department of the treasury taxpayer_identification_number wee person to contact kekke tel fax tax periods ended december 20xx december ' 20xx december 20xx uil internal_revenue_service appeals_office liberty avenue room pittsburgh pa release number release date date date kek rr wkkek rekkk certified mail dear this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code the code it is determined that you do not qualify as exempt from federal_income_tax under sec_501 of the code effective january 20xx the revocation of your exempt status was made for the following reason sec_1_501_c_3_-1 of the federal tax regulations provides that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt because your organization has operated primarily for the personal benefit of your trustee you have failed to demonstrate that you are operated exclusively for tax-exempt purposes described in sec_501 of the code as such you are not an organization described in sec_501 and the favorable determination_letter issued to you on november xx 19xx regarding your exempt status is hereby revoked contributions to your organization are not deductible under sec_170 of the code you are required to file federal_income_tax returns on form sec_1041 for the tax periods stated in the heading of this letter and for all tax years thereafter file your return with the appropriate internal_revenue_service center per the instructions of the return for further instructions forms and information please visit www irs gov we will make this letter and the proposed adverse determination_letter available for public inspection under code sec_6110 after deleting certain identifying information we have provided to you in a separate mailing notice notice of intention to disclose please review the notice and the documents attached that show our proposed deletions if you disagree with our proposed deletions follow the instructions in notice you have waived your right to contest this determination under the declaratory_judgment provisions of sec_7428 of the code you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matters that may not have been resolved through normal channels get prompt and proper handling if you want taxpayer_advocate assistance please contact the taxpayer_advocate for the irs office that issued this letter you may call toll-free for the taxpayer_advocate or visit www irs gov advocate for more information if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours is appeals team manager enclosure publication cc rrekk internal_revenue_service tax_exempt_and_government_entities_division department of the treasury po box m s ogden ut date date org address certified mail - return receipt requested dear taxpayer_identification_number form tax_year s ended person to contact id number contact telephone number contact fax number we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures jor unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not catalog number 34809f letter rev have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at if you have any questions please call the contact person at the telephone number shown in the heading of this letter contact you if you write please provide a telephone number and the most convenient time to call if we need to thank you for your cooperation sincerely nanette m downing director eo examinations enclosures publication publication report of examination letter rev catalog number 34809f form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org ein ein schedule no or exhibit year period ended 20xx 20xx 20xx legend org - organization name city - city donor - donor through ra - state - state ein - ein xx - date country - country dir - dir-2 dir-3 - dir address - address trustee - trustee ra-1 through ra- co-1 through co-19 - through companies primary issue whether the sec_501 tax exempt status of the org should be revoked because it is not operated exclusively for tax exempt effective january 19xx facts i trust instrument the org the organization was created on october 19xx the declaration of trust declaration shows that trustee and donor were the donors while the organization has a governing board made up of five directors or what the declaration refers to as members’ trustee is the sole trustee of the organization the original declaration named co-1 as the primary charity but it was amended on october 19xx to name co-2 d b a co-3 as the primary charity that was the only amendment made to the original declaration the organization included the amendment to the declaration in its application_for recognition of tax exempt status the service recognized the organization as an tax exempt_organization described in sec_501 and sec_509 of the code in a letter dated november 19xx the declaration states that it shall be irrevocable and that the donor expressly waived the right and the power to alter amend revoke or terminate the trust or the terms of declaration the declaration also provides that the donor renounced any power to determine or control by alteration amendment revocation termination or otherwise and that the donor renounces any interest in either vested or contingent including any reversionary_interest or possibility of reverter the income or principle of the trust estate the declaration requires each year for trustee to distribute of the adjusted_net_income of the trust to the co-2 d b a co-3 the named primary charity in addition to this distribution the declaration states that trustee shall distribute a total of of the adjusted_net_income to one or more identified charitable organizations or to the primary charity as directed by a majority of the board_of directors the board there are charitable organizations identified on schedule a to the declaration the declaration provides that upon winding up and dissolution of the organization after paying or adequately proving debts and obligations of the form 886-a rev department of the treasury - internal_revenue_service page -1- schedule no or exhibit year