IRS revokes a "University" that never operated and whose funds a controller spent on himself

Plain-English summary

This is the IRS's determination revoking a section 501(c)(3) organization's exemption on two grounds: it never operated for an exempt purpose, and its money went to a person who controlled it. The organization had been recognized as a school (a 170(b)(1)(A)(ii) educational organization), so donations to it had been deductible, and it later changed its name. When the IRS examined it, it found no sign the school ever ran: no curriculum, no instructors hired, no students enrolled. The same consultant who appears in a companion case controlled everything here too. He incorporated this organization (and others) at the request of people he would not name, set up its mailbox addresses, filed its paperwork, and was the only person with access to its checking account and debit card. Bank records showed he pulled out cash and charged the organization's money on personal things: restaurants, travel, retail purchases, motor-vehicle and homeowner-association fees, and medical expenses. The IRS treats him as a "disqualified person" under section 4958 (someone with substantial influence over the organization) and concludes the organization's earnings inured to his private benefit. Because it neither operated as a school nor kept its funds dedicated to charity, the IRS proposes to revoke exemption, which would end deductibility of contributions under section 170. One striking detail: although the school was never active, it paid a fee to file for a Department of Homeland Security program.

Ruling snapshot

• Question: Should a recognized 501(c)(3) school lose exemption when it never operated and its sole controller spent its funds on himself?
• Outcome: revocation (fails the operational test and its net earnings inured to a disqualified person)
• Key authorities: IRC § 501(c)(3); IRC § 4958(c), (e), (f); IRC § 170; Treas. Reg. §§ 1.501(c)(3)-1(a), (c), (d)(3)(i), (f)(2)(ii)

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service
IRS Tax Exempt and Government Entities Taxpayer ID number (last 4 digits):
Number: 202336027

Release Date: 9/8/2023 Tax periods ended:

Person to contact:
Name:
ID number:
Telephone:

UIL: 501.03-00 Fax:
Last day to file petition with United States
Tax Court:

Form:

CERTIFIED MAIL - Return Receipt Requested
Dear

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: You did not respond to
our requests for information regarding your purpose and activities. Organizations described in IRC section 501
(c)(3) of the Code and exempt under Section 501(a) must be both organized and operated exclusively for
exempt purposes. Further, no part of the net earnings of a section 501(c)(3) organization may inure to the
benefit of any private shareholder or individual. You have not demonstrated 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 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 can file an action for declaratory judgment under the provisions
of Section 7428 of the Code in either:

* The United States Tax Court,
* The United States Court of Federal Claims, or
* The United States District Court for the District of Columbia

You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this
determination letter to you. You can download a fillable petition or complaint form and get information about
filing at each respective court's website listed below or by contacting the Office of the Clerk of the Court at one
of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee
with the petition or complaint.

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E


You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available
on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to
do so. You may also file your petition at the address below:

United States Tax Court
400 Second Street, NW
Washington, DC 20217
ustaxcourt.gov

The websites of the U.S. Court of Federal Claims and the U.S. District Court for the District of Columbia contain
instructions about how to file your completed complaint electronically. You may also file your complaint at one of
the addresses below:

US Court of Federal Claims
717 Madison Place, NW
Washington, DC 20439
uscfc.uscourts.gov

US District Court for the District of Columbia
333 Constitution Avenue, NW
Washington, DC 20001
dcd.uscourts.gov

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 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.

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E


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.

You may fax your documents to the fax number shown above, using either a fax machine or online fax service.
Protect yourself when sending digital data by understanding the fax service's privacy and security policies.

Keep the original letter for your records.

Sincerely,

[illegible signature]
Lynn A. Brinkley
Director, Exempt Organizations Examinations

Enclosures:
Publication 1
Publication 594
Publication 892

Letter 6337 (Rev. 8-2022)
Catalog Number 74808E


Department of the Treasury Date:
Internal Revenue Service 09/20/2022
IRS Tax Exempt and Government Entities Taxpayer ID number:

Form:

Tax periods ended:

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

Manager's contact information:

CERTIFIED MAIL — Return Receipt Requested Name:
ID number:
Telephone:
Response due date:
Dear

Why you're receiving this letter
We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke
your tax-exempt status as an organization described in Internal Revenue Code (IRC) Section 501(c)(3).

If you agree
If you haven't already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the
contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an
organization described in IRC Section 501(c)(3) for the periods above.

After we issue the final adverse determination letter, we'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.

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


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.

