Health-services organization lost exemption for private benefit and commercial activity

Plain-English summary

A health-services organization recognized under Section 501(c)(3) was examined after it shifted from its stated charitable, educational, and scientific purposes to providing paid services. The IRS found that its primary activities benefited related for-profit businesses owned or controlled by its director and their customers, while the organization did not publish research or demonstrate a substantial public benefit. It also found a substantial commercial purpose and activities that were not in furtherance of exemption. The IRS therefore revoked the organization’s tax-exempt status and required it to file corporate income tax returns. As an alternative position if revocation were not sustained, the IRS concluded that revenue from services to a related for-profit business was unrelated business income subject to Form 990-T filing, tax, and applicable late-filing and late-payment penalties.

Ruling snapshot

• Question: Did the organization continue to operate exclusively for public charitable, educational, or scientific purposes rather than for related private interests and commercial purposes?
• Outcome: revocation
• Key authorities: IRC §§ 501(c)(3), 511-513, 6651; Treas. Reg. §§ 1.501(c)(3)-1, 1.512(a)-1, 1.513-1; Better Business Bureau v. United States; American Campaign Academy v. Commissioner; International Postgraduate Medical Foundation v. Commissioner

Full text (IRS public release)

Department of the Treasury                              Date: MAY 02 2024
Internal Revenue Service
Independent Office of Appeals                              Person to contact:
                                                          Name:
Release Number: 202430009                                  Employee ID number:
Release Date: 7/26/2024                                    Telephone:
                                                          Hours:
                                                          Employer ID number:

                                                          Uniform issue list (UIL):
                                                          501.03-00

Certified Mail

Dear        :

This is a final adverse 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).

We have hereby revoked the favorable determination letter to you dated                         and you’re no
longer exempt under IRC Section 501(a) effective                         .

We made the adverse determination for the following reasons:
You have not demonstrated that you are operated exclusively for charitable, scientific, or other exempt purposes
within the meaning of section 501(c)(3) of the Internal Revenue Code, or that no part of your net earnings
inures to the benefit of any private shareholder or individual. You have failed to demonstrate that you are not
operated for the substantial, non-incidental benefit of private interests, including those of          and his
companies. You are also operated for a substantial commercial purpose, in addition to other substantial non-
exempt purposes. More than an insubstantial part of your activities are in furtherance of non-exempt purposes.

Contributions to your organization are not deductible under IRC Section 170.

You’re required to file federal income tax returns on Forms 1120, U.S. Corporation Income Tax Return. Mail
your form to the appropriate Internal Revenue Service Center per the form’s instructions. You can get forms and
instructions by visiting our website at IRS.gov/Forms or by calling 800-TAX-FORM (800-829-3676).

We’ll make this letter and the proposed adverse determination letter available for public inspection under IRC
Section 6110 after deleting certain identifying information. We provided to you, in a separate mailing, Letter 437,
Notice of Intention to Disclose. Please review the Letter 437 and the documents attached that show our proposed
deletions. If you disagree with our proposed deletions, follow the instructions in Letter 437.

If you decide to contest this determination, you can file an action for declaratory judgment under the provisions
of IRC Section 7428 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

Letter 1371 (Rev. 4-2024)
Catalog Number 40683R

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.

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:

U.S. Court of Federal Claims

717 Madison Place, NW

Washington, DC 20439

uscfc.uscourts.gov

U.S. District Court for the District of Columbia
333 Constitution Avenue, NW
Washington, DC 20001

dcd.uscourts.gov

Note: We won't delay processing income tax returns and assessing any taxes due even if you file a petition for
declaratory judgment under IRC Section 7428.

Taxpayer rights and sources for assistance

The Internal Revenue Code (IRC) gives taxpayers specific rights. The Taxpayer Bill of Rights groups these into
10 fundamental rights. See IRC Section 7803(a)(3). IRS employees are responsible for being familiar with and
following these rights. For additional information about your taxpayer rights, please see the enclosed Publication 1,
Your Rights as a Taxpayer, or visit IRS.gov/taxpayer-bill-of-rights.

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers and
protects taxpayers’ rights. TAS can offer you help if your tax problem is causing a financial difficulty, you've
tried but been unable to resolve your issue with the IRS, or you believe an IRS system, process, or procedure
isn't working as it should. If you qualify for TAS assistance, which is always free, TAS will do everything
possible to help you. To learn more, visit TaxpayerAdvocate.IRS.gov or call 877-777-4778.