period ended 20xx 20xx 20xx form_886 a name of taxpayer department of the treasury - internal_revenue_service explanation of items org ein ein organization the remaining assets shall be distributed to a non-profit fund foundation or corporation which is organized and operated exclusively for charitable educational religious and or scientific purposes and which has established its tax exempt status under sec_501 the declaration provides that the board shall be the governing body of the trust and are referred to as directors or members as trustee is the sole trustee of the organization the declaration provides that the members of the board shall be determined as follows e e one board member shall be appointed by the primary charity two board members shall be from the class consisting of trustee and donor and their descendants the family’ the other members of the board shall be appointed by the majority vote of the remaining members of the board dir-1 and dir-2 were named in the declaration as the initial remaining board members the organization's application_for exemption dated december 19xx listed dir-1 as one of the organization’s board members along with trustee and donor dir-1 and dir-2 dir-1 was also a board member of the co-1 at the same time and was the director appointed by the primary charity dir-1 is an attorney who provided legal advice to trustee and donor about sec_4958 issues the latter section of this rar discusses this advice in greater detail and its trustee and donors is unclear even though the service made numerous requests asking the organization to provide information on the board members and their relationship to the organization and the donors the organization failed to provide any such information dir-2s’ relationship with the organization the amended declaration of trust dated october 19xx and the forms for 20xx 20xx and 20xx the relevant tax years identified the following individuals as board members trustee substantial_contributor and disqualified_person donor spouse of trustee and a disqualified_person dir-3 appointed by co-4 dir-1 treasurer of co-4 dir-2 the board’s meeting minutes show that there were several replacements throughout the years of different board members in other tax years however trustee and donor and dir-1 always remained board members form 886-a rev department of the treasury - internal_revenue_service page -2- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20xkx 20xx org ein ein ul attorney letter the administrative file contains a letter from the law firm of co-5 signed by dir- one of the organization’s board members and addressed to trustee and donor the letter is dated march 19xx and it discusses the law with respect to ilr c sec_4958 it mentions the term disqualified persons and that excess_benefit transactions will result in the imposition of excise_taxes with respect to disqualified persons including founders and organizational managers it then discusses how legislative_history reveals that congress intended to create a kind of safe_harbor according to the letter the safe harbor’ in is that it contains a rebuttable_presumption that a compensation arrangement between a disqualified_person and an organization is reasonable and not subject_to excise_taxes if the arrangement is approved by the board_of directors or trustees that was composed entirely of individuals unrelated to and not subject_to the control of the disqualified_person s involved in the arrangement obtained and relied upon appropriate data as to comparability such as surveys or reports from other similarly situated organizations both taxable and tax-exempt and adequately documented the basis for its determination such as an evaluation of the person whose compensation is being established and setting forth the basis for determining that the person’s compensation was reasonable the letter goes on to state the following a similar rebuttable_presumption would arise with respect to the reasonableness of the valuation of property sold or transferred or purchased by the organization to or form sic a disqualified_person provided the board_of directors or trustees followed the same requirements mentioned above emphasis added the letter also cautions the organization to maintain extensive records of any compensation or loans between the disqualified_person and the organization as proof of the reasonableness of any such transactions operations the service determined that the organization qualified for tax exempt status based on the representations made in its application and supplemental materials the form 886-a rev department of the treasury - internal_revenue_service page -3- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx org ein ein 20xxk 20xx organization did not disclose that it would lend any funds to disqualified persons or make payments to disqualified persons it also represented that it would receive dollar_figure in contributions by the end of 19xx to fund its operations and use all of those funds to exclusively support the publicly supported organizations named in its declaration and schedule a the service was unable to verify whether the organization received this amount by the end of 19xx from the documentation that the service did review it appears that the organization received dollar_figure from october 19xx to 19xx a review of the organization’s board minutes from 19xx to 20xx reveals that the organization’s board only met once a year with the exception of 20xx when it met twice from 19xx to 20xx the minutes showed the following significant points of note at the only board meeting held in 19xx on december 19xx the board approved the following e the organization's purchase of a partnership_interest in co-6 the lp was wholly owned by the co-7 co-7 the purchase_price was dollar_figure the minutes state that the value of that purchase was to be validated by an independent_appraiser the organization failed to provide any proof of an appraiser report even though the service requested