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,

Digitally signed by Christopher M. Holmes
Christopher M. Holmes Date: 2022.03.20 11:07:56 -0700

for Lynn A. Brinkley
Acting Director, Exempt Organizations Examinations

Enclosures:
Form 4621-A
Form 886-A
Form 6018
Publication 892
Publication 3498

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


Form 886-A Department of the Treasury - Internal Revenue Service Schedule number or exhibit
Explanation of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
ISSUES:
Whether exemption under section 501(c)(3) of the Internal Revenue Code
("IRC") should be revoked due to:

1. Its failure to operate for an exempt purpose; and
2. Its net earnings inured to the benefit of a disqualified person.
FACTS:
Background
("the ") was incorporated in the state of by on
. The one-page article of incorporation states:
* the name is , a Non Profit Religious Corporation,
* its specific purpose is "to provide religious education programs and to continue development
of religious educations",
* it is organized and operated exclusively for charitable purpose within the meaning of IRC
section 501(c)(3), and
* upon dissolution, its assets remaining shall be distributed to an organization exempt under
section 501(c)(3).

On , as , filed a Form 1023, Application
for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code, for the
. A letter from was included with the Form 1023, stating that he was a
founding board member and willing to make a gift to the of at least $ if the
received their tax-exempt status in the coming year. The Form 1023 listed the following
board members:
*
*

The received their exemption under IRC section 170(b)(1)(A)(ii) on ;
the effective date of exemption was retroactive to . Additionally, the
was able to receive tax-deductible contributions under IRC section 170.

On , the filed a certificate of amendment with the state of
that changed their name to

Beginning with the fiscal year, ending , the began submitting
. The filed listed the name as
and stated the following information:

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
Explanation of Items

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

Tax Year Tax Period Principal Officer's Name Principal Officer's Address

Examination
An information document request was sent to the by the initial examining revenue agent
on . No response was received from the University and a delinquency notice was sent
on . Additionally, the University was notified of the Service's intent to make third party
contacts in a letter sent on

The subsequent examining revenue agent ("agent") attempted to locate the officers, for
the present and prior exam years, and was able to locate , the primary officer listed on
the . A third-party summons for testimony and available records was
hand delivered to his last known personal residence on

Interview
On , an individual answering to the name of presented himself to
the agent at the Service office located in . Upon examining his identification, the
agent determined that this was not but an acquaintance. The interview was rescheduled
to the following day. presented himself on , for an interview and to
provide available documents. Key points taken from the interview were:

* changes to the accreditation authority caused a rush in the creation of post-
secondary schools,
* stated he had incorporated the and multiple other organizations with the
state of at the behest of individuals that he declined to name,
* he was asked to help due to his familiarity with the school accreditation process,
he was involved in the filing of the ,
* the address was owned by an associate of , who allowed him to
use various suite numbers for mailing purposes based on vacancy,
* the address was a mailbox set up by to handle the
dissolution of the ;
he could not recall a or , and
the had never been active as a school.

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
Explanation of Items

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

stated that he was a consultant and not involved in the day-to-day operations for the
. When asked to list any of the other board members or provide the name of the individual
who enlisted his services, stated he did not remember or declined to answer. The agent
asked if was to be compensated for his consultant services and he stated he was a
volunteer and not compensated.

Banking Activity

At the interview, provided the monthly bank statements for the exam period
and stated that only he had access to the University's checking account and debit card. The monthly
statements for the checking account ending in showed the following
transactions.

DATE DESCRIPTION AMOUNT

Check # from
Cash Deposit
Cash Deposit
Check# pay to order of
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Cash Deposit
Cash Deposit
ATM Withdrawal
Card Purchase -
Foreign Exchange Fee
Card Purchase -
Foreign Exchange Fee
Card Purchase -
Foreign Exchange Fee
Book Transfer -
International Incoming Wire Fee
Card Purchase -

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
Explanation of Items

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

Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Cash Deposit

Web Pymt -

Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase Return -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Book Transfer
International Incoming Wire Fee
Card Purchase -
Card Purchase -
Card Purchase -
Web Pymt -

Web Pymt -

Card Purchase Return -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -

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
Explanation of Items

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

Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Foreign Exchange Fee
Card Purchase -
Card Purchase -
Foreign Exchange Fee
Card Purchase -

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


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

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

Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase Return -
ATM Withdrawal
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -
Card Purchase -

Ending Balance at Fiscal Year End

The agent asked to provide additional information on the source of the cash deposits, the
nature of the expenditures, names of individuals present at the restaurants, and how the ending
balance at the fiscal year end of , was spent by the stated that
the deposits were donations, most from individuals residing in the ; the
expenditures were meals and gifts, and he speculated that the remaining funds were used to
dissolve the . No additional documentation was received by the agent to support

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
Explanation of Items

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

statements.
LAW:

IRC section 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 education purposes, or to foster national or international amateur sports
competition, or for the prevention of cruelty to children or animals, no part of the net earnings of
which inures to the benefit of the 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 section 4958(c) defines the term "excess benefit transaction" as any transaction in which an
economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for
the use of any disqualified person if the value of the economic benefit provided exceeds the value of
the consideration (including the performance of services) received for providing such benefit. For
purposes of the preceding sentence, an economic benefit shall not be treated as consideration for
performance of services unless such organization clearly indicated its intent to so treat such benefit.

