Child-recovery charity lost exemption after substantial insider transfers and personal spending

View official IRS release (PDF)

Plain-English summary

A charity used volunteers to help locate and recover missing or exploited children, including work under a contract with a rehabilitation center. After that contract ended, the organization’s reported recoveries and funding declined. Its president controlled its bank accounts, also owned related for-profit investigative businesses, and received compensation and other transfers. The IRS found that the charity did not substantiate several transfers or extensive credit-card charges for items such as food, alcohol, cigars, gas, travel, home security, and vehicle costs, although it accepted certain documented vehicle repairs, gun purchases for resale, and audit-representation fees as business expenses. The examination concluded that the president received multiple substantial excess benefits, that the charity lacked safeguards and had not shown correction, and that its funds inured to an insider. The IRS therefore revoked the charity’s IRC § 501(c)(3) exemption.

Ruling snapshot

• Question: Did transfers and personal-card payments benefiting the charity’s president constitute inurement that defeated IRC § 501(c)(3) status?
• Outcome: Revocation
• Key authorities: IRC §§ 501(a), 501(c)(3), 4958; Treas. Reg. §§ 1.501(a)-1(c), 1.501(c)(3)-1; Founding Church of Scientology v. United States, 412 F.2d 1197 (Ct. Cl. 1969)

Full text (IRS public release)

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

[redacted]

[redacted]

Date:
09/30/2024

Taxpayer ID number (last 4 digits):
[redacted]

Form:
[redacted]

Tax periods ended:
[redacted]

Person to contact:
Name: [redacted]
ID number: [redacted]
Telephone: [redacted]
Fax: [redacted]

Release Number: 202516009
Release Date: 4/18/2025
UIL Code: 501.03-00

Last day to file petition with United States
Tax Court:
12/30/2024

CERTIFIED MAIL - Return Receipt Requested

Dear [redacted]:

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
[redacted]. Your determination letter dated [redacted] is revoked.

Our adverse determination as to your exempt status was made for the following reasons: You have not
demonstrated that you operated exclusively for an exempt purpose as described in section 501(c)(3). Treasury
Regulation section 1.501(c)(3)-1(d)(1)(ii) provides that an organization is not operated exclusively for exempt
purposes unless it serves a public rather than a private interest. We hereby determined that you operated for the
benefit of private interests of a private individual. You have failed to show that no part of your net earnings
inure to the benefit of a private individual.

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

Letter 6337 (Rev. 3-2024)
Catalog Number 74808E

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:

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).

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 if 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. Visit TaxpayerAdvocate.IRS.gov/contact-us or call 877-777-4778 (TTY/TDD 800-829-4059)
to find the location and phone number of your local advocate. Learn more about TAS and your rights under the
Taxpayer Bill of Rights at TaxpayerAdvocate.IRS.gov. Do not send your Tax Court petition to TAS. Use the
Tax Court address provided earlier in the letter. Contacting TAS does not extend the time to file a petition.

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.

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.

Letter 6337 (Rev. 3-2024)}
Catalog Number 74808E

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,
A. Brinkley

Director, Exempt Organizations Examinations

Enclosures:

Publication 1
Publication 594
Publication 892

Letter 6337 (Rev. 3-2024)
Catalog Number 74808E

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

[redacted]

[redacted]

Date:
05/10/2024

Taxpayer ID number:
[redacted]

Form:
[redacted]

Tax periods ended:
[redacted]

Person to contact:
Name: [redacted]
ID number: [redacted]
Telephone: [redacted]
Fax: [redacted]

Address:
[redacted]

Manager’s contact information:
Name: [redacted]
ID number: [redacted]
Telephone: [redacted]

Response due date:
June 7, 2024

CERTIFIED MAIL - Return Receipt Requested

Dear [redacted]:

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

If you agree
If you haven’t already, please sign the enclosed Form 6018, Consent to Proposed Action, and return it to the

contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an
organization described in IRC Section 501(c)(3) for the periods above.