it numerous times o o following line of credit to co-8 co-8 and co-6 in the amount of at the 19xx board meeting held on april 19xx the board approved the the board_of the organization voted to invest dollar_figure in co-7 trustee made the presentation from a financial and marketing package prepared by dir- a principle of co-7 a company operating out of state and a former organization board member extension of a dollar_figure co-8 is a partnership with only one partner trustee trustee and donor both recused themselves from voting on this matter according to the minutes the credit was to accrue interest at a prevailing industry rate and that the line of credit would be personally guaranteed by trustee and that it would be documented by a mutually agreed law firm to protect the interests of the foundation in such a manner as is acceptable in the industry the organization failed to provide any documentation of the terms of this line of credit despite the service’s repeated requests the organization's purchase of interest in co-6 for dollar_figure the minutes state that the value of this purchase_price was to be validated later by an department of the treasury - internal_revenue_service form 886-a crev page -4- o form_886 a department of the treasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year period ended 20xx org ein ein 20xx 20xx independent appraisal there is no documentation showing whether such an appraisal was ever obtained the organization also failed to provide proof of any documentation related to the purchase there are no sales documents no proofs of transfer of shares etc repeated requests for such documents despite the service’s trustee then presented the board with the opportunity for the organization to invest dollar_figure in co-9 the board unanimously voted to approve this investment 9’s ownership the organization did not provide any information about co- o o trustee also presented a request to extend dollar_figure in loans to ra-1 ra-2 co- and the org trustee and donor recused themselves from voting on this matter and the remaining board members voted to approve this loan the board minutes in later years show that ra-2 became a board member of the organization but he was not a board member at the time of this loan the organization failed to provide any information about both ra-2 and ra-1 the service repeatedly requested information on ra-1’s and ra-2’s relationship with the organization its founders and the primary charity but the organization failed to provide any such information trustee made a presentation for a loan of dollar_figure to co-10 co-10 co-10 is a partnership whose only two partners are trustee and donor according to the minutes the loan was to be made at an interest rate of payments would be due semi annually and that it was secured_by the underlying property located at address city state the service has no further information about this alleged loan the organization’s next board meeting was held on april 19xx the board meeting minutes of that meeting showed the following o trustee made a proposal suggesting that the organization purchase interest in co-6 hereinafter the partnership for dollar_figuredollar_figure from the co-7 he also told the board that the partnership is a owner of co-8 and provided various financial records as it pertains to co-8 he also represented that the value of the purchase_price would be confirmed by an independent_appraiser trustee and donor both recused themselves from voting on the matter and remaining board members approved the purchase form 886-a crev department of the treasury - internal_revenue_service page -5- form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org ein ein schedule no or exhibit year period ended 20xx 20xx 20xx ra-3 a controller and accountant for co-8 and another entity called co-11 development was present at the meeting and made a presentation to the board asking that the organization extend a line of credit to co-8 and development for dollar_figuredollar_figure the organization failed to provide any information on development's ownership but the service was able to determine the owners as trustee and donor and two of their children ra-4 ra-5 according to the minutes the terms of the credit line will be that it would accrue interest at the prevailing rate in the industry and that trustee would personally guarantee the credit and that it would be documented by a mutually agreed law firm to protect the interests of the foundation in such a manner as is acceptable in the _ industry again trustee and donor both recused themselves from voting on the matter and the remaining board members approved this matter the organization failed to provide any documentation of the terms of this line of credit or any other information related to the line of credit despite the service's repeated requests the board meeting minutes for the one board meeting held in 19xx on april showed the following 19xx ra-3 a controller and accountant for co-8 was present at the meeting and made a presentation to the board asking that the organization extend a line of credit to co-8 for dollar_figuredollar_figure according to the minutes the terms of the credit line will be that it will accrue interest at the prevailing rate in the industry that trustee would personally guarantee the credit and that it would be documented by a mutually agreed law firm to protect the interests of the foundation in such a manner as is acceptable in the industry again trustee and donor both recused themselves from voting on the matter and the remaining board members approved this matter the organization failed to provide any documentation related to the terms of this line of credit despite the service’s repeated requests trustee then requested that the board approve a loan to co-10 in the amount not to exceed dollar_figure to be secured_by the property at address city state the one board meeting held in 20xx on april 20xx showed the following ra-3 a controller and