Tax professionals who are independent from the IRS may be able to help you.

Low Income Taxpayer Clinics (LITCs) can represent low-income persons before the IRS or in court. LITCs can
also help persons who speak English as a second language. Any services provided by an LITC must be for free
or a small fee. To find an LITC near you:

* Go to TaxpayerAdvocate.IRS.gov/litmap;

* Download IRS Publication 4134, Low Income Taxpayer Clinic List, available at IRS.gov/forms; or

* Call the IRS toll-free at 800-829-3676 and ask for a copy of Publication 4134.

Letter 1371 (Rev. 4-2024)
Catalog Number 40683R

State bar associations, state or local societies of accountants or enrolled agents, or other nonprofit tax professional
organizations may also be able to provide referrals.

TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process. TAS
cannot reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition
in a United States Court.

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

Sincerely,
Danny Werfel
Commissioner
By
Valeria B. Farr
Valeria B Farr
Appeals Team Manager

Enclosures:

Publication 1

IRS Appeals Survey

cc:

Letter 1371 (Rev. 4-2024)
Catalog Number 40683R

Department of the Treasury Date:
Internal Revenue Service December 22, 2022
Tax Exempt and Government Entities

Taxpayer ID number:
Form:

Fax 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,
January 23, 2023

Why you're receiving this letter

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.

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.

Letter 3618 (Rev. 3-2024)

7 Catalog Number 348096

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 i 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,

Ursula Elbert, AGM for

Lynn Brinkley

Director, Exempt Organizations
Examinations

Enclosures:

Letter 3618 (Rev. 3-2024)
Catalog Number 34809F

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
ISSUE
Whether . is operating for the benefit of a private interest within the meaning

of Treas. Reg. Section 1.501(c)(3)-1(d)(ii)?

Whether more than an insubstantial part of .’s activities are not in furtherance of
an exempt purpose with the meaning of Treas. Reg. Section 1.501(c)(3)-1(c)(1)?

FACTS
Application for Recognition of Tax-Exempt Status
. (hereinafter referred to as “the organization”) was incorporated in the state
of as a nonprofit corporation on

The organization was granted tax-exempt status under IRC section 501(c)(3) within the meaning
of section 509(a)(1) and 170(b)(1)(A)(vi) with an effective date of

Exempt Purpose

The organization's articles of incorporation states, Its purpose as specified in the articles of
incorporation, is charitable, educational and/or scientific.

The organization’s application for exemption, Form 1023, describes the following activities they
planned to accomplish in furtherance of their exempt purposes.

a) The organization will focus on that affect many individuals
worldwide. Our goal is to ; , and fo
b) The first project will focus on people who have ’ and to
as to whether or not they have a that has recently been
classified as " Cc )-
c) The organization will provide information to in for
possible

d) The organization will

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
. OF exnipl
(May 2017) Explanations of Items
Name of taxpayer Tax identification Number (last 4 digits) | Year/Period ended
During the interview conducted on , : , Director/CEO, said the
organization's purpose isto (
) and has expanded to other aspects of and
Activities
Care:
During the interview said the organization's primary activities are providing

with ; , ' , level
was asked if the

‘organization had any other activities, he stated no other activities are conducted.

The agent reviewed the general ledger and identified main sources of income were from
services to and the other from services. No other activities were

identified during review of the organization’s financial records.

The organization’s Information Document Request #1 response states, amounts reported by the

organization as income represent payments from ; , and providers for
services rendered directly supporting the objective and mission of the organization as a
and provider. These payments were for , ;
, and . , ,and
are on our P&L statement as “ » while

Services” appears in its own income category.

Information Document Request #7 asked the organization to provide a schedule of all

receiving at the organization from to . The schedule provided information
on the of that were referred for services by

for the tax years ; and
The organization's response indicated, from to . % of the organization's were
referred for services by The ; and % ofthe
organization's were also . See Exhibit 1 for
calculation.

Service:

The Information Document Request #1 response also provides, the organization began offering
services to in of and was paid
by for hese services.