After we issue the final adverse determination letter. we'll announce that your organization is no longer eligible
to receive tax deductible contributions under IRC Section 170.

If you disagree

1. Request a meeting or telephone conference with the manager shown at the top of this letter.

2. Send any information you want us to consider.

3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional
   information as stated in 1 and 2, above, you'll still be able to file a protest with IRS Appeals Office after
   the meeting or after we consider the information.

The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes
informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period of
limitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case.
For your protest to be valid, it must contain certain specific information, including a statement of the
facts, applicable law, and arguments in support of your position. For specific information needed for a
valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.

Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn’t
apply now that we’ve issued this letter.

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

4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt Government Entities)
   if you feel the issue hasn’t been addressed in published precedent or has been treated inconsistently by the
   IRS.

If you’re considering requesting technical advice, contact the person shown at the top of this letter. If you
disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as
explained above. A decision made in a technical advice memorandum, however, generally is final and
binding on Appeals.

If we don't hear from you
If you don't respond to this proposal within 30 calendar days from the date of this letter, we'll issue a final

adverse determination letter.

Contacting the Taxpayer Advocate Office is a taxpayer right
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your

taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't
been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS
will do everything possible to help you. Visit www.taxpayeradvocate.irs.gov or call 877-777-4778.

Additional information
You can get any of the forms and publications mentioned in this letter by visiting our website at

www.irs.gov/forms-pubs or by calling 800-TAX-FORM (800-829-3676).

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

Sincerely,
hint A Whatliae
hn A. Matias

Group Manager

for Lynn A. Brinkley
Enclosures: Director, Exempt Organizations Examinations
Form 886-A
Form 6018

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

• i Schedule number
  Form 886-A Department of the Treasury Internal Revenue Service or exhibil
  (May 2017) Explanations of items
  Name of taxpayer Tax Identification # (last 4 digits) Year/Period ended
  ISSUE
  Whether [redacted] operated exclusively for one or more exempt purposes

described under IRC Section 501(c)(3).

FACTS

Background of [redacted]

In the past, [redacted] engaged in a number of programs,
including its Locate, Recovery, and Rescue Program ("LRR Program’). The LRR Program arose
out of [redacted] mandate to assist vulnerable populations, including runaways at risk of
falling victim to child sex trafficking. Beginning in late [redacted] and continuing through [redacted],

[redacted] transitioned the LRR program to a newly formed corporation [redacted].

Per Article of Incorporation filed with the State of [redacted]: [redacted] was incorporated on
[redacted] for the purpose of rescuing and recovering missing and exploited children. Per Article
3, Section 3.1 of its bylaws, [redacted] is an association of volunteers who assist child victims of
exploitation.

On [redacted] filed a Form 1023-EZ, Streamlined Application for Recognition of
Exemption Under Section 501(c)(3) of the Internal Revenue Code, seeking tax-exempt status
under IRC Section 501(c)(3). On [redacted] the IRS recognized [redacted] as a 501(c)(3)
public charity. [redacted] public charity status remained effective to the present date.

According to [redacted]’s own statistics, [redacted] recovered [redacted] children in [redacted]. [redacted] were recoveries
from rehabilitation center such as [redacted], where [redacted] was paid to provide services.

Per the contract with [redacted], [redacted] provided volunteers to shadow the
residents when they left on the weekend. In an interview with

[redacted] executive director stated that the shadowing prevented pimps from
luring girls into prostitution. In return, [redacted] paid [redacted] for each volunteer provided.
[redacted] then paid [redacted] to [redacted] to each volunteer for their work. Exhibit 1.

[redacted] terminated its contract with [redacted]. Per [redacted]’s own statistics, the recoveries declined to
[redacted] and [redacted] in [redacted], respectively. [redacted] did not post statistics for [redacted] and beyond, Exhibit 2.