accountant for co-8 was present at the meeting and made a presentation to the board asking that the organization extend a line of credit to co-8 for dollar_figuredollar_figure according to the minutes the terms of the credit line will be that it would accrue interest at the prevailing rate in the industry and that trustee would personally guarantee the credit and that it would be documented form 886-a cev department of the treasury - internal_revenue_service page -6- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20xx 20xx org ein ein by a mutually agreed law firm to protect the interests of the foundation in such a manner as is acceptable in the industry trustee and donor both recused themselves from voting and the remaining board members approved this matter the organization failed to provide any documentation of the terms of this line of credit despite the service’s repeated requests o trustee then requested that the board approve a loan to ra-6 in the amount not to exceed dollar_figuredollar_figure the board unanimously approved this loan the minutes have no mention of the terms of the loan the service was not provided any further information about this loan the organization failed to provide any information on ra-6 or what his relationship was to the organization its founders or its board members despite repeated requests other records show that in the 20xx tax_year co-8 received dollar_figuredollar_figure from the organization as follows dollar_figuredollar_figure total alleged loan from the organization to co-8 since the organization’s inception to 12-31-19xx per its 19xx form_990 dollar_figuredollar_figure total alleged loan from the organization to co-8 since the organization’s inception to 12-31-20xx per the organization’s own accounting_records dollar_figuredollar_figure difference this is the amount that co-8 received from the organization as alleged loans credit in tax_year 20xx there are no records to show that this amount was ever paid back to the organization organization’s one board meeting for 20xx was held on april 20xx the board minutes show the following o o the board members discussed the line of credit extended to co-8 development and co-10 in past years those loans were in excess of dollar_figuredollar_figure trustee represented that he was working to have the lines and loan paid off in full so that the board could forgo collection efforts the organization failed to provide any payment records for the alleged loans and credit extensions trustee represented that he would pay the loans totaling in excess of dollar_figuredollar_figure by using stock that he or co-8 were receiving from co-12 co-12 the board agreed to forego collection efforts in anticipation of said pay-offs dir-1 board member as legal counsel was directed to monitor said situation and advise the board accordingly form 886-a ev department of the treasury - internal_revenue_service page -7- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20xx 20xx org ein ein o o co-12 is a publicly traded corporation listed on the co-13 automated quotation bulletin board system under the symbol co-12 in which trustee is the chief operating officer and director the corporation’s current business plan is to build multiple observation ferris wheels observation wheels currently proposed sites for construction of observation wheels include city state country country and country the organization approved a loan to ra-7 ra-2 and ra-8 in the aggregate amount not to exceed dollar_figuredollar_figure ra-2 was listed as a board member on the april 20xx board meeting minutes the service also repeatedly requested information about ra-7 and ra-8’s relationship to the organization its founders and the primary charity but the organization again failed to provide any such information the minutes state that the loan was approved unanimously and there is nothing to indicate that ra-2 recused himself from voting on this loan the first of two board meetings during 20xx was held on april 20xx the board meeting minutes show the following o ra-2 resigned as a board member and was replaced by dir-3 of the co-3 upon unanimous vote of the board trustee then gave a general report of the organization’s finances including reports on the organization’s various investments the details of which are not specified in the minutes dir-1 then lead a discussion pertaining to the workout of various obligations associated with trustee that was owed the organization again the details of those workouts were not detailed in the minutes the board then agreed to allow these discussions to continue with the target resolution date of june 20xx the second and last board meeting of 20xx was held on june 20xx the minutes of that board meeting shows the following o that there were various delinquencies associated with the various alleged loans from entities related to trustee and donor trustee apparently gave the board some solutions to this issue which are not specified in the minutes and also suggested that he would convey some stock to satisfy this obligation both trustee and donor recused themselves from voting on any resolutions related to these matters the remaining three board members then adopted the following resolutions o it accepted trustee’ contribution of dollar_figure common shares of co-12 stock allegedly valued at dollar_figure per share if co-12 stock was worth dollar_figure per share then the total value of this contribution would be dollar_figuredollar_figure the board agreed to accept this in satisfaction form 886-a crev department of the treasury - internal_revenue_service page -8- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ein ein schedule no or exhibit year period ended 20xx 20xx 20xx by a write-off of dollar_figure in uncollectible of a total obligation of dollar_figuredollar_figure that ra-9 ra-10 ra-11 and co-8 owed according to the board minutes ra-9 ra-10 and ra-11 are related to trustee but the service was unable to determine the nature of their