Charity loses exemption over gaming operations and private benefit

View official IRS release (PDF)

Plain-English summary

The IRS revoked a charity's IRC § 501(c)(3) exemption after examining its fundraising, spending, governance, and use of assets. The organization raised substantially all of its revenue through raffles and sweepstakes, including promotions for high-end vehicles, while only a comparatively small portion supported direct charitable programs. The examination report found that gaming prizes, advertising, administration, and other noncharitable costs consumed much of the organization's resources. It also found that the organization lacked independent board oversight while its president controlled operations and compensation. Charity funds were used for rent and extensive improvements to a residence owned by the president, and the report identified additional large uncategorized withdrawals. The IRS concluded that the organization operated for a substantial nonexempt gaming-business purpose and conferred substantial private benefits, so it failed the operational test and contributions were no longer deductible under IRC § 170.

Ruling snapshot

• Question: Did the organization continue to qualify for exemption as a charity under IRC § 501(c)(3)?
• Outcome: Revocation, because substantial gaming operations and private benefit outweighed the organization's charitable activity
• Key authorities: IRC §§ 170, 501(a), 501(c)(3), 502, 512, 513, 7428; Treas. Reg. §§ 1.501(c)(3)-1, 1.502-1

Full text (IRS public release)

Department of the Treasury Date:
Internal Revenue Service June 3, 2025
Tax Exempt and Government Entities

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: 202535014
Release Date: 8/29/2025
UIL Code: 501.03-00

Last day to file petition with United States Tax Court:
September 1, 2025

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

. Your determination letter dated a. is revoked.

Our adverse determination as to your exempt status was made for the following reasons: Your organization is
not organized and operated exclusively for exempt purposes within the meaning of section 501(c)(3) of the
Code. Rather, you are operated for a substantial non-exempt purpose, and you have not demonstrated that you
are operated for public benefit rather than private benefit. Accordingly, your organization does not qualify for
exemption as an organization described in 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. 3-2024)
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:

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

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.

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.

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

Keep the original letter for your records.

Lynn 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 Date:
Internal Revenue Service 11/14/2024
Tax Exempt and Government Entities

Taxpayer ID number:

Form:
Tax periods ended:

Person to contact:
Name:

ID number:
Telephone:
Fax:

Address:

Name:
CERTIFIED MAIL — Return Receipt Requested ID number:

Telephone:
Response due date:
12/14/2024

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.

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 m | 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,

Larry D. Pugh

For Lynn A. Brinkley
Director, Exempt Organizations Examinations

Enclosures:
Form 886-A

Form 6018
Pub 892
Pub 3498

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

Department of the Treasury - Internal Revenue Service Schedule number or
Form 886-A Explanation of Items exhibit
(Rev. May 2017)
Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended
ISSUE
Does continue to qualify for tax exemption under Internal Revenue Code
Section 501(c)(3)?
FACTS
( ) was incorporated on as a nonprofit corporation.
Its Form 1023-EZ, initial application for exemption, was reviewed by the examiner.
The application was signed on , by President/Treasurer of

requested exemption under section 501(c)(3) of the Code and sought non-private
foundation classification as a publicly supported charity under sections 509(a)(1)/170(b)(1)(A)(vi).
stated it was formed to provide food, opportunity, shelter, and above all , for those
less fortunate. Form 1023-EZ also disclosed that would operate bingo or other gaming
activities. The final determination letter (Letter 947) was mailed on recognizing
as an organization described in section 501(c)(3), classified as a publicly supported charity under
sections 509(a)(1)/170(b)(1)(A)(vi). The effective date of exemption per Letter 947 is ,

The examination of Form 990 for was started on .
The interview was conducted . Those in attendance, during the initial
interview, included Treasurer and Program Director : Power of
Attorney-CPA (POA) , and the examiner. was absent.
Interview was conducted at . This was the main office location of

the organization.

The following information was gathered during the initial interview:

e Treasurer stated was formed to provide food, opportunity, shelter, and
above all for those less fortunate. focus has mainly been
In a new mission statement was adopted. It reads, "

mission is to support

e Treasurer stated that from through , net revenue from
fundraising was roughly $ . Subtracting expenses for accounting, legal, office
expenses, marketing, IT/Website, and payroll, net revenue is $ . Based on this
number, programs received %, or roughly $ . Without subtracting

expenses, programs received %.

o Note: Treasurer summarized the above numbers for the examiner.

Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)
Page 1 of 27

Department of the Treasury - Internal Revenue Service Schedule number or
Form 886-A Explanation of Items exhibit
(Rev. May 2017)
Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended
e Treasurer stated, that in the course of the years, acquired assets
of the office in for over $ as well as the . is currently in
the process of building “ ” for and have spent $
on the and another $ on design, engineering, and site work. Of the time
devoted to the programs and the mission, not including , and
overseeing, planning, and coordinating the building process, the time spent on
programs is % collectively. Outside of the programs and building, time is spent on

fund-raising efforts.

e In addition to the office, rented a property owned by its President in
as a vacation home for and has been used for that purpose
Treasurer stated started the program in late . At the time of the
interview, was paying $ ‘month for the use of this property.

« Individuals are made aware of program through website, referral from other
organizations, the (___), and word of mouth. Those eligible to
participate in this program include for emergency direct aid and there
is no discrimination ( ).

« Treasurer stated spent $ for the relief program in . More
than individual were assisted with aid for evictions, medical costs, rents, foods.
etc. also added some new programs in such as transport,

( event), and the vacation home.

e Per the Treasurer , income is coming from raffles and

sweepstakes.

e Examiner asked, “what are the primary activities of the organization?” Per the Treasurer
, every day is direct aid to

° had employees. Per the Treasurer in there was
board member- the president and CEO. The President/CEO was
compensated. The reason why did not have a board in is that the organization

has just begun operations and it didn’t believe a board was needed. Per the Treasurer and
POA, the President of the organization does everything: all the fundraising, communication
with all the external people, and manages the organization.

e Per the Treasurer : has checking account.
expenditures are registered in by the accountant, and she (Treasurer)
does the recording. Per the Treasurer , the President/CEO writes the checks,
is authorized to sign the checks, and signature is required on checks.
Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)

Page 2 of 27

Department of the Treasury - Internal Revenue Service Schedule number or
Form 886-A Explanation of Items exhibit
_ (Rev. May 2017)
Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended
e Examiner noted there was $ for mileage reimbursement from the Adjusted Trial

Balance. Examiner asked for an explanation and if there is a mileage log. Per the Treasurer
and POA, that was the mileage reimbursement paid to the president of the organization for
the travel expenses incurred while delivering the raffles to the winners the

. There is no log for mileage and documentation because the confiscated all the
paper and electronic documents from the organization (this report will go into more details

on the involvement).

e Examiner noted some payments made to the state of (state tax). Examiner asked
what activity conducted in . Per the Treasurer and POA, back in , the
organization was in before moving to . The payments were payroll

taxes made to

e Examiner asked what gaming activities conducts. Per the Treasurer, the gaming
consists of raffles and sweepstakes. The gaming was played on . Anybody
whois of age and older can play the games, but the organization will check the ID when
someone wins. All the employees work the gaming operations. Income from gaming is
recorded as debit or cash to raffles and sweepstakes. Expenses are recorded as credit to
cash and debit to cost to sweepstakes. Everything is done . There isn't a separate
account for gaming and the organization has bank account.