In a news article titled
board member
acknowledged that does not rescue children. Rather, only assists in
their recoveries. The only person who physically rescues a child is law enforcement.

[redacted] acknowledged in [redacted] in an interview with the [redacted] that the majority of
those rescues were young people who had wandered away from the group home for at-risk
teenagers such as [redacted].

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

Form 886-A Department of the Treasury — Internal Revenue Service Schedule number
. OF 6x
(May 2017) Explanations of items
Name of taxpayer Tax Identification # (last 4 digits) Year/Period ended
Some volunteers had since disassociated themselves from [redacted]. They claimed in interviews that
[redacted] and [redacted] were more interested in publicity to raise funds than rescuing children.
Volunteers questioned [redacted] method of counting recoveries, where they claimed [redacted] made the
recoveries look better than they actually were. See news article titled [redacted].

[redacted] also lost funding from [redacted].

Board Members and Officers

Below is the current board members and officers. Some are involved in both [redacted] and [redacted].

1. [redacted], Director and President
2. [redacted], Director and Secretary (son of [redacted])
3. [redacted], Director and Treasurer
4. [redacted], Director (was not listed on Form 1023-EZ)
   About [redacted]
   [redacted] signed the Form 1023-EZ as president. He has been serving as director
   and president since its inception. has access to bank accounts.
   was also the owner of a for-profit business called
   He's also a partner of IRS records show that
   several contractors who received a Form 1099 from also
   performed work for They were the volunteers who paid for their work.
   Form 990, Financial Records and Other information Return

The Form 990 was prepared by outside accounting firms. reports the following financial
information on its Form 990.

Cash
Land, buildings and equipment
Total assets

Accounts payable and accrued expenses
Net assets or fund balance
Total liabilities and net assets/fund balance

Income
Federal campaign
Investment

Total income

Expenses

Catalog Number 20810W Page 2 www Irs.g0V Form 886-A (Rev. 5-2017)

Department of the Treasury — Internat Revenue Service Schedule number
Form 886-A partmen' reasury — inte Se

. ar exhibit
(May 2017) Explanations of Items
Name of taxpayer Tax Identification # {last 4 digits) Year/Period ended

Officers’ compensation
Management
Office expenses
Travel
Insurance
Fundraising

Total expenses

Net income

[redacted] primary sources of revenue came from public donation. [redacted] also received fees from
[redacted] for services provided.

In response to Information Document Request (IDR) #1, instead of [redacted] provided an
Excel file named [redacted]. The file contained the following tabs:
1.

2.

3

4.

5

6

7.

8,

9.

10.

The tab showed charges for airfares, hotels, car rental as well as regular purchases

of gas, groceries, meals, restaurant dining, wine, cigars, as well as purchases from

In the letter dated [redacted]: representative of [redacted]
provided the following explanation regarding books and records.

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

Form 886-A Department of the Treasury — internal Revenue Service alee number
. 14
(May 2017) Explanations of Items
Name of taxpayer Tax Identification # (last 4 digits) Year/Period ended
reported the following on the tax years Form 990:

Total revenue

Total expenses

Total assets

Total liabilities

Net assets or fund balances
It's unknown how the return preparer came up with the figures above. did not provide a
balance sheet, profit & loss statement, general ledger or workpapers used in the preparation of
the Form 990.

was the owner of the following bank and investment accounts:

1.
2.
3.
4.
Per signature cards provided by [redacted], [redacted] is the sole signer of the two [redacted].
Exhibit 3.
In [redacted] purchased a recreational vehicle for use as a mobile command center and in
community events. Per [redacted] representative [redacted]
did not keep a mileage log. All maintenance is done by [redacted].
Some maintenance was done by a mobile mechanic due to safety issues.
Transfers of Funds to [redacted]

1. [redacted] Online Transfer to [redacted] on [redacted]

[redacted] showed the above transfer to [redacted]. Exhibit 4. In
IDR #2, the examining agent requested [redacted] to explain how [redacted] used the [redacted] for

activities and provided records to substantiate such uses.