relationship to trustee there are no records showing any alleged loans to ra-9 ra-10 or ra-11 from the organization the only record of any alleged loans are to co-8 from previous board minutes the minutes also show that the total original loan obligation to the organization was dollar_figuredollar_figure it is not known how this amount was derived this amount was then discounted obligations from co-9 which apparently had filed bankruptcy and dollar_figuredollar_figure in discount of interest obligations there is no explanation of why interest was discounted there is also no explanation for why the organization's bad investment in co-9 for dollar_figure would be written off of a purported loan obligation that third parties ra-9 ra-10 ra-11 and co-8 had to the organization the minutes further state that trustee agreed to forego a purported loan the organization owes him in the amount of dollar_figuredollar_figure there are no records of any such loan from trustee to the organization according to the board minutes the organization was thus owed dollar_figuredollar_figure dollar_figuredollar_figure less dollar_figuredollar_figure the total alleged loan that the organization owed trustee the total alleged value of co-12 stock given in satisfaction to pay off all of the alleged loans despite repeated requests for loan documents in relation to co-8 and the organization as the lender the organization failed to provide any such documents there is also no documentation of a loan dollar_figuredollar_figure that the organization allegedly borrowed from trustee the service also repeated requested evidence of the value of co-12 stock at the time of the alleged transfers the organization failed to provide any such proof o the board also approved the transfer of big_number common shares on co-12 allegedly valued at dollar_figure per share by the co-7 in satisfaction of an alleged loan it took out from the organization for dollar_figuredollar_figure the one board meeting held in 20xx was on april 20xx the board meeting minutes showed the following o trustee gave a general report of the business and finances of the organization and gave a report on the financial status of co-12 and the anticipated building of the first of what was to be several large-scale observation wheels in city the board unanimously agreed to hold on co-12 stock in anticipation of it increasing in value form 886-a rev department of the treasury - internal_revenue_service page -9- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx org ein ein 20xx 20xx the form 10-ksb an annual report for publicly traded small_business companies that is required to be filed with the securities_and_exchange_commission sec for the year ended december 20xx listed the value of co-12 as follows 20xx 20xx low high low high quarter quarter quarter quarter dollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure not trading not trading dollar_figuredollar_figure dollar_figuredollar_figure dollar_figure during 20xx there was one board meeting held on april 20xx those meeting minutes show the following o o meeting minutes show the following during 20xx there was one board meeting held on august 20xx those trustee gave a general report of the business and finances of the organization the president of co-12 ra-8 as the organization refused to provide any information it is not known if this ra-8 is ra-8 who received an alleged loan from the organization as reflected in the board meeting minutes of april 20xx joined the meeting telephonically and gave a report on co-12’s the board voted to hold onto its co-12 stock for another months and agreed that in the event that the stocks do not show a significant increase the organization consider dissolving and donating all of the assets to its primary beneficiary co-3 the co-3 trustee proposed that the organization be liquidated the minutes do not detail any of the points of a discussion that apparently ensued after the proposal the minutes listed the organization's assets as the following the quotations reflect inter-dealer prices without retail mark-up markdown or commission and may not represent actual transactions department of the treasury - internal_revenue_service form 886-acrev page -10- o form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer org ein ein schedule no or exhibit year period ended 20xx 20xx 20xx dollar_figuredollar_figure shares of common_stock of co-12 allegedly transferred to it by trustee back in 20xx to satisfy an alleged loan from ra-9 ra-10 and ra-11 and co-8 shares of common_stock of co-12 allegedly transferred to it by co- interest in co-8 per the past board minutes from 19xx and 19xx should amount to partnership shares certain rights in an oil painting with a value of dollar_figuredollar_figure the board also unanimously agreed to liquidate all of the organization’s assets and to donate the said assets to the co-3 the organization also provided a letter dated january 20xx from the co-3 acknowledging receipt of the assets as mentioned on above curiously the 20xx minutes do not state the other investments and loans that were documented in the previous years’ board minutes that can not be accounted for with the alleged transfers of co-12 stock the organization’s forms for tax years ending 20xx 20xx 20xx the tax years with open statutes for assessment reflect the following ty 20xx ty 20xx ty 20xx contributions gifts grants direct public support dollar_figure interest on savings and temporary cash investments dividends other investment_income total revenue grants other expenses total expenses dollar_figure dollar_figure f h p f f f f f form 886-a ev department of the treasury - internal_revenue_service page -11- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20xx 20xx org ein ein excess or deficit for year dollar_figure balance_sheet ty 20xx ty 20xx ty 20xx savings and temporary cash investments investments - securities investments - other total assets other liabilities total liabilities total liabilities