« Raffles were conducted times in . The winners received , such asa ,
, , and the winners also have cash option. The winner who opted for cash
received less for the book value ofthe —.. kept a list of the winners. Per the

Treasurer, the organization did not issue W-2Gs, but the Treasurer created some on
own and mailed them to the winners.

recorded the minutes to the board meetings for . Based on the review of the board
meeting minutes, examiner noticed does not have a board. The President is the
Officer/Director on the board making decisions. In the first quarter of , the President had a
meeting with his CPA and discussed 401k matching options, non-profit directors, officer's
insurance, and an increase in President's compensation. After compensation comparisons, the

President increased his salary to $ per month with an opportunity for quarterly bonuses of
$ based on organization’s performance and growth.
official website is . It appears the website stopped being
operational at some point in , and web search using keywords “ " indicates
is permanently closed. While the website was operational, it provided a wealth of
information on activities. Per the website, main programs were:
Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)

Page 3 of 27

Department of the Treasury - Internal Revenue Service Schedule number or
Form 886-A Explanation of Items exhibit
(Rev. May 2017)
Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended
website provided the following information about operations:
Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)

Page 4 of 27

Department of the Treasury - Internal Revenue Service Schedule number or
Form 886-A Explanation of items exhibit
(Rev_May 2017)
Name of Taxpayer Tax Identification Number (iast 4 digits) | Year/Period Ended
Examiner reviewed bank account activity and referred to general ledger to determine how
was operating in (exam year). The following table below provides revenue
breakdown for - :
Revenue Breakdown for -
Description Amount % of Total
$ %
ATM Check Deposit 3 %
Donation $ %
Payment Return $ %
Edeposit IN Branch/Store | $ %
Payment $ %
interest Payment s %
Transfer $ %
Total = 5 %
Per the bank statements and the general ledger, total deposits in were $ .
Per the bank statements, majority of income ( %) came in from (“ ").
is a payment processing company. processes income from selling raffle
tickets . Examiner noted that all other income is miniscule compared to the

raffle/gaming income.

The following table below provides expense breakdown for -

‘s Expenditure breakdown for -

Description Amount % of Total
Notes Payable ( Note payable & ) $ %
Cost of Sweepstake prizes (prizes given to participants) $ %
Sweepstakes: Costs ( / advertising costs) $ %
Fees for services: Accounting fees $ %
Pay $ %
Pay $ %
Pay $ %
Pay $ %

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

Page 5 of 27

Cepariment of the Treasury - Internal Revenue Service Schedule number or
Form 886-A Explanation of Items exhibit
(Rev. May 2017)
Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended

%
%
%
%
%
%
%
%

Rent/Lease, and Travel expenses
Amber Clute Fees for services: Contractors

Payroll Liabilities & Federal Taxes (941/944)
Leasehold Improvements -

Bank Withdrawals (no information provided in the General ledger)
Main Office Occupancy costs (Rent, Lease, Maintenance, Internet)
Program Expenses ( provided)

Total

w*n
now wf ~
a

Total expenses in were $ . Per the bank statements, total deposits in were
$ . Deposits minus withdrawals equals $ of net income.

As stated, raised funds primarily by way of advertising and conducting raffles for high-
end motor vehicles. Examiner noted expenses related for prizes on the bank statements.

Examiner noted cash withdrawals were made and categorized as "

" Examiner noted expenses related to advertising and promotion.
Direct gaming expenses (raffle prizes/advertising) were $ ,whichis % of total
expenses.

Multiple contractors were paid for work performed on the
property. This property was a single-family residence titled in President's name.

There appears to have been extensive improvements made on that property in , to include the
installation of a pool, patio, and garage (and renovations to the bathrooms, ceilings, and walls).
President/CEO signed all the checks directed towards

property improvements. Total costs associated to the leasehold improvements of that property
were $ , Which is about % of total expenses. President

was leasing this residence to for $ a month during

Examiner noted some cash withdrawals that were not categorized at all in the general ledger.
There was no explanation provided in the general ledger for how the money was spent for those
withdrawals, so the nature behind those withdrawals is unclear. Total amount of uncategorized
withdrawals in question is $ , whichis about % of total expenses. Together,
property improvements and uncategorized withdrawals make up % of total expenses.

Expenses directed towards President/CEO pay, bonuses, reimbursements,
and lease was $ which is about % of total expenses. Overall, expenses associated
with gaming, property improvements, uncategorized withdrawals, and lease,
pay and reimbursements to President total to $ ,whichis %
of total expenses in (see excerpt on the next page for details).

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

Page 6 of 27

Department of the Treasury - Internal Revenue Service Schedule number or

Form 886-A Explanation of Items exhibit

(Rev, May 2017)

Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended
Description Amount % of Tatal
Cost of Sweepstake prizes (prizes given to participants)
Sweepstakes: Casts ( advertising costs)

Total

Description

Bank Withdrawals ( no information provided in the General ledger)
Leasehold Improvements
Total

Description
Pay
Rent/Lease, and Travel expenses
Total

Total

It is important to report that the Department of Justice (DOJ) indicted President
on mail and wire fraud charges among others. The to the DOJ's

Department of Justice alleges generated more than $ in cash flow that went through
a bank account under wherein President/Owner was the sole person on
the account. The DOJ also alleges was the sole member of the non-profit’s board of
directors. The indictment says misrepresented everything from his salary and
compensation to how the money was spent. This indictment was filed on , and
encompasses periods from around or beginning of , through at least in or around

of . Since the exam year is , this indictment covers the period during the exam
and is relevant to the exam.