In the letter dated [redacted], [redacted] representative stated the [redacted] was used for

activities. The representative did not provide any documentation to substantiate the use of

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 # (last 4 digits) Year/Period ended

ee
the [redacted]. The representative stated [redacted] will supplement this response when and if it is able
to do so. [redacted] did not supplement this response.

2. Transfers to Checking Account Ending in [redacted]
   [redacted] accounts showed the following transfers.
   Date Payee Description Amount
   In the letter dated [redacted], [redacted] representative stated that [redacted] is the owner of
   the checking account [redacted].

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
ry i} a])
(May 2017) Explanations of Items
Name of taxpayer Tax Identification # (last 4 digits) Year/Period ended
[redacted] trial balance shows negative [redacted] adjustment to the [redacted] leaving a balance of
[redacted] which [redacted] reported as compensation to [redacted] on the Form 990.
See below for transfers to [redacted] account during the tax years [redacted] to [redacted].
Date Payee From Account Amount
Date Payee From Account Amount
Date Payee Description Amount

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

corm 886-A Department of the Treasury — Intemat Revenue Service Sone number
(May 2017) Explanations of Items
Name of taxpayer Tax Identification # (last 4 digits} Year/Period ended
Sum of A: $

3. Transfers to

The statements show the transfer below.
Date Payee Amount
In response to IDR #4, [redacted] stated account belonged to [redacted]. The funds were used
for reimbursement of expenses related to recovery of missing children for the operations
team. [redacted] referred to Attachment. See below for description of the Attachment.
Payments to [redacted]
[redacted] paid the amounts below to personal credit cards:
Charges to credit card
Previously, [redacted] provided an Excel file listing charges and payments made
in [redacted]. See tab of Excel file titled [redacted].
In response to IDR #2, [redacted] provided statements for account [redacted]

(Document 5.1 and 5.2) below.

Closing date Payments New charges

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
(May 2017) Explanations of Items
Name of taxpayer Tax Identification # (last 4 digits) Year/Period ended
The statements showed [redacted] was the cardholder. The statements showed most charges
were for food, drinks, and restaurant dining. There were charges for gas, cigar, and AAA
membership dues as well. The charges and payments posted to the account did not
reflect those on the tab and those paid from accounts. There was a

charge for [redacted] for repair of the RV.

In response to IDR #2, [redacted] representative stated the charges were for operations, meetings,
community events, instruction to groups including law enforcement, and fundraising events.
[redacted] did not provide any documentation to support its claim but stated that it will supplement the
responses if and when it’s able to do so.

In response to another item on IDR #2, [redacted] provided the items below.
1.
2.
3.
4,
5.
6.
7.
e The [redacted] covered address listed on the house. The monthly service
charge was [redacted], which [redacted] charged to the card.
e Three businesses insured by the liability insurance policy were: (1)
(2)
(3) [redacted]. The certificate did not show a premium amount.

e Regarding the gun for sale to volunteer members. The
statement (provided by [redacted]) for the closing date [redacted] showed: [redacted] spent [redacted]
to purchase guns for resale. At least one member repurchased guns from [redacted].

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

tthe T -! IR i Schedule number
Form 886-A Department of the Treasury — Internal Revenue Service

(May 2017) Explanations of Items or exhibit

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

In IDR #3, the examining agent requested substantiation for charges and payments again. In
response, only provided statements for account for the tax
years (except for ), and

The statements showed purchases of office supplies, airplane tickets, lodging, gas, beer, wine,
foods, drinks, Turbo tax software, home security services (ADT), car repair from Chevrolet
dealership, AAA membership dues, home improvement store, and others.

The statements also showed the following charges by the law firm that
represented in the examination

Date Payee Amount
There were no charges by prior to
In the fax transmittal dated [redacted], [redacted] referred the examining agent to Attachment
below for its responses to request for substantiations for charges.