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
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

information Document Request #5 asked the organization to provide descriptions of the consulting
services the organization provides The organization responded, payments
from were for services provided by the organization consisted of providing
health content information for nutritional and medicinal supplements listed on

website and for providing nutritional information to customers contacting for
specific inquiries related to products for sale. No contracts or agreements was provided in support
of the services described by or to support the terms of the arrangement between
the organization and

From to revenues from services to averaged % of otal
revenues. See Exhibit 2 for calculation.

Related Entities:

During the interview was asked if the organization had any related entities.
responded, he owns . The ,a
and an online selling platform for selling
to the public. All entities share the same office location. Usage of office space

and expenses are allocated to each entity.

The is a for-profit business incorporated in the of on
. The annual state filing has listed as CEO.
owns and is the business main practitioner of — . , performs

, and recommends treatments. See Exhibit 3 for copy of filings.

On the ; _ there is a link to the organization’s
Website and is a division of the organization. is
the business name under which the organization engages in providing / .
On the website, under Services/ / and Services/

, are descriptions of the services provide by . The
descriptions and links are grouped together to advertise various services offered to persons
seeking services at the . See Exhibit 4 for website image.

During the phone call on 4 was asked fo explain what the expense
items described as “Kits and Supplies”. said, they were devices used by both
himself and to and to help in and

said, he frained on how to use the device and provided

guidance on ifs use on

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
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
is a for-profit business incorporated in the of on ; .
The annual state filing was amended, on _ , , to remove from
being listed as CEO/CFO. The annual state filing filed on ; , has

listed as CEO. See Exhibit 5 for copy of filings.
LAW

Internal Revenue Code section 501(c)(3) provides for the exemption from Federal income tax of
corporations organized and operated exclusively for religious, charitable, literary, scientific, and
educational purposes; no part of the net earnings of which inures to any private shareholder or
individual.

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

Treasury Regulation Section 1.501(c)(3)-1(c)(1) 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.

Treasury Regulation Section 1.501(c)(3)-1(d)(i) states, an organization may be exempt as an
organization described in section 501(c)(3) if it is organized and operated exclusively for one or
more of the following purposes:

(a) Religious,

(b) Charitable,

(c) Scientific,

(d) Testing for public safety,

(e) Literary,

(f) Educational, or

(g) Prevention of cruelty to children or animals.

Treasury Regulation Section 1.501(c)(3)-1(d)(1)(ii) which holds, an organization is not
organized or operated exclusively for one or more of the purposes specified in subdivision (i) of
this subparagraph unless it serves a public rather than a private interest. Thus, to meet the
requirement of this subdivision, it is necessary for an organization to establish that it is not
organized or operated for the benefit of private interests such as designated individuals, the
creator or his family, shareholders of the organization, or persons controlled, directly or indirectly,
by such private interests.

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

(May 2017) Explanations of Items

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

In Better Business Bureau of Washington, D.C.. Inc. v. United States, 326 U.S. 279 (1945).
An organization's activities that were aimed, in part, at promoting the prosperity and standing of
the business community were determined to serve a substantial private purpose and, regardless
of the number or importance of any of its other truly exempt purposes, will still fail to qualify for
exemption under Section 501(c)(3).

In American Campaign Academy v. Commissioner, 92 T.C. 1053 (1989), the court held an
organization that operated a school to train individuals for careers as political campaign
professionals, but that could not establish that it operated on a nonpartisan basis, did not
exclusively serve purposes described in § 501(c)(3) because it also served private interests mor exhibit
than incidentally. The court found that the organization was created and funded by persons
affiliated with entities of a particular political party and that most of the organization’s graduates
worked in campaigns for the party's candidates. Consequently, the court concluded that the
organization conducted its educational activities with the objective of benefiting the party's
candidates and entities. Although the candidates and entities benefited were not organization
“insiders,” the court stated that the conferral of benefits on disinterested persons who are not
members of a charitable class may cause an organization to serve a private interest within the
meaning of § 1.501(c)(3)-1(d)(1)(ii). The court concluded by stating that even if the political party's
candidates and entities did “comprise a charitable class, [the organization] would bear the burden
of proving that its activities benefited members of the class in a non-select manner.”