Note: . The defendant is presumed innocent until proven
guilty. The details of the are described on the next several pages of this report.

THE GRAND JURY CHARGES THAT:

1. in or around of , through at least in or around of
   , the defendant, (" "), was the founder, Chief
   Executive Officer (CEO), Chief Financial Officer (CFO), and sole board member of a charity
   named (" ). incorporated as a non-profit
   corporation in the State of on or about :

Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)
Page 7 of 27

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

2. professed mission was raising funds, primarily by way of advertising
   a was a resident of the of and residing in
   at the time that incorporated . utilized a address as

mailing and physical address.

4. would operate from that - location from
   inception until in or around , when re-located the charity's operations
   to

5. opened a bank account in the name of (the " ") on or
   about ,ata branch of Bank, a financial institution
   as that term is defined at ! described in the Business
   Account Application as the " , and described the

business as a non-profit organization for the homeless.

6. On or about , the Internal Revenue Service ("IRS") issued a tax-exempt
   determination letter classifying as a "public charity" that is "required to file Form
   990/990-EZ/990-N” annually - that is, granting tax-exempt status as a charitable
   organization pursuant to Section 501(c)(3) of the Internal Revenue Code. The IRS letter
   was addressed to office location in

7. On or about registered as a charitable organization with
   the Secretary of State, stating that the purpose of the organization was to

8. Beginning in or around of created several public-facing, internet-
   based platforms that and his associates would subsequently use to
   communicate information about fledgling charity.

A website ( ) was registered on or about , , and
used his personal account to create a account for
" "on or around ' (" i).
would subsequently use the to advertise, promote, and
conduct raffle ticket sales, as well as to communicate with potential
and actual raffle ticket purchasers.

9. , aided and abetted by others, also registered an email domain name
   ) for the charity, and thereafter utilized multiple email addresses

Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)
Page 8 of 27

Department of the Treasury - intemal Revenue Service Schedule number or

Form 886-A Explanation of Items exhibit

(Rev. May 2017)

Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended

under that domain - to include and
to correspond with members of the public on behalf.

10. described mission (via the charity's website and the
    ) as the following: "Our vision is to build (or )
    where homeless can find shelter, food, counseling and job skills training.”

The website further informed viewers that: "

11. primary fundraising method consisted of advertising and selling raffle tickets for
    high-end automobiles and cash prizes, typically through the use of advertisements on the
    and the website. solicited raffle ticket purchases
    with the claim that the raffle proceeds (other than necessary advertising and operating
    expenses) would go to benefit in-need of the

12. Individuals who decided to purchase raffle tickets from would do so by selecting a
    payment link on the . Those purchases would then be
    processed by a payment processing company (to include ; , and ), with
    the funds eventually deposited into the Bank Account. typically conducted
    the raffles doing so in live video feeds streamed to the public on the

13. Over the course of activities, between of , through at least
    of , individuals in all states and commonwealths purchased raffle tickets from
    through the . Between of and of ;
    charitable raffles generated more than $ in proceeds, the entirety of which
    flowed into the Bank Account.

14.From in or around , through in or around at least of , within the

of and elsewhere, , the defendant, devised

and intended to devise a scheme and artifice to defraud individuals, and to obtain money
and property from the same, by means of materially false and fraudulent pretenses,
representations, and promises concerning numerous aspects of operations.

15. It was part of the scheme to defraud that , when advertising upcoming raffles,
    corresponding with potential and current raffle ticket purchasers, and responding to queries
    from members of the general public, made repeated misrepresentations about the nature of
    and basis for the financial compensation that was drawing from the

Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)
Page 9 of 27

Department of the Treasury ~ intemal Revenue Service Schedule number or
Form 886-A Explanation of Items exhibl
(Rev. May 2017) =
Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended
16.For the year of existence, spanning at least of until in or around
of ; consistently represented in his public postings that was not drawing
financial compensation from the charity, and was instead-like all the charity's staff-a
“volunteer.” made these claims to both induce further raffle ticket sales and quell

criticism of fledgling charity.

typically issued these representations on the , often in the
context of directly refuting allegations by other posters that was using
the charity's raffle ticket proceeds to enrich or that was dissipating the
charity's proceeds in unseemly or outright fraudulent fashion.

17. Those representations included the following statements, issued by on the

18.In truth and fact, however, had begun withdrawing funds from the Bank
Account (for reimbursement and salary) beginning in at least of

19. did not announce that would be paying a salary from the Bank
    Account until in or around of . did not acknowledge at that point (or any
    time afterwards) that had in fact already been paying with funds from the

Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)
Page 10 of 27

Department of the Treasury - Internal Revenue Service Schedule number or

Form 886-A Explanation of Items Sole)

(Rev. May 2017)

Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended

Bank Account, to include drafting a series of payroll checks to (covering the
months of the calendar year) months before his announcement.

20. it was further part of the scheme and artifice to defraud that misrepresented the
    purported justification for decision to begin paying a Salary with charity funds.
    explained to the public that would begin drawing a salary from
    when the charity became sole employment- that is, at the point that
    left previous job “for good."

21.In announcing in late of that had decided to begin paying a
salary, represented that would soon be resigning from current employer.
At that point, claimed, would commence working for "hours [a

week] full-time," and so would begin paying a salary.

a. indicated that the timing of | departure from current employment
was imminent in a posting on , "

b. subsequently announced _ resignation from his previous job in a
posted to the on :

22.|n truth and fact, however, had not left government contractor employer.
Instead, continued to work for that employer for approximately more
months, submitting resignation to that employer on , . Between

of and of continued to receive regutar, salary

payments from his (purportedly former) employer.

23. It was further part of the scheme and artifice to defraud that , after announcing
    that had decided to start paying a salary from , misrepresented the
    purported justification for the amount of that forthcoming salary. Specifi cally,
    claimed in public postings on the that

"and therefore would pay a salary that was

limited to the same amount had earned at his previous employment.

public statements to this effect included the following public postings:

See excerpt on the next page for details!

Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)
Page 11 of 27

"Department of the Treasury ~ Internal Revenue Service Schedule number or
Form 886-A Explanation of Items omni
(Rev_May 2017) . __ _
Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended
24.|n truth and fact, however, knowingly misrepresented the amount of — previous
salary in order to provide ostensible justification for paying a significantly higher

salary from charity's bank account.