1. IRS Information Document Request #3 - Attachment 1
2. IRS Information Document Request #3 — Attachment 2

Attachments are two tables containing descriptions below. A portion of the tables are
reproduced here.

Catalog Number 20810W Page 9 WA IF5.go¥ Form 886-A (Rev. 5-2017)

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

« xhibit
(May 2017) Explanations of Items ores
Name of taxpayer Tax Identification # (last 4 digits) Year/Period ended

also provided the following car rental and hotel receipts along with the Attachment:

NOOO hb wh =

also provided two printed links to YouTube videos and three printouts of pictures.

The two tables did not contain responses to IDR #4, Item #6, which requested substantiations

for card payments made in the tax years
Charges to
In response to IDR #2, provided statements for credit card account for the
following periods:
¢
¢
¢
4
The statements showed was the cardholder Most charges were for gasoline.
in response to IDR #3, provided statements for credit card account for the

following periods:

°* @ @# @ 8 @ @ 8 @ 6 & 68 6

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

Form 886-A Department of the Treasury - Internal Revenue Service Schedule number
® or exhib!
(May 2017) Explanations of Items
Name of taxpayer Tax Identification # (iast 4 digits) Year/Period ended
e
e
°
e
e
*

The statements showed most charges were for gas. There were 5 charges related to the RV.

Dated
Dated
Dated
Dated
Dated

The RV repairs charged to card by year are as follows:

Charges to credit cards

[redacted] did not provide statements for the credit cards. [redacted] also did
not provide any records to substantiate the charges to these cards.

Intent to Compensate for His Services

On the Form 990, Part VII-A Current Officers, Directors, Trustees and Key Employees,
[redacted] was listed as Executive Director and was an individual trustee or director. The Form
990 reported the following compensation to [redacted].

TY

TY

TY

TY

The $ and ¢ reflected the transfers to checking account . Although

reported the $ on the Form 990, it did not report the amount on a Form W-2 or 1099.

IRS records show filed one Form 1099-NEC reporting $ paid to for-profit

business Private Investigative Research Company in [redacted]. IRS records show [redacted] did not file a

Form W-2 or 1099 for the tax years [redacted].

In response to IDR #1, [redacted] provided board minutes dated [redacted] and
[redacted]. In the board minutes dated [redacted], [redacted] board of directors hired [redacted].

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

Form 886-A, Department of the Treasury - Internal Revenue Service Schedule number
or exhibit
(May 2017) Explanations of items
Name of taxpayer Tax Identification # (last 4 digits) Year/Period ended
to serve as a consultant-advisor to the Board. [redacted] agreed to pay [redacted] per

month plus all expenses in lieu of per diem. The minutes did not specify the expenses.

In the board minutes dated

would provide private investigator management services, private investigator
administrative services, coordination volunteers, facilitation of private investigator licensing,
oversight of private investigator work, and coordination with parents and victims to ensure all

services are being provided in alignment with mission and procedures. The minutes
reiterated the $ monthly salary but did not include paid expenses. The starting date for
compensation was Exhibit 5.

LAW

IRC Section 501(c)(3) provides for exemption from income tax for corporations, and any
community chest, fund, or foundation, organized and operated exclusively for religious,
charitable, scientific, testing for public safety, literary, or educational purposes, or 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.

Treasury Regulations (Treas. Reg.) Section 1.501(c)(3)-1(a)(1) 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 or the operational test, it is not exempt.

Treas. Reg. Section 1.501(c)(3)-1(c}(2) 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 of
private shareholders or individuals.

Treas. Reg. Section 1.501(a)-1(c) defines the words private shareholder or individual in section
501 as persons having a personal and private interest in the activities of the organization.