In International Postgraduate Medical Foundation v. Commissioner, TCM 1989-36 (1989),
the Tax Court considered the qualification for exemption under Section 501(c)(3) of the Code of a
nonprofit corporation that conducted continuing medical education tours. The Tax Court found that
a substantial purpose of the petitioner was benefiting the for-profit travel agency. it concluded that:
“When a for-profit organization benefits substantially from the manner in which the activities of a
related organization are carried on, the latter organization is not operated exclusively within the
meaning of Section 501(c)(3), even if it furthers other exempt purposes.” A substantial purpose of
the applicant's operations was to increase the income of the for-profit travel agency.

Rev. Rul. 72-147, 1972-1 C.B. 147, held an organization that provided housing to low-income
families did not qualify for exemption under section 501(c)(3) because it gave preference to
employees of business operated by the individual who also controlled the organization. The ruling
reasoned that, although providing housing for low-income families furthers charitable purposes,
doing so in a manner that gives preference to employees of the founder's business primarily
serves the private interest of the founder rather than a public interest.

Revenue Ruling 69-526, 1969-2 CB 115, describes an organization formed by a group of
physicians specializing in heart disease to research the cause and to publish treatments of heart
defects which qualified for exemption under section 501(c)(3) of the Code. The creators conducted
their medical practices apart from the organization's research program. Although their private
patients were accepted for study on the same criteria as other patients, the majority of the

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

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

. or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax identification Number (last 4 digits) | Year/Period ended

organization's patients had no prior contact with the creators. The organization's facilities are
maintained separately from the facilities of its physician-creators and are used exclusively for the
organization's research. The organization received exemption because it served a public rather
than a private interest as required by Income Tax Regulations section 1.501(c)(3)-1(d)(5).

TAXPAYER’S POSITION

The Taxpayer's position is unknown at this time.

GOVERNMENT’S POSITION

Based on our examination of your activities during : and , we have determined you
are not operating exclusively for an exempt purpose as required to be described in Internal
Revenue Code Section 501(c)(3) and Treasury Regulation Section 1.501(c)(3)-1(a)(1).

The following determinations are based on our findings,

1) The organization operated for the benefit of a private interest within the meaning of Treas. Reg.
Section 1.501(c)(3)-1(d)(ii).

2) More than an insubstantial part of the organization’s activities were not in furtherance of an
exempt purpose within the meaning of Treas. Reg. Section 1.501(c)(3)-1(c)(1).

Operating for the benefit of a private interest:

Section 1.501(c)(3)-1(d)(1)(ii) of the Regulations states, an organization is not organized or
operated exclusively for one or more of the purposes specified in subdivision (i) of this
subparagraph unless it serves a public rather than a private interest. Thus, to meet the
requirement of this subdivision, it is necessary for an organization to establish that it is not
organized or operated for the benefit of private interests such as designated individuals, the
creator or his family, shareholders of the organization, or persons controlled, directly or indirectly,
by such private interests.

During the interview conducted on : , Director/CEO, said the
organization’s purpose is to (
). and has
During the examination of the tax year ends , ; it was identified
the organization’s primary activities are with
services and services to

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
(May 2017) Explanations of Items
Name of taxpayer Tax identification Number (last * digits) | Year/Period ended

Primarily engaging in these activities demonstrates your operations further private interests, the

private interests of the and its : , and its
customers, rather than for a public interest. The organization's activities are primarily
aimed ai providing services to . The organization's

other primary activity is aimed at carrying on an unrelated trade or business which does not
contribute in a substantial way to the organization’s exempt purpose.

Furthermore, the organization does not publish any findings or research, nor demonstrated to
have provided any information to other unrelated entities for the benefit of the public.

You differ from the organization in Revenue Ruling 69-526 for the following reasons. In the ruling
multiple are involved in the creation of the organization rather than in your
case, . The organization in the ruling had results that were made public through
publication in professional journals, lectures, and film strips. You have not demonstrated as to how

or would be disseminated or even if research has been conducted at all.
In the ruling any personal benefit derived by the -creators did not lessen the public
benefits flowing from the organization's operations because its activities resulted in a public
benefit; however, in your case the benefit derived from your activities does not substantially
provide a public benefit because your activities result in a substantial benefit to private interest.

in Revenue Ruling 69-526 were referred to the organization as being recognized as in
need and based on whether their condition merits ; however, your
service activities are performed on you receive primarily from

referrals for the purpose of providing them with and are not evaluated to
determine whether their condition warrants a special study. Finally, in the ruling a majority of the
organization’s have never had contact with its creators; however, in your case a majority
of the organization’s have had contact with the creator since they are also of his
for-profit business.