25.At the time that incorporated , was employed by a government
contractor. maintained that employment through of . During
tenure at this employer, received a salary of approximately $ in :
approximately $ in , and approximately $ in

26. ultimately paid a total of $ in salary and discretionary " "
    payments from the Bank Account for the calendar year. Contrary to
    representations to the public that salary would be
    consistent with “current living,” or even “less than what [ ) made" at
    previous job, salary for constituted an approximate % raise from
    his previous employment's salary.

ZT. would later pay approximately $ in salary and discretionary
bonuses in . For the calendar year, explained to accountant in
of , € ) anticipated paying a total of $ in salary
and discretionary bonuses. In of , proposed and approved a
compensation package for that included a base salary of $ and
quarterly " "payments of $ —a total compensation package of at least
$ ;
Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)

Page 12 of 27

Department of the Treasury ~ Internal Revenue Service Schedule number or
Form 886-A Explanation of Items exhiett
(Rev_May 2017)
Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended
28.!t was further part of the scheme and artifice to defraud that misrepresented to
potential and current raffle ticket purchasers that tickets purchased from for raffle
entries were "tax-deductible." In truth and fact, however, knew that these

statements were false because the Internal Revenue Code does not permit tax deduction
claims for purchases of games-of-chance tickets (bingos, raffles, etc.), whether from profit or
non-profit organizations. deliberately circumvented this IRS prohibition, however,
by structuring the receipts that provided to raffle ticket purchasers so that the receipts
concealed the true nature of the financial transaction in question. That is, the receipts
characterized the patron's purchase of a raffle ticket instead as a charitable
“donation,” omitting any reference to raffles or the ticket purchaser's raffle ticket number.

29. advertised these knowingly false statements to induce the public to purchase
    (purportedly tax-deductible) raffle tickets from his organization. In doing so, both
    deliberately misled potential raffle ticket purchasers and simultaneously facilitated the
    submission fraudulent purportedly tax-deductible "donation" receipts (by witting or unwitting

raffle ticket purchasers) to the Internal Revenue Service.

30. frequently reassured raffle ticket purchasers that (contrary to the clear
    "charitable donation” language on the ticket purchaser's receipt) the purchasers had not
    made a “donation” to , but had instead successfully purchased entries in the
    upcoming raffle. misrepresentations regarding this aspect of his scheme
    and artifice to defraud included the following postings:
    Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)

Page 13 of 27

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

31. It was further part of the scheme and artifice to defraud that misrepresented how

would use the charity's raffle ticket proceeds. In public postings on
and website, and in correspondence with and promotional materials provided to

potential and previous raffle ticket purchasers, advertised that “direct
mission" was raising funds to build “ | which

described as a" [square foot] facility in “ capable of housing
“upwards of at a time.” To that end, repeatedly assured the public
that a significant portion - ” " . of all the proceeds generated by the charity's raffle

ticket sales were "allocated for our direct mission" and accordingly segregated in a
separate, steadily increasing “

32.1n truth and fact, however, there was no" ." Instead, directed that

all raffle ticket proceeds be deposited into a bank account (the Bank Account).
thereafter utilized those charitable proceeds as __ saw fit: paying

salary and discretionary bonuses; paying advertising costs; purchasing the raffle
prize ; reimbursing for various and sundry travel expenses; etc.
The balance in the Bank Account, accordingly, increased and decreased according
to raffle ticket sales and expenditures. At no point during the timeframe
of this indictment, contrary to representations, had established a
separate account for the purported " ," or otherwise segregated a portion of the

charity's raffle ticket proceeds for the purchase and/or construction of "

33. The building purchased by during the course of the time frame described above
    consisted of purchase in or around of (for approximately
    $ )ofa square foot office facility in
    Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)

Page 14 of 27

Department of the Treasury - Internal Revenue Service Schedule number or
Form 886-A Explanation of Items exhibit
(Rev. May 2017) _ =
Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended

34. it was further part of the scheme and artifice to defraud that misappropriated
    raffle ticket proceeds to pay for personal expenses, and that
    subsequently and knowingly mischaracterized those transactions in accounting

records and publicly available tax filings in order to present a misleading portrait of the
charity's financial decision-making.

35. As the signatory on the Bank Account, regularly utilized funds in the

Bank Account to pay credit card bills. assured

accountant, however - and later, federal agents - that used funds to

pay for credit card expenditures incurred on legitimate, -serving transactions (or for

legitimately reimbursable expenses, such as hotel and meals costs while

traveling on business). claimed that was carefulto segregate — credit

card usage - that is, that used personal credit cards for personal expenses, and
credit cards for legitimate business.

36.In truth and fact, however, utilized access to the Bank Account to pay
for numerous personal expenditures that had incurred using either (the
purportedly) -business- credit cards or through the issuance of checks drawn on
the Bank Account. later approved the mis-categorization of those
personal expenditures in accounting records, so that personal
expenditures were instead categorized as instances of “ ” provided by the charity
to homeless or otherwise in-need . also approved the mis-categorization
of salary payments to staffers so that those payments were instead described as
additional instances of financial “ " provided by to in-need

37. use of the Bank Account to pay for personal expenditures (and his
    subsequent mischaracterizations of those transactions), and
    mischaracterization of payments to contractors, included (but were not limited to) the
    following:

Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)
Page 15 of 27

Department of the Treasury intemal Revenue Service Schedule number or

Form 886-A Explanation of Items exhibit
(Rev_May 2017)

Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended

38. understood that the mischaracterization of these personal expenditures and
    salary payments as being instances of financial “ ” provided by the charity to
    destitute had the effect of both falsely inflating the amount of raffle proceeds
    that appeared to be allocated to the direct assistance of homeless or otherwise
    disadvantaged ; and simultaneously decreasing the amount of raffle proceeds that

represented were being aliocated to pay the salaries or compensation of
employees.

39. also understood that these accounting records would form the basis for
    required, publicly available annual tax filing with the IRS--that is, the IRS Form 990.
    The IRS Form 990 is of especial importance to both the IRS (which describes the Form 990
    as the IRS's "primary tool for gathering information about tax-exempt organizations") and
    those members of the public interested in assessing the financial decision-making and
    financial priorities exercised by tax-exempt charitable organizations.

40. subsequently approved the filing of Form 990 with the IRS on or
    about , . That filing, which detailed ' financial activity throughout the
    calendar year, incorporated the financial mis-categorizations described above.

41. posted a filed copy of the Form 990 on the website.
    subsequently and frequently urged members of the public to view the Form 990,
    pointing to the representations on that filed tax form as evidence of responsible
    stewardship of its charity raffle proceeds.