IRC section 4958(e) defines "applicable tax-exempt organization" as an organization described in
either section 501(c)(3) or section 501(c)(4) of the Internal Revenue Code or an organization which
was so described at any time during the five-year period ending on the date of the excess benefit
transaction.

IRC section 4958(f)(1) defines a "disqualified person" as (A) any person who was, at any time during
the five-year period ending on the date of such transaction, in a position to exercise substantial
influence over the affairs of the organization, (B) a member of the family of a disqualified person, and
(C) a 35% controlled entity.

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

Section 1.501(c)(3)-1(c)(1) of the Regulations states 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.

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

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
Explanation of Items

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

of private shareholders or individuals.

Section 1.501(c)(3)-1(d)(3)(i) of the Regulations defines the word "educational", as used in IRC
section 501(c)(3), as —

(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.

Section 1.501(c)(3)-1(f)(2)(ii) of the Regulations states that in determining whether to continue to
recognize the tax-exempt status of an applicable tax-exempt organization (as defined in section
4958(e) and section 53.4958-2) described in section 501(c)(3) that engages in one or more excess
benefit transactions (as defined in section 4958(c) and section 53.4958-4) that violate the prohibition
on inurement under section 501(c)(3), the Commissioner will consider all relevant facts and
circumstances, including, but not limited to, the following —

A. The size and scope of the organization's regular and ongoing activities that further exempt
purposes before and after the excess benefit transaction or transactions occurred;

B. The size and scope of the excess benefit transaction or transactions (collectively, if more than
one) in relation to the size and scope of the organization's
C. Whether the organization has been involved in multiple excess benefit transactions with one
or more persons;
D. Whether the organization has implemented safeguard that are reasonably calculated to
prevent excess benefit transactions; and
E. Whether the excess benefit transaction has been corrected (within the meaning of section
4958(f)(6) and section 53.4958-7), or the organization has made good faith efforts to seek
correction from the disqualified person(s) who benefited from the excess benefit transaction.
TAXPAYER'S POSITION:
The position is unknown at this time; however, the had dissolved with the
state of as of
GOVERNMENT'S POSITION:
It is the government's position that the exemption under IRC section 501(c)(3) should be
revoked due to (1) failure to operate for an exempt purpose and (2) net earnings inured to the benefit
of a disqualified person.

The received its exemption as a school; however, no evidence was provided to the agent
that demonstrated or showed that the attempted to instruct or train individuals, or the
public, as described in section 1.501(c)(3)-1(d)(3)(i) of the Regulations. There was no curriculum
provided to the agent, no evidence that instructors were hired, and no students found to be enrolled.

In the interview with , he cited lack of support from others, who he did not name, for the

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
Explanation of Items

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

not becoming operational. Despite never being active, on , the
paid $ to file
a program of the Department of
Homeland Security.

A review of the available documents show that was involved in the
incorporation, application for exemption, opening and use of the bank account, filing the
, and controlling the mailing addresses. It is determined that meets the
criteria in IRC section 4958(f)(1) as exercising a substantial influence over the
operations and is a disqualified person. Additionally, the meets the definition of an
applicable tax-exempt organization as described in IRC section 4958(e).

During the exam period, the statements show that the had the
following bank transactions:

Bank Activity

Deposits

Secretary of State Fees

Cash Withdrawals
Personal Transactions
Ending Balance

As the only individual with access to this bank account and the sole debit card holder,
withdrew $ in cash from this account and charged $ in personal transactions that
consisted of restaurants throughout , travel, retail store purchases,
Department of Motor Vehicle fees, homeowner association fees, and personal medical expenses.
Currently, it is unknown how the spent the remaining funds of $ and if this bank
account is still open.

CONCLUSION:
Due to the failure to operate for an exempt purpose and its net earnings inuring to the
benefit of a disqualified person, the government proposes to revoke the exemption
under IRC section 501(c)(3) effective

If this revocation becomes final, the will no longer be able to accept tax deductible
contributions under IRC section 170 and will be required to file
, for the fiscal period ending , and for all subsequent tax periods for which
the remains subject to Federal Income Tax.

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