Treas. Reg. Section 1.501(c)(3)-1(f)(2)(i) provides that, regardless of whether a particular
transaction is subject to excise taxes under section 4958, the substantive requirements for tax
exemption under section 501(c)(3) still apply to an applicable tax-exempt organization described
in section 501(c)(3) whose disqualified persons or organization managers are subject to excise
taxes under section 4958. Accordingly, an organization will no longer meet the requirements for
tax-exempt status under section 501(c)(3) if it fails to satisfy the requirements of paragraph (b),
(c) or (d) of this section.

Treas. Reg. Section 1.501(c)(3)-1(f}(2)(i) provides that, in determining whether to continue to
recognize the tax-exempt status of an applicable tax-exempt organization (as defined in §§
4958(e) and 53.4958-2) described in section 501(c)(3) that engages in one or more excess

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

_ f Schedule number
Form 886 -A Deparment of the Treasury — Interna) Revenue Service

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

benefit transactions 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(s} occurred;

B. The size and scope of the excess benefit transaction(s) (collectively. if more than one) in
relation to the size and scope of the organization's regular and ongoing activities that further
exempt purposes;

C. Whether the organization has been involved in multiple excess benefit transactions with one
or more persons,

D. Whether the organization has implemented safeguards that are reasonably calculated to
prevent excess benefit transactions, and

E. Whether the excess benefit transaction has been corrected (within the meaning of
§4958(f)(6) and §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.

All factors should be considered in combination with each other. Depending on the particular
situation, greater or lesser weight may be assigned to some factors than to others. The
safeguard and correction factors will weigh more heavily in favor of continuing to recognize
exemption where the organization discovers the excess benefit transactions and takes action
before the IRS discovers the excess benefit transactions. Further, with respect to the correction
factor, correction after excess benefit transactions are discovered by the IRS, by itself, is never
a sufficient basis for continuing exemption. Regs. §1.501 (c)(3)-1 (f}(2)(ii).

Founding Church of Scientology v. U.S.. 412 F.2d 1197 (Ct. Cl. 1969) involved channeling of an

organization's funds to those in control of the organization. In that case, a wide variety of
devices were employed, including fees, commissions, excessive rental payments, loans and
excessive salaries, to divert the organization's funds to its founder, L. Ron Hubbard, and his
immediate family. The principle of inurement was neatly summarized when the Court stated,
“what emerges from these facts is the inference that the Hubbard family was entitled to make
ready personal use of the corporate earnings." See also John Marshall Law School v. U.S., 81-2
U.S.T.C. 9514 (Ct. Cl. 1981), in which the Court found that the Commissioner acted properly in
revoking exemption under IRC 501(c)(3) on the grounds of inurement to the controlling officers
and their families. The inurement included, but was not limited to, payments to the families as
follows: automobile, education and travel expenses, insurance policies, basketball and hockey
tickets, membership in a private eating establishment, membership in a health spa, interest-free
loans, home repairs, personal household furnishings and appliances, and golfing equipment.
The Court concluded that “nothing we have found in the record dispels the substantial doubts
the court entertains concerning the receipt of benefit by the Hubbards from plaintiff's net
earnings. Since plaintiff has failed to meet its burden of proof, we hold therefore that a part of
the corporate net earnings was a source of benefit to private individuals.” Supra, at 1202.

Attempting after the fact to demonstrate that an undocumented transaction is a typical business
arrangement is not likely to prevent a finding of inurement. Founding Church of Scientology v.
United States, 412 F.2d 1197 (Ct. Cl. 1969), cert. den., 397 U.S. 1009 (1970).

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

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

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

The taxpayers have the burden of proofs that they are entitled to deductions. See Hradesky v.
Commission, 540 F.2d 821 (5th Cir. 1976), and Welch v. Helvering, 290 U.S. 111, 115 (1933)

TAXPAYER'S POSITION

Taxpayer's position is unknown
GOVERNMENT’S POSITION

IRC Section 501(c)(3) requires an organization to be both “organized” and “operated”
exclusively for one or more IRC 501(c)(3) purposes. If the organization fails either the
organizational test or the operational test, it isn’t exempt. See Treas. Reg. Section 1.501(c)(3)-
1(a)(1}. The operational test applies to the organization's activities and how it furthers exempt
purposes.