42. understood and intended, when be directed members of the public to view the
    Form 990, that the mis-categorization of personal expenditures
    and his payments to staff (among other transactions) as instances of "direct
    [charitable] relief" to had the effect of producing an inaccurate summary of how
    was in fact allocating the proceeds generated by the charity's raffle ticket sales.

43. also used funds drawn from the Bank Account to purchase a residence
    titled in name, and to subsequently make extensive improvements on that
    residence. Specifically, purchased a residence in ;
    on or about : . wrote a $ check from the Bank
    Account to pay for the " "deposit on the residence, although titied
    the residence in his name.

Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)
Page 16 of 27

Department of the Treasury - Internal Revenue Service Schedule number or
Form 886-A Explanation of Items exhibit
(Rev. May 2017)
Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended
44, began "leasing" this residence (while residing in the home) to his charity in
of , paying (as landlord) $ a month from the Bank
Account. also withdrew $ from the Bank Account to serve as the
charity's " "on lease of residence. The purported
justification for the lease was that residence would at some point be
used in the course of of advertised programs--" " -which
offered the opportunity to stay at the residence for week-long
periods.

45. subsequently made extensive improvements to the residence, to include the

installation of a pool, patio, and garage (and renovations to the residence’s bathrooms,
ceilings, and walls). Characterizing these improvements to the residence as "leaseholder
improvements” made by the lessee (that is, ), used funds from the
Bank Account to fund these home improvement projects. Between and
of ,; withdrew more than $ in charity funds to complete the
aforementioned improvements. resided at the residence until in or about

of

46. utilized the residence to host the " " program from
    approximately of through of subsequently terminated
    the lease to and returned to using the house (which had at all times remained titled in

name) as full-time personal residence through at least of
did not reimburse his charity for the $ in charity funds that
spent on improvements to the residence at any point prior to learning that his
financial management of was under federal criminal investigation.

Examiner discovered that signed the plea deal on ; for the
aforementioned federal fraud case against agreeing to be sentenced on count of engaging
in a monetary transaction with property derived from unlawful activity. The U.S. Attorney's Office
agreed to drop other charges, including mail and wire fraud, as part of the deal.

is set to be sentenced : ,and faces upto ——- years in prison and fines more than
$ , though the plea deal stipulates that the government will recommend a lower sentence,
likely in line with request for months in prison. must also forfeit any assets

possesses that are related to his crime.
Read more at
and

Additionally, during the course of the examination, examiner discovered that

(DOJ) assessed civil penalties against as part of a
settlement agreement involving an illegal raffle enterprise. to the press release and the
Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)

Page 17 of 27

Department of the Treasury - Internal Revenue Service Schedule number or
Form 886-A Explanation of Items exhmit
(Rev. May 2017) = =
Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended

settlement agreement is here
. The details of the press release are on the next page.

— announced ’ organizations in the
state will soon receive donations as a result of civil penalties assessed as part of a settlement
agreement involving an illegal raffle enterprise and the (DOJ)
In a press release, a series of nationwide and raffles were held by

non-profit, , from f - The

Attorney General's office says it was found that the organization was selling raffle tickets in other
states where such sales were illegal. Additionally, they applied a substantial portion of raffle

proceeds to administrative costs rather than maximizing monies donated to " charities.
voluntarily entered into the settlement agreement and made the payments.

As part of the settlement, the chose charities to benefit from the
settlement:

e on the , Which serves by at

($ ).
e , based in , which offers guided as a part
of the ($ ).
e , which provides housing and resources for homeless
at the in ($ ).

Under the settlement agreement, $ will go the state general fund. Additionally,

nonprofit raffle registration will be revoked in

LAW

Section 501(a) of the Code exempts from federal income taxation organizations described
in section 501(c).

Section 501(c)(3) of the Code exempts from federal income tax organizations which are 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 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 insures 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

Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)
Page 18 of 27

Department of the Treasury ~ Internal Revenue Service Schedule number or
Form 886-A Explanation of items extviett
(Rev. May 2017)
Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended

distributing of statements), any political campaign on behalf of (or in opposition to) any candidate
for public office.

Section 1.501(c)(3)-1(a) of the income Tax Regulations provides that, in order to be exempt as an
organization described in section 501(c)(3) of the Code, an organization must be both organized
and operated exclusively for one or more of the purposes specified in such section.

Section 1.501(c)(3)-1(c)(1) of the regulations provides that an organization will be regarded as
“operated exclusively” for one or more exempt purposes if it engages primarily in activities
which accomplish one or more of such exempt purposes specified in section 501(c)(3) of the Code.
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 of private shareholders or individuals.

Section 1.501(c)(3)-1(d)(1)(ii) of the regulations provides that an organization is not organized or
operated exclusively for one or more exempt purposes specified in section 501(c)(3) of the Code
unless it serves a public rather than a private interest. Thus, 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 organizations, or persons controlled,
directly or indirectly, by such private interests.

Section 1.501(c)(3)-1(e)(1) of the regulations provides that an organization may meet the
requirements of section 501(c)(3) of the Code although it operates a trade or business as a
substantial part of its activities, if the operation of such trade or business is in furtherance of the
organization's exempt purpose or purposes and if the organization is not organized or operated for
the primary purpose of carrying on an unrelated trade or business, as defined in section 513.

In determining the existence or nonexistence of such primary purpose, all the circumstances must
be considered, including the size and extent of the trade or business and the size and extent of the
activities which are in furtherance of one or more exempt purposes.

Section 502(a) of the Code provides that an organization operated for the primary purpose of
carrying on a trade or business for profit shall not be exempi from taxation under section 501 on
the ground that all of its profits are payable to one or more organizations exempt from taxation
under section 501.

Section 1.502-1(a) of the regulations provides that, in the case of an organization operated for the
primary purpose of carrying on a trade or business for profit, exemption is not allowed under
section 501 of the Code on the ground that all of the profits of such organization are payable to
one or more organizations exempt from taxation under section 501. In determining the primary

Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)
Page 19 of 27

Department of the Treasury - intemal Revenue Service Schedule number or
Form 886-A Explanation of Items exh
(Rev_May 2017) = _
Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended

purpose of an organization, all the circumstances must be considered, including the size and
extent of the trade or business, and the size and extent of those activities of such organization
which are specified in the applicable paragraph of section 501.

Section 512(a) of the Code provides that the term “unrelated business taxable income” means the
gross income derived by any organization from any unrelated trade or business regularly carried
on by it, less allowable deductions which are directly connected with the carrying on of such trade
or business, computed with certain modifications.

