

It has failed to maintain records in support of its exempt operations, and therefore has not established that it is observing the conditions required for the continuation of exempt status. Furthermore, it has failed to demonstrate that its earnings did not inure to the benefit of or other insiders. Accordingly, it is proposed that the organization's exempt status be revoked effective

Taxpayer's Position:

Taxpayer said that he closed the in and he does not plan to restart the operations.

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

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

Taxpayer stated that he used the remaining funds in the bank to pay mortgage, utilities in attempt to sell the property. The furniture and appliances were donated to the other organizations, e.g. a church on the reservation. The vehicles were donated as well, the van was given away to the church on the reservation.

In his response to IDR # 0003 stated that he used a personal credit card for many years to purchase different things for the , paid that card off and for some reason this was noted as a loan, does not know why.

Taxpayer explained that used credit card to pay for the
operational expenses, taking students to doctors, taking them to the restaurants to have meals on the way to the appointments, etc. Per his words, another credit card was used for paying academic fees to , etc. During the interview and following responses to IDRs stated that does not have any receipts to substantiate the expenses. informed that destroyed all the records since did not have an adequate storage to keep them after he closed the organization.

Conclusion:

It is the Service's position that the Organization does not qualify for exemption from federal income tax under IRC § 501(c)(3). The proposed date of the revocation is . Form , U.S. Corporation Income Tax Return, should be filed for and subsequent years during which the was operational.

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