The organization is like the organization in Rev. Rul. 72-147, it does not qualify for exemption
under section 501(c)(3) because of the preference provided to its related for-profit entities. Your
organization provides services ( services) primarily to the of a related for-
profit business, and services to customers of another related for-profit business to a degree that
indicates preferential treatment.

American Campaign Academy, 92 T.C, at 1077 holds that the organization's activities must
benefit the members of that charitable class in a “non-select manner.” A organization
that primarily provides - services to of a related for-profit business and
services exclusively to another related for-profit business is not treating all charitable
class members in a neutral manner. Instead, the organization’s close relationship with the
Director/CEO’s for-profit businesses has had the effect of directing the organization's operations to
more than insubstantially benefit the and customers of the for-profit businesses. in that
circumstance, the related for-profit’s , customers, and business are impermissibly being

Catalog Number 20810W Page 7 vAWW.ITS.goV Farm 886-A (Rev. 5-2017)

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
conferred private interest because referrals from and the
services to limit most services and all services

to specific individuals, instead of treating them all as members of the public in a non-selective
manner. Therefore, the organization, like the one in American Campaign Academy, is not
operated to serve the public.

International Postgraduate Medical Foundation v. Commissioner holds, “where a for-profit
organization benefits substantially from the manner in which the activities of a related exempt
organization are carried on, the latter organization is not operated exclusively for exempt purposes
within the meaning of section 501(c)(3), even if it furthers other exempt purposes.” The
organization operations direct its activities in a manner that more than insubstantially benefited its
related for-profit business, , and customers.

While there is some public benefit served by helping and treating , the reason the
organization was granted exemption was for charitable, educational and/or scientific purposes, not
to primarily provide services to of a related for-profit business and

services to another related for-profit business. For these reasons you are serving primarily private,
rather than public interests and no longer qualify for exemption.

Activities not in furtherance of an exempt purpose:
A tax-exempt organization under Internal Revenue Code Section 501(c)(3) must be operated

exclusively for charitable or other exempt purposes with no part of its net earnings inuring to the
benefit of any private shareholder or individual. See also Treas. Reg. § 1.501(c)(3)-1(a)(1).

The presence of a single non-exempt purpose, if substantial in nature, will destroy exemption
under IL.R.C. § 501(c)(3) regardless of the number or importance of any other exempt purposes.
Better Business Bureau of Washington. D.C. v. United States, 326 U.S. 279 (1945).

The organization has main activities, is providing services to , the

other is providing services to a for-profit entity.

From to the organization charged fees to in exchange for services.
receiving services in did receive services free of charge. However, the

number of receiving a charitable benefit was low. were provided

services free of charge in . No formal charitable policy was provided for inspection and no

proof of community benefit was established.

The organization does not research or publish findings from their services to
demonstrate how the activity furthers a scientific exempt purpose.

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
(May 2017) Explanations of Items

Name of taxpayer Tax identification Number (last 4 digifs) | Year/Period ended

The organization is not engaged in providing instruction or training to individuals for the purpose of

improving or developing their capabilities or the instruction of the public cn subjects useful to the
individual and beneficial to the community.

From to the organization provided ~ services to a for-profit business. The
organization’s services does not contribute to the development of on
or publications concerning or any other . No
are conducted, no is provided, and no research has been published

because of the activity, therefore the activity is not in furtherance of a charitable or other exempt
purpose.

From to the activities above all involved related entities. The
and are for-profit business owned and controlled by : the
Director/CEO/Founder of the organization. Secretary of state corporate fillings support

these facts. Operations directed to the benefit of related organizations do not further a charitable
purpose.

You fail to qualify for exemption because your service and service
activities benefit the interest of ; , their and
customers and in manner that is more than insubstantial like the organizations in

Better Business Bureau of Washington. D.C. v. United States, 326 U.S. 279 (1945) and
International Postgraduate Medical Foundation v. Commissioner, TCM 1989-36 (1989)

CONCLUSION

Based on the facts gathered the organization’s services to of

and services to are its primary activities. The
activities are conferring more than an insubstantial amount of benefit to private interest and do not
further an exempt purpose. Therefore, the organization fails to demonstrate that its activities
substantially further an exempt purpose pursuant to Section 1.501(c)(3)-1(c)(1) of the Treasury
Regulations and fails to establish it is operating for the benefit of the public rather than private
interest pursuant to Section 1.501(c)(3)-1(d)(1)(ii) of the Treasury Regulations. The proposed
revocation of the organization's exempt status is effective , .