Section 513 of the Code provides that the term “unrelated trade or business” means any trade or
business the conduct of which is not substantially related (aside from the need of such
organization for income or the use it makes of the profits derived) to the exercise or performance
by such organization of its charitable, educational, or other purpose or functions constituting the
bases for its exemption under section 501.

In Rev. Rul. 64-182, 1964-1 C.B. 186, the Service published the commensurate test. In this ruling,
an organization was organized exclusively for charitable purposes by which it derived its income
principally from the rental of space in a large commercial office building which it owned,
maintained, and operated. The charitable purposes of the corporation were carried out by aiding
other charitable organizations, selected in the discretion of its governing body, through
contributions and grants to such organizations for charitable purposes. (n the ruling, the Service
held that the organization was deemed to meet the primary purpose test of section 1.501(c)(3)-
1(€)(1) of the Income Tax Regulations, and was to be entitled to exemption from Federal income
tax as a corporation organized and operated exclusively for charitable purposes within the
meaning of section 501(c)(3) of the Code, where it was shown to be carrying on through such
contributions and grants a charitable program commensurate in scope with its financial resources.

Rev. Rul. 67-5, 1967-1 C.B. 123, holds that a foundation controlled by the creator's family was
operated to enable the creator and his family to engage in financiai activities that were beneficial to
them, but detrimental to the foundation. This resulted in the foundation's ownership of common
stock that paid no dividends of a corporation controlled by the foundation's creator and his family,
which prevented it from carrying on a charitable program.

Rev. Rul. 70-186, 1970-1 C.B. 129, holds that a nonprofit organization formed to preserve and
improve a lake used extensively as a public recreational facility qualifies for exemption under
section 501(c)(3) of the Code. The organization was formed to preserve a lake as a public
recreational facility and to improve the condition of the water in the take to enhance its recreational
features. It is financed by contributions from lake front property owners, from members of the
community adjacent to the lake, and from municipalities bordering the lake. The organization's
principal activity is to treat the water, to remove algae, and to otherwise improve the condition of
the water for recreational purposes.

Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)
Page 20 of 27

Department of the Treasury ~ Internal Revenue Service Schedule number or
Form 886-A Explanation of Items extott
(Rev. May 2017)
Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended

By treating the water, removing algae, and otherwise improving the condition of the water, thereby
insuring the continued use of the lake for public recreational purposes, the organization is
performing a charitable activity. The benefits to be derived from the organization's activities flow
principally to the general public through the maintenance and improvement of public recreational
facilities. Any private benefits derived by the lake front property owners do not lessen the public
benefits flowing from the organization's operations. In fact, it would be impossible for the
organization to accomplish its purposes without providing benefits to the lake front property
owners.

In Better Business Bureau of Washington, D.C. v. U.S., 326 U.S. 279, 283, 66 S. Ct. 112, 90 L. Ed.
67 (1945), the Supreme Court held that the “presence of a single ... (nonexempt] purpose, if
substantial in nature, will destroy the exemption regardless of the number or importance of truly ...
[exempt] purposes.”

In B.S.W. Group, Inc. v. Commissioner, 70 T.C. 352 (1978), the court found that a corporation
formed to provide consulting services did not satisfy the operational test under section 501(c)(3) of
the Code because its activities constituted the conduct of a trade or business that is ordinarily
carried on by commercial ventures organized for profit. Its primary purpose was not charitable,
educational, or scientific, but rather commercial. In addition, the court found that the organization's
financing did not resemble that of the typical section 501(c)(3) organizations. It had not solicited,
nor had it received, voluntary contributions from the public. (ts source of income was from fees
from services, and those fees were set high enough to recoup all projected costs and to produce a
profit. Moreover, it did not appear that the corporation ever planned to charge a fee less than
“cost.” And finally, the corporation did not limit its clientele to organizations that were section
501(c)(3) exempt organizations.

In Est of Hawaii v. Commissioner, 71 T.C. 1067, 1081-82 (1979), the Tax Court held that
compensation need not be unreasonable or exceed fair market value to constitute private benefit,
stating “[nlor can we agree with petitioner that the critical inquiry is whether the payments made to
International were reasonable or excessive. Regardless of whether the payments made by
petitioner to International were excessive, International and EST, Inc., benefited substantially from
the operation of petitioner.”

In Retired Teachers Legal Defense Fund v. Commissioner, 78 T.C. 280, 286 (1982) the Tax Court
defined private benefit to include any “advantage; profit; fruit; privilege; gain or interest.”

In Church by Mail v. Commissioner. 765 F. 2d 1387 (9th Cir. 1985), affg 48 T.C.M. (CCH) 471
(1984), the Tax Court found it unnecessary to consider the reasonableness of payments made by
the applicant to a business owned by its officers. The 9th Circuit Court of Appeals, in affirming the
Tax Court's decision, stated: “The critical inquiry is not whether particular contractual payments to
a related for-profit organization are reasonable or excessive, but instead whether the entire

Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)
Page 21 of 27

Department of the Treasury ~ Internal Revenue Service Schedule number or
Form 886-A Explanation of Items exhibit
(Rev_May 2017)
Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended

enterprise is carried on in such a manner that the for-profit organization benefits substantially from
the operation of the Church.”

In Easter House v. U.S., 12 Cl Ct. 476, 486 (1987), affd, 846 F. 2d 78 (Fed. Cir.) cert. denied, 488
U.S. 907, 109 S. Ct. 257, 102 L. Ed. 2d 246 (1988), the court found an organization that operated
an adoption agency was not exempt under section 501(c)(3) of the Code because a substantial
purpose of the agency was a nonexempt commercial purpose. The court concluded that the
organization did not qualify for exemption under section 501(c)(3) because its primary activity was
placing children for adoption in a manner indistinguishable from that of a commercial adoption
agency. The court rejected the organization's argument that the adoption services merely
complemented the health-related services to unwed mothers and their children. Rather, the court
found that the health-related services were merely incident to the organization's operation of an
adoption service, which, in and of itself, did not serve an exempt purpose. The organization's sole
source of support was the fees it charged adoptive parents, rather than contributions from the
public. The court also found that the organization competed with for-profit adoption agencies,
engaged in substantial advertising, and accumulated substantial profits. Accordingly, the court
found that the “business purpose, and not the advancement of educational and charitable activities
purpose, of plaintiffs adoption service is its primary goal” and held that the organization was not
operated exclusively for purposes described in section 501(c)(3). Easter House. 12 Cl. Ct. at 485-
486.