and net assets fund balances dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure according to the 20xx form_990 the organization had total assets in excess of dollar_figure dollars presumably this was the value of the assets that the organization transferred to the co-3 the organization made the following grants ty 20xx co-14 co-15 co-16 co-17 co-18 co-19 form 886-a crev ty 20xx none except for the co-15 none of the charities listed above are disclosed on the schedule a to the declaration department of the treasury - internal_revenue_service page -12- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20xx 20xx org ein ein ty 20xx applicable law none sec_501 exempts from federal_income_tax corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes 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 and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of any candidate for public_office regulation sec_1_501_c_3_-1 provides that an organization will be it engages regarded as operated exclusively for one or more exempt purposes only if primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose regulation sec_1_501_c_3_-1 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 the words private_shareholder_or_individual refer to persons having a personal and private interest in the activities of the organization regulation sec_1_501_c_3_-1 provides an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus to meet the requirement of this subdivision it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests in 326_us_279 the united_states supreme court held that regardless of the number of truly exempt purposes the presence of a single substantial non-exempt purpose will preclude exemption under sec_501 in 412_f2d_1197 ct_cl the court stated that loans to an organization’s founder or substantial_contributor can form 886-a crev department of the treasury - internal_revenue_service page -13- borm a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ein ein schedule no or exhibit year period ended 20xx 20xx 20xx constitute inurement that is prohibited under sec_501 made loans to its founder and his family and failed to produce documentation that demonstrated that the loans were advantageous to the church the church also failed to produce documentation to show that the loans were repaid significantly the court stated that the very existence of a private source of loan credit from an organization's earnings may itself amount to inurement of benefit in that case the church in revrul_67_5 1967_1_cb_123 it was held that a foundation controlled by the creator’s family was operated to enable the creator and his family to engage in financial activities which were beneficial to them but detrimental to the foundation it was further held that the foundation was operated for a substantial non-exempt purpose and served the private interests of the creator and his family therefore the foundation was not entitled to exemption from federal_income_tax under sec_501 54_tc_905 whether a particular transaction actually constitutes a loan is determined upon consideration of all the facts for a payment to constitute a loan when the payments are received the recipient must intend to repay the amounts and the transferor must intend to enforce payment see also 88_tc_604 affid without published opinion 855_f2d_866 cir 55_tc_85 in greg r vinikoor v commissioner t c memo the tax_court provided the following factors to determine whether a transfer was made with a real expectation of repayment and an intention to enforce the debt there was a promissory note or other evidence_of_indebtedness interest was charged there was security or collateral there was a fixed maturity_date ademand for repayment was made any actual repayment was made the transferee had the ability to repay any records maintained by the transferor and or the transferee reflected the transaction as a loan and the manner in which the transaction was reported for federal tax purposes is consistent with a loan taxpayer’s position form 886-a crev department of the treasury - internal_revenue_service page -14- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx org ein ein 20xx 20xx the taxpayer believes the organization operated in accordance with the requirements of sec_501 and sec_509 government's position the sec_501 tax exempt status of the org the organization should be revoked because it is not operated exclusively for tax exempt purposes and its net_earnings inure to the benefit of private shareholders and individuals from the documentation that the service was able to review it appears that the organization was funded with approximately dollar_figure from its inception in october 19xx to 19xx all of those funds came from trustee donor either directly or through the co- co-7 mentioned in the facts section of this rar it type of alleged investment the organization’ board minutes and forms year the alleged investment was made amount of proof of the the alleged value of investment investment the following two charts list the alleged investments loans and lines of credit per since its inception the organization’s main activity consisted of one thing made alleged investments in entities owned or controlled directly by trustee and donor or those with some connection to trustee and donor the alleged investments were either in the form of transferred shares or partnership interests in those entities that trustee and donor controlled or in the form of alleged loans and lines of credit to those entities or other individuals with some connection to trustee and donor resolution of this investment after the organization dissolved in 20xx unknown this interests in co-8 only other partners are trustee and donor allegedly purchased from the co-7 investment is partnership never addressed in the 20xx board minutes that lists all of org’s assets that were liquidated department of the treasury - internal_revenue_service form 886-acrev the receipt of page -15- none dollar_figuredollar_figure 