Form 1120, U.S. Corporation Income Tax Return, should be filed for ; ; , and each
year thereafter if the organization remains subject to federal income tax. If the proposed
revocation becomes final, appropriate state officials will be notified of such action in accordance
with Section 6104(c) of the Internal Revenue Code.

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 exhibi

(May 2017) Explanations of Items

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

Alternative Position, if revocation is not sustained.

Unrelated Business Income (UBI)

ISSUE

Whether services revenue is defined as unrelated business income?
Whether the organization required to file Form 990-T?

Whether the organization subject to failure to file tax return and failure to pay tax penalties?

FACTS
Application for Recognition of Tax-Exempt Status
. (hereinafter referred to as “the organization’) was incorporated in the state
of as a nonprofit corporation on

The organization was granted tax-exempt status under IRC section 501(c)(3) within the meaning
of section 509(a)(1) and 170(b)(1)(A)(vi) with an effective date of

Exempt Purpose

The organization's articles of incorporation states, its purpose as specified in the articles of
incorporation, is charitable, educational and/or scientific.

The organization’s application for exemption, Form 1023, was received on . The
application described the following activities they planned to accomplish in furtherance of their
exempt purposes.

a) The organization will focus on
. Our goal is to

b) The project will focus on who have been with , and to
as to whether they that has recently been

classified as “ ae ")-

c) The organization will provide information to providers in for

possible

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
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digifs)_ | Year/Period ended

d) The organization will attempt to

During the interview conducted on ; : , Director/CEO, said the

organization’s purpose is to of (
) and has expanded to other of and
Activity
Service:

The Information Document Request #1 response also states the organization began offering
services to in of and was paid by
for these services.

Information Document Request #5 asked the organization to provide descriptions of the
services The organization provides

The organization responded payments from were for services provided
consisting of providing information for and listed
on website and for providing to

for specific inquiries related to products for sale.

During the telephone call conducted on ' , the agent asked to
explain the services offered to

responded the organization employee provides customer service to
customers, the employee answers customer questions, provides information on the benefits of the
supplements and their uses to customers. Also, the organization’s employee provides content for
's website. The organization bills based on the time the
organization’s employee says they spend on business.

The agent asked if the organization keeps track of time employees spend on providing services to
answered, they do not keep track of the time spent. They rely on
the employee to. say how much time they spent conducting .

No contracts or agreements was provided in support of the services described by or
to support the terms of the arrangement between the organization and

From to revenues from services to averaged % of total
revenues.

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

_ i Schedute b
Form 886-A Department of the Treasury — Internal Revenue Service Schedule number or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended
The organization receives payment from for services on a regular
and ongoing basis as indicated by general ledger posting of payments and bank deposits.

LAW

Internal Revenue Code Section 511 imposes a tax at corporate rates under section 11 on the
unrelated business taxable income of certain tax-exempt organizations.

Internal Revenue Code Section 512- Except as otherwise provided in this subsection, the term
“unrelated business taxable income” means the gross income derived by any organization from
any unrelated trade or business (as defined in section 513) regularly carried on by it, less
allowable deductions which are directly connected with the carrying on of such trade or business.

Internal Revenue Code Section 513- The term “unrelated trade or business” means, in the case
of any organization subject to the tax imposed by section 511, any trade or business the conduct
of which is not substantially related to the exercise or performance by such organization of its
charitable function constituting the basis for its exemption under section 501.

Treasury Regulation Section 1.512(a)-1(b) of the regulations states that only expenses
attributable solely to the conduct of unrelated business activity, and have proximate relationship to
the unrelated business activity, qualify for deduction to the extent that they meet the requirements
of sections 162, or 167, or other relevant provisions of the Code.

Internal Revenue Code Section 6651(a)(1) - the failure to file any return required, there shall be
added to the amount required to be shown as tax on such return 5 percent of the amount of such

tax if the failure is for not more than 1 month, with an additional 5 percent for each additional
month or fraction thereof during which such failure continues, not exceeding 25 percent in the
aggregate.