Treas. Reg. Section 1.501(c)(3)-1(a)(1) provides that an organization described in section
501(c)(3) 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.

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 of private shareholders or individuals. Treas. Reg. Section
1.501(c)(3)-1(c)(2). A private shareholder or individual in section 501 is persons having a
personal and private interest in the activities of the organization.

was an insider with respect to

is an officer and director. He manages activities and received compensation
(for himself and his business) for his services. had access to bank accounts
and was the sole signer of these accounts. All these factors show that has personal

and private interest in the activities of and was an insider with respect to

Transfers of funds to [redacted] constituted inurement

The table below lists all transfers of funds to

Transfer to

[redacted] claimed [redacted] used the [redacted] for [redacted] activities but did not provide any records
to support that claim. Instead, the representative stated [redacted] will supplement this response when
and if it is able to do so. The transfer was a channeling of funds from [redacted] to [redacted].

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

Form 886-A Department of the Treasury ~ Internal Revenue Service Schedule number
. fr éx I
(May 2017) Explanations of Items
Name of taxpayer Tax Identification # (last 4 digits) Year/Period ended

Transfers to checking ending

[redacted] reported the [redacted] transfer in [redacted] as compensation to [redacted] on the
Form 990. [redacted] also reported the [redacted] transfer in [redacted] on the Form 1099-NEC.
Therefore, [redacted] has indicated intent to treat the transfers in [redacted] as compensation for
services. The amount did not seem excessive. Therefore, the transfers in [redacted] and [redacted] did not
constitute excess benefit.
With respect to the [redacted] and [redacted] transfers in [redacted], [redacted] neither reported the
transfers on the Form 990 nor Form 1099. In addition, the board's approval of
compensation discussed in the meetings dated [redacted] and [redacted] did not apply to the
transfers in [redacted]. The starting date for compensation was [redacted].
Therefore, [redacted] did not indicate intent to treat the [redacted] and [redacted] as compensation for
services. The [redacted] and [redacted] constituted channeling of funds to [redacted].
Transfers to checking ending [redacted]

[redacted] claimed [redacted] used the [redacted] transferred to [redacted] account for [redacted] activities but
did not provide any records to support that claim. Therefore, the [redacted] constituted channeling
of funds to [redacted].
It’s concluded that the transfers of funds to [redacted] constituted inurement.
Payments to personal credit cards constituted inurement
Charges to [redacted]

[redacted] was the cardholder of all three cards. The statements showed

hundreds of charges. Some charges appeared business-related. Others such as food and
drinks, beer, wine, cigar, car repair, tax software, home security services, gas, etc. were
personal in nature. When taxpayers are mixing business and personal, they bear the burden of
substantiating business from personal. In addition, the taxpayers bear the burden of proving
entitlement to the deductions. See Welch v. Helvering.

In applying the principle above, [redacted] bear the burden of proving the purchases
were for [redacted] activities.

In response to IDRs #2 and 3, [redacted] provided two tables containing general descriptions of the
events that [redacted] claimed to have conducted in [redacted]. The two tables appear to be created from
recollection and after the fact. Some items contained more descriptions. Others simply
contained “Travel” or “Operations”. Without other corroborating evidence, which the examining
agent requested in IDR #2, 3, and 4, and to which [redacted] did not provide, it's not possible to
connect the trips to [redacted] activities.

The same analysis applies to the car rental and hotel receipts. They did not establish whether
the trips were related to the business of [redacted]. The trips could also be related to the business

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

Department of the Treasury ~ Internal Revenue Service Schedule number
(May 2017) Explanations of Items
Name of taxpayer Tax Identification # (iast 4 digits) Year/Period ended

activities of Private Investigative Research Company and Strategic Ops Security & investigative.
Both entities also provided investigative services. Keep in mind that some of the volunteers

were also employed by business Strategic Ops Security & investigative.

