501(c)(3) status revoked from a group that sold luxury "trip" auction packages for other nonprofits' fundraisers, ruled a commercial business, not education

Plain-English summary

The IRS revoked the federal tax exemption of an organization that had been recognized as a 501(c)(3) public charity. The group described its mission as educating and training other nonprofits about fundraising, but its actual money came from preparing luxury "trip" packages that other charities auctioned at their galas: the organization ran the whole financial transaction, charged a set fee per package sold, held large cash reserves to fund the promised trips, and remitted the rest to the hosting charity. On audit, the examiner found the group was operating exactly like its for-profit predecessor (a travel/fundraising business whose owner had reported the income as ordinary business income), that its bank accounts were commingled across several related entities, and that essentially all of its revenue came from these package sales rather than from any educational activity. Applying the rule that a single substantial non-exempt purpose defeats exemption (and the travel-tour and unrelated-business-income regulations under sections 501(c)(3) and 513), the IRS concluded the organization was operated primarily as a commercial enterprise, not exclusively for exempt educational purposes. Exemption was revoked, and the organization was told it must file corporate income tax returns (Form 1120) going forward. This matters because it shows that routing business profits to charitable ends does not, by itself, make an organization tax-exempt: what controls is whether the organization's own activities are primarily charitable or educational.

Ruling snapshot

• Question: Does the organization still qualify for exemption under IRC § 501(c)(3), given that its revenue comes from selling "trip" packages as auction items for other nonprofits' fundraising events?
• Outcome: Revocation (final adverse determination; exemption revoked, Form 1120 filing required)
• Key authorities: IRC §§ 501(c)(3), 513(c); Treas. Reg. §§ 1.501(c)(3)-1(a), (c), (d)(3)(i), (e)(1), 1.513-1(b), 1.513-7(a) & (b); Rev. Ruls. 77-366 and 67-327; Better Business Bureau v. United States, 326 U.S. 279 (1945); Greater United Navajo Development Enterprises v. Commissioner, 74 T.C. 69 (1980); Make a Joyful Noise, Inc. v. Commissioner, T.C. Memo 1989-4

Full text (IRS public release)

(Scanned document; OCR-proofread. Obvious scan misreads were corrected; wording is preserved verbatim, and redaction gaps left by the IRS appear as blank spaces or underscores.)

Department of the Treasury
Internal Revenue Service                                   Date: January 20, 2022
IRS Tax Exempt and Government Entities

Release Number: 202305012
Release Date: 2/3/2023
UIL Code: 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
Washington, DC 20217               Washington, DC 20439               Washington, DC 20001

Letter 6337 (12-2020)

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                                   Date: October 13, 2021
IRS Tax Exempt and Government Entities

Response due date: November 12, 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.

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                Explanations of Items

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 III, 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
        - 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 officers, 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)
[Financial schedules for the short year ended and the year ended — revenue, expenses, assets, and
liabilities line items appear here; the dollar amounts were redacted by the IRS. Revenue consisted of
Program Service Revenue ("Auction Income") and Investment Income; a large "Other Liabilities"
("Donor Travel Deposits") balance appears among 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
organizations. 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
received the majority of their income from "     . Income," which is income derived from the "sale" of
        packages prepared by         , 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   ", 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 blog to help
with the training sessions and         . The Organization began hiring employees in         or         and
hired independent contractors prior to that time.

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         the
Organization added a few more         , which, presumably, brought the total to at least ten 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.

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.

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 commingled 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 commingled
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         as a not-for-profit corporation on
and is still active, listing the same address as that of the Organization and currently listing         as
President and Secretary,         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         , a not-for-profit corporation
   (   ) and the         a not-for-profit corporation, (   )
   is as follows.

           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
   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 Title     , Chapter     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, Division of Corporations 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       .

   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 "         "
   arm.         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 ghost 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.

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 versus
   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
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.

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
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(c), 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:

[The regulation's Examples 1 through 7 are reproduced in full in the audit report. In summary: Example 1
(university alumni association travel tours with no scheduled instruction — unrelated trade or business);
Example 2 (educational organization's study tours with certified teachers, examinations, and academic
credit — substantially related); Example 3 (501(c)(4) advocacy organization's Washington, DC tours of
legislator meetings — substantially related); Example 4 (cultural organization with Category A immersion
tours that are related and Category B recreational tours that are not); Example 5 (scientific organization's
data-collection field trips — substantially related); Example 6 (educational organization's expert-led
archaeological expedition tours with educational materials — substantially related); Example 7 (performing-
arts organization's primarily social/sightseeing tours with no coordinated educational program — unrelated
trade or business).]

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
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).

[The Government's Position restates IRC Sec. 501(c)(3), Treas. Reg. Sec. 1.501(c)(3)-1(a), (c), (d)(3)(i),
and (e)(1), IRC Sec. 513(c), and Treas. Reg. Sec. 1.513-1(b) and 1.513-7(a) and (b), and explains that
Examples 1, 4, and 7 of Treas. Reg. Sec. 1.513-7(b) are the most pertinent to this case, along with
Rev. Ruls. 77-366 and 67-327 and the Better Business Bureau, Greater United Navajo Development
Enterprises, and Make a Joyful Noise court cases.]

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
$     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.

Form 886-A (Rev. 5-2017)  Catalog Number 20810W