Internal Revenue Code Section 6651(a)(2) — the failure to pay the amount shown as tax on any
return, on or before the date prescribed for payment of such tax, there shall be added to the
amount shown as tax on such return 0.5 percent of the amount of such tax if the failure is for not
more than 1 month, with an additional 0.5 percent for each additional month or fraction thereof
during which such failure continues, not exceeding 25 percent in the aggregate

Internal Revenue Code Section 6651(c) - the amount of the addition under paragraph (1) of
subsection (a) shall be reduced by the amount of the addition under paragraph (2) of subsection
(a) for any month to which an addition to tax applies under both paragraphs (1) and (2).

Treasury Regulation Sections 1.513-1(a), (b), (c), (d) Definition of unrelated trade or business.
in general, the term unrelated business taxable income means the gross income derived by an
organization from any unrelated trade or business, regularly carried on by it, and not substantially

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

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

. or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

related to its exempt purpose; less the deductions and subject to the modifications provided in
section 512.

TAXPAYER’S POSITION

The Taxpayer's position is unknown currently.

GOVERNMENT’S POSITION

Unrelated Business Income:

services revenue meets the definition of unrelated business income as described in

Internal Revenue Code Sections 512 and 513. Services provided to
is a business activity engaged by the organization to earn a profit. The organization regularly

engages in providing services to Services are not
substantially related to the organization’s exempt purpose of charitable, educational, and scientific.
Compensated employees provide the services. The unrelated business income. is
subject to unrelated business income tax under Internal Revenue Code Section 511 at the tax rate
stated in Internal Revenue Code Section 11. Exempt Organizations subject to the unrelated
business income tax, and must submit the Form 990-T, Exempt Organization Business Income
Tax Return, for each taxable year they have gross unrelated taxable income of $1000 or more.

Expense Allocation:

The agent requested a description of services, contracts, payment agreements, time logs and any
other documents in support of the service arrangement between the organization and
Organization only provided general descriptions of the services provided.

did state billings sent to was based on the time the employee said they
had worked on business. However, no documentation was kept keeping track of
the time spent or other support for the services provided. No records of time spent on
services was provided, no agreements to establish prices for services was executed, and no
reasonable bases for expense allocation was maintained by the organization.

Treasury Regulations Section 1.512(a)-1(a) states, only expenses directly connected with the
carrying on of the unrelated trade or business and which is attributable solely to the conduct of
unrelated business activities that are proximately and primarily related to that business activity,
qualify as a deduction.

We have used the gross-to-gross receipt method to allocate expenses related to

service revenues. We have determined the gross-to-gross receipt allocation method was

reasonable in this situation for the years ending , and
, because no records were kept tracking time employees spent on

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

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number
. or exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) | Year/Period ended

activities, no agreements in support of the pay arrangements were executed between the
organization and , and no expense allocation records were maintained. The
method was used to compute the ordinary and necessary expenses by dividing the total
service revenue by total revenues, which produced the ratioof % for the tax year
ended : ,  % for the tax year , ,and % for the tax year
: . See Exhibit 1 — Alternative Position for calculations.

The expense items, employee wages, occupancy, payroll taxes and bank fees, reported on the
Form 990-EZ for the tax years : ; , , and ,
were allocated to the organization’s service operations at the applicable ratios. See
Exhibit 2 — Alternative Position for calculations.

CONCLUSION

The organization’s services activity is subject to unrelated business income tax and the
tax for the years ending and

The organization is required to file the Form 990-T returns for the years ; and fo

report unrelated business income and pay tax on unrelated business taxable income.

The organization is subject to Failure to File and Failure to Pay penalties for not filing the Form
990-T to report unrelated business taxable income and pay tax for the tax years ending

The organization’s unrelated business income taxes and penalties for calendar years ,
and are stated below:

Summary of Taxes, Penalties, and Interest
Balance Due / Taxes

Estimated Failure to File — IRC 6651(a)(1)

Estimated Failure to Pay — IRC 6651(a)(2)
Estimated Interest

Estimated Amount Due

We have prepared Form 4549 and exhibits to provide detailed deductions in assessing the
unrelated business income tax for the periods , and

' . Penalties and Interest to be calculated at the date of payment by Service
Center.

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