In Living Faith. Inc. v. Commissioner, 950 F.2d 365 (1991), the Court of Appeals upheld a Tax
Court decision that an organization operating restaurants and health food stores in a manner
consistent with the doctrines of the Seventh Day Adventist Church did not qualify for exemption
under section 501(c)(3) of the Code because the organization was operated for a substantial
nonexempt commercial purpose. The court found that the organization's activities were
“presumptively commercial” because the organization was in competition with other restaurants,
engaged in marketing, and generally operated in a manner similar to commercial businesses.

In Airlie Foundation v. Commissioner, 283 F. Supp. 2d 58 (D.D.C., 03), the court relied on the
“commerciality” doctrine in applying the operational test. Because of the commercial manner in
which this organization conducted its activities, the court found that it was operated for a non-
exempt commercial purpose, rather than for a tax-exempt purpose. As the court stated:

Among the major factors courts have considered in assessing commerciality are competition with
for profit commercial entities; extent and degree of below cost services provided; pricing policies;
and reasonableness of financial reserves. Additional factors include, inter alia, whether the
organization uses commercial promotional methods (e.g. advertising) and the extent to which the
organization receives charitable donations.

APPLICATION OF LAW
On the basis of the information obtained during the exam, the Internal Revenue Service (the
“Service”) contends that is not organized and operated exclusively for exempt purposes
Catalog Number 20810W WWw.irS.gov Form 886-A (Rev. 5-2017)

Page 22 of 27

Department of the Treasury - Internal Revenue Service Schedule number or
Form 886-A Explanation of Items exhibit
(Rev. May 2017)
Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended
within the meaning of section 501(c)(3) of the Code. Rather, the Service contends that is

organized and operated for the primary purpose of carrying on an unrelated trade or business
within the meaning of section 513 of the Code, and, further, that it is organized and operated for
the benefit of private interests. Under the “operational test” set out in section 1.501(c)(3)-1(c) of the
regulations, an organization must prove that it operates exclusively for one or more exempt
purposes within the meaning of section 501(c)(3) by showing that it engages primarily in activities
which accomplish one or more of such exempt purposes. The Service contends that fails
the operational test set out in section 1.501(c)(3)-1(c) of the regulations because it failed to prove
that it operates exclusively for one or more exempt purposes within the meaning of section
501(c)(3).

Section 1.501(c)(3)-1(e) of the regulations explains that an organization may operate a trade or
business as a substantial part of its activities and still qualify for exemption under section 501(c)(3),
so long as the operation of the trade or business is in furtherance of the organization's exempt
purpose and the organization is not organized or operated for the primary purpose of carrying on
an unrelated trade or business. The term “unrelated trade or business’, as it applies to an
organization described in section 501(c)(3) of the Code, means any trade or business the conduct
of which is not substantially related (aside from the need of such organization for income or the
use it makes of the profits derived) to the exercise or performance by such organization of its
exempt purposes.

The courts have developed guidelines intended to help discern whether an organization has a
substantial nonexempt commercial purpose, i.e., if it is conducting unrelated trade or business.
See e.g., B.S.W. Group, supra; Easter House, supra; Airlie, supra; Living Faith, supra. Generally,
the factors proffered by courts focus on the nature of the activities and how an organization
conducts its business. primary activity is gaming, i.e., conducting unrelated trade or
business. Gaming includes bingo, beano, raffles, lotteries, pull-tabs, scratch-offs, pari-mutuel
betting, Calcutta wagering, pickle jars, punchboards, tip boards, tip jars, certain video games, and
other games of chance. Gaming is a recreational activity and, if conducted for a profit, a trade or
business. Gaming activities involving the public do not directly further 501(c)(3) exempt purposes.
Therefore, 501(c)(3) organization will not continue to qualify for exemption if gaming activities are
their primary activities. As the court found in Better Business Bureau of Washington, D.C. v. U.S.,
the presence of a single, substantial non-exempt purpose will preclude exemption regardless of
the number of other exempt activities.

Specifically, raises funds primarily by way of advertising and conducting raffles and

sweepstakes for ; raffles is not substantially related to the
exempt purpose of helping struggling , except insofar as it provides the

with income. Treasurer stated is funded through raffles and sweepstakes.
website provided that is % self-funded and relies on giveaways to generate the

revenue needed. Per the bank statements, total deposits in were $

Substantially all of those deposits ( %) came in from raffle sales. All other income is

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

Page 23 of 27

Department of the Treasury - intemal Revenue Service Schedule number or

Form 886-A Explanation of Items Silas

(Rev, May 2017)

Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended

miniscule compared to the raffle income; moreover, has not received voluntary contributions

from the general public.

Income from its raffle and sweepstakes activities (revenues from ) totaled $

Of this amount, distributed $ for charitable purposes, i.e. assistance to needy
which is approximately % of total revenues raised for charitable purposes.

The amount of $ was designated as a program service expense.

total expenses in were $ ; gaming expenses (raffle
prizes/advertising) were $ ,whichis % of total expenses. intent was to use
raffle funds to provide housing and other assistance to homeless or otherwise destitute
Based on the activity in the bank statements, very little (3 which is less than % of total
expenses) was going to and towards other 501(c)(3) charitable purposes.

To summarize, examiner's findings indicate applied a substantial portion of raffle proceeds
to gaming expenses and administrative costs rather than to 501(c)(3) charitable purposes.
Because approximately % of all revenues were collected via raffles, % ofall expenses
were spent on raffle prizes/advertising, and just under % of funds were dedicated to charitable
work, such as providing to and those less fortunate, purported
charitable activities were not commensurate in scope with financial resources, which is a
requirement for a section 501(c)(3) fundraising organization as stated in Rev. Rul. 64-182.

Whether an organization is operating a "real and substantial" charitable program, as described in
Rev. Rul. 64-182, depends on all the facts and circumstances of the case. One of the significant
factors is whether a relatively low charitable payouts reflect private benefit or inurement in the
operation of the gaming activity. See, e.g., Rev. Rul. 67-5, 1967-1 C.B. 123, where the Service
held that an organization that engaged in activities beneficial to the founder and his family, but
detrimental to the foundation, operated for a substantial non-exempt purpose and served the
private interests of the founder. Thus, in any case involving possible application of Rev. Rul. 64-
182 adverse to the organization, the possibility of private benefit or inurement should be
considered.