Since owned the RV, the $ repair incurred in was deemed business related.
The statement showed spent $ to purchase guns for resale to
volunteer members. At least one member repurchased the guns from Therefore, the

$ was business related.

Similarly, the $ attorney fees paid to for audit representation

were business related.

did not provide substantiation for credit card payments made in

Charges to
The statements showed was the cardholder. Most charges were gasoline. did
not provide any substantiations for charges to the card. also did not provide a

mileage log for the RV. As such, it's not possible to conclude the gas was for the RV. The
charges related to repair of the RV were business related.

Charges to credit cards

did not provide statements for the credit cards.
did not provide records to substantiate the charges.

have the burden of establishing that the credit card charges and payments
were for the benefits of Welch v. Helvering, 290 U.S. 111, 115 (1933}. Neither
satisfied that burden. Except for the charges related to repair of the RV, guns, and
attorney fees, the remaining charges were personal and constituted excess benefits.

The table below summarizes all credit card charges where [redacted] failed to establish a connection to
[redacted] activities:

The table below summarizes the amounts where [redacted] failed to establish a business purpose:

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

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

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

Transfers of funds
Credit card payments

Whether the excess benefit transactions constituted inurement

In determining whether to continue to recognize the tax-exempt status of an applicable tax
exempt organization that engages in one or more excess benefit transactions that violate the
prohibition on inurement under IRC Section 501(c)(3), all relevant facts and circumstances,
including, but not limited to, the following are taken into account:

i. The size and scope of the organization's regular and ongoing activities that further exempt
purposes before and after the excess benefit transaction(s) occurred

[redacted] began operations in [redacted]. [redacted]’s own recovery statistics suggested providing services to
[redacted] rehabilitation center accounted for a substantial portion of its operation. [redacted] has since lost its
contract with [redacted]. As a result, the recoveries dropped to [redacted]. [redacted] did not post
recovery statistics for [redacted] and beyond. Some volunteers have since cut ties with [redacted]. [redacted] also
lost funding from [redacted].

These factors suggested [redacted] activity has decreased.

ii, 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 regular and ongoing
activities that further exempt purposes

Below is an analysis of the EBTs in comparison to total expenses.

Total expenses per return
Excess benefit transactions
Percentage

The excess benefit transactions were substantial.

ii. Whether the organization has been involved in multiple excess benefit transactions with one
or more persons

was a board member and president of He oversaw operation and had
access to bank accounts, He used funds for his personal benefit as if the funds were
his own. The excess benefit transactions included paying his personal credit cards where he
failed to establish a business connection and withdrawing funds for his own use.

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

Schedule number

Form 886-A Department of the Treasury — Internal Revenue Service or exhibit
s x!
(May 2017) Explanations of Items
Name of taxpayer Tax Identification # (last 4 digits) Year/Period ended

iv. Whether the organization has implemented safeguards that are reasonably calculated to
prevent excess benefit transactions

is a director and officer As the sole signer of the accounts, he had sole
control over the accounts. There does not appear to be any oversight over his activities. As a
result, was able to engage in transactions that resulted in excess benefits to

himself. The examining agent is not aware of any implemented safeguards.

v. Whether the excess benefit transaction has been corrected, or the organization has made
good faith efforts to seek correction from the disqualified person(s) who benefited from the
excess benefit transaction.

No verifiable evidence that the excess benefit transactions were corrected.

CONCLUSION

[redacted] was an insider with respect to [redacted]. He engaged in transactions with [redacted] that
resulted in excess benefits to him. The excess benefit transactions constituted inurement. As a
result, [redacted] failed to operate exclusively for one or more 501(c)(3) exempt purposes. [redacted] tax-
exempt status should be revoked effective [redacted]. [redacted] is required to file a Form 1120

for all future years.

Catalog Number 20810W Page 18 www.irs.gov Form 886-A (Rev. 5-2017)