Under section 1.501(c)(3)-1(d)(1)(ii) of the regulations, an organization is not operated exclusively
for exempt purposes unless it serves a public rather than a private interest. Although an
organization exempt under section 501(c)(3) of the Code may provide benefits to private
individuals, those benefits must be incidental quantitatively and qualitatively to furthering exempt
purposes. To be qualitatively incidental, private benefit must be a necessary concomitant of the
activity that benefits the public at large; in other words, the benefit to the public cannot be achieved
without necessarily benefiting certain private individuals. To be quantitatively incidental, the private
benefit must be insubstantial, measured in the context of the overall public benefit conferred by the
activity.

Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)
Page 24 of 27

Department of the Treasury - intemal Revenue Service Schedule number or
Form 886-A Explanation of Items exhibit
(Rev. May 2017)
Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended

Considering information obtained from DOJ’s indictment and the subsequent plea deal, settlement
with Department of Justice’s , and examiner's findings, the
Service contends that provides substantial, not incidental, benefits to President/CEO

. does not have a board. The President is the
Officer/Director on the board making decisions. was involved in all of the
fundraising, communication with all the external people, and managing the organization.
Without any oversight, was able to set his own compensation, increasing his
salary to $ per month with opportunity for quarterly bonuses of $ . As stated in Est of
Hawaii, the Tax Court held that compensation need not be unreasonable or exceed fair market
value to constitute private benefit. See also Church by Mail v. Commissioner in which the Tax
Court found it unnecessary to consider the reasonableness of payments made by the applicant to
a business owned by its officers. Additionally, as stated in Retired Teachers Legal Defense Fund v.
Commissioner, private benefit is any “advantage; profit; fruit; privilege; gain or interest.”
To summarize, , as the overseer of the organization, had unrestricted
authority to set his own compensation, which is a conflict-of-interest transaction and, thus, was in a
position to personally benefit from resources.

In addition to setting his own compensation, benefited from the
organization's resources by directing funds towards
property (the “property’). Specifically, examiner noted that multiple contractors were paid for work
performed on the property. This property was a single-family residence purchased by but
titled in name. was leasing this residence to
for $ a month, in addition to receiving his regular compensation from . Extensive
improvements were made on the property in , to include the installation of a pool, patio, and
garage (and renovations to the bathrooms, ceilings, and walls). Characterizing these
improvements to the property as "leasehold improvements” made by the lessee (that is, ),
used funds from bank account to fund these home improvement
projects.

Total costs associated to the leasehold improvements of the property were $ , which is
about % of total expenses. DOJ’s indictment alleges that lived at the
property until in or about of . Furthermore, DOJ’s indictment alleges

did not reimburse his charity for funds spent on improvements to the property at any
point prior to learning that his financial management of was under federal criminal
investigation.
To summarize, purchased the property using funds, titled it in
own name, leased it back to , made extensive improvements to the property, and appears to
have used it as his personal residence. Considering information obtained from DOJ’s indictment/
plea deal and examiner's findings, the Service contends that business operations involving the
property do not serve to “substantially benefit’ and its exempt purpose, rather they serve to
substantially benefit President/CEO

Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)
Page 25 of 27

Department of the Treasury - Internal Revenue Service Schedule number or

Form 886-A Explanation of items exhibit

(Rev. May 2017)

Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended
Altogether, spent $ ,whichis % oftotalexpenses and % ofthe gross
revenues in , on the leasehold improvements, lease, pay, travel, and reimbursements to
President ._ As stated previously, salary,

reimbursements, rent from lease, travel expenses, and any other fringe benefits need not be
unreasonable or exceed fair market value to constitute private benefit. See e.g., Church by Mail v.
Commissioner, Retired Teachers Legal Defense Fund v. Commissioner. Private benefit is any
“advantage; profit; fruit; privilege; gain or interest.” To reiterate, , as the
overseer of the organization, used his position of power to personally benefit from the
organization’s resources.

Unlike the situation described in Rev. Rul. 70-186, supra, in which an organization preserved a
lake for public recreation and, in so doing, incidentally benefited lakefront property owners, in

case the private benefit is substantial and the public benefit is incidental. The Service
argues that ’s low charitable payouts (less than % of ' total revenues and expenses
in ) reflect private benefit to . The Service argues is similar to the
organization described in Rev. Rul. 67-5, where the Service held that an organization that engaged
in activities beneficial to the founder and his family, but detrimental to the foundation, operated for
a substantial non-exempt purpose and served the private interests of the founder. By serving the
private interests of ; was prevented from carrying on a charitable
program.

Ona note, examiner noted some cash withdrawals that were not categorized at all in the
general ledger. These are large/questionable transactions because there was no explanation
provided in the general ledger for how the money was spent, so the nature behind those
withdrawals is unclear. Total amount of uncategorized withdrawals in question is $
which is about % of total expenses. It is not an insignificant amount to say the least, so the
Service will consider it in this report. Without adequate records, the Service cannot verify that
used the aforementioned funds to further 501(c)(3) charitable purposes. Thus, the Service
has no reason to believe that these funds were used for charitable purposes and has not
provided any evidence to the contrary.

Overall, expenses associated with gaming, property improvements, uncategorized withdrawals,
and lease, pay, and reimbursements to President total to $
which is % of total expenses in and % of the organization’s gross revenues. To reiterate,
purported charitable activities were not commensurate in scope with financial
resources, primary activity was gaming, i.e., conducting unrelated trade or business, and
failed to prove that it operates exclusively for one or more exempt purposes within the
meaning of section 501(c)(3).

TAXPAYER'S POSITION

The taxpayer's position is solicited.

Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)
Page 26 of 27

Department of the Treasury - Internal Revenue Service Schedule number or

Form 886-A Explanation of Items exhibit
(Rev. May 2017)

Name of Taxpayer Tax Identification Number (last 4 digits) | Year/Period Ended

CONCLUSION

For the above reasons, we find that is not organized and operated exclusively for exempt
purposes within the meaning of section 501(c)(3) of the Code. Rather, is organized and
operated for the primary purpose of conducting an unrelated trade or business. Furthermore, we
find that provides substantial benefits to private interests in return for a comparatively
incidental public benefit. Accordingly, does not qualify for exemption as an organization
described in section 501(c)(3) of the Code and it must file federal income tax returns. Contributions
to are not deductible under section 170 of the Code.

Catalog Number 20810W www.irs.gov Form 886-A (Rev. 5-2017)
Page 27 of 27