19xx form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ein ein schedule no or exhibit year period ended 20xx 20xxk 20xx 19xx 19xx 19xx none none it was dollar_figure receipt of of dollar_figure limited_partnership interests in co-8 uncertain if a purchase of shares interest in co-7 course or an alleged loan as an investment receipt of partnership interests in co-6 apparently by 19xx this partnership was also owner of co-8 another partnership that back in 19xx had only one partner trustee allegedly unknown this investment is never addressed in the 20xx board minutes that lists all of the org’s assets that were liquidated unknown this investment is never addressed in the 20xx board minutes that lists all of the org’s assets that were liquidated somehow this investment in co-9 was written off of a loan that co-8 and individuals ra-9 ra-10 and ra-11 related parties to trustee owed the organization unknown this investment is never addressed in the 20xx board minutes that lists all of the org’s assets that were liquidated alleged loan to co-9 as an investment none none 19xx dollar_figuredollar_figure dollar_figure department of the treasury - internal_revenue_service form 886-a kev page -16- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ein ein schedule no or exhibit year period ended 20xx 20xx 20xx purchased from the co-7 it was represented to the board that these alleged investments were to have been valued by an independent_appraiser after the board approved their purchases the organization failed to provide any documentation that it ever obtained independent appraisals for any these alleged investments resolution 19xx 19xx 19xx amount lender unknown unknown unknown organization organization organization dollar_figure ‘line of credit dollar_figure loan dollar_figure loan co-8 at the time of this payment trustee was its sole partner and co-6 ra-1 ra-2 co-8 year of purported borrower purported alleged loan 19xx co-10 trustee donor are its only partners co-8 and co-11 according to later board minutes by 19xx of co-8 was owned by co-6 records show ‘line of credit minutes of 20xx shows that the board approved a transfer of co-12 stock allegedly worth dollar_figure from trustee to satisfy this loan unknown dollar_figuredollar_figure ‘line of credit dollar_figure ‘loan’ dollar_figuredollar_figure dollar_figuredollar_figure line of credit co-8 board unknown as to organization organization organization organization unknown co-10 20xx 19xx co-8 19xx co-8 form 886-acev department of the treasury - internal_revenue_service page -17- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20xx 20xx org rin ein that the 20xx organization ra-6 organization paid a total of dollar_figuredollar_figure to co-8 dollar_figuredollar_figure loan board minutes of 20xx state that the board approved a transfer of co-12 stock 20xx trustee ‘ allegedly worth from trustee in part to satisfy this loan board minutes of 20xx state that the board approved a transfer of co-12 stock allegedly worth dollar_figure from trustee in part to satisfy this loan unknown organization dollar_figuredollar_figure loan ra-7 ra-2 ra-8 the information reported on the forms from 19xx to 20xxare contradicted by what is on the organization’s own board minutes for example the forms from that time period only shows the following extensions of credit unknown organization payments from loan receivables the 20xx form_990 reported interest_income of dollar_figure the organization provided no documentary proof to verify this information or that the 19xx form_990 reported that the organization received dollar_figure in interest co-8 -dollar_figure co-6 - co-10- total this was the extent of the credit extensions department of the treasury - internal_revenue_service form 886-a rev page -18- e e e dollar_figure dollar_figure dollar_figure dollar_figure form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx org ein ein 20xx 20xx the organization was not able to the 20xx return reported interest_income of dollar_figure provide any proof to verify payments in these amounts or any other_amounts who made these payments or when these payments were made the 20xx form_990 also reported the following the terms of the alleged loan to co-8 were as follows e e e line of credit at a rate of issued on january 19xx personally secured_by trustee the terms of the alleged loan to co-6 were as follows original amount dollar_figure year unsecured loan at arate of issued on june 19xx the terms of the alleged loan to co-10 were as follows e e e original amount of dollar_figure line of credit at a rate of issued on june 19xx this is the extent of the information the service has of these purported loans and lines of credit there is no documentary proof of these loans lines of credit or any other information on the other loans detailed in the board minutes in june of 20xx trustee allegedly satisfied some of the loans and lines of credit by transferring stock in a publicly-held company co-12 the transfers occurred in two different transactions first trustee transferred dollar_figure shares of co-12 alleged to be valued at dollar_figure per share in an attempt to satisfy a loan to co-8 and trustee and three related parties ra-9 ra-10 and ra-11 there have never been any records of loans made to these parties or that the board approved these alleged loans moreover the board minutes april of 20xx show that the directors acknowledged that these alleged loans were in excess of dollar_figuredollar_figure yet they inexplicably agreed that the so-called borrowers’ obligation should be dollar_figuredollar_figure in june 20xx without any proof that there were payments made during this time period the board then further discounts this obligation by writing off as uncollectable a dollar_figure investment in co-9 there were no records to show that this loan form 886-a crev department of the treasury - internal_revenue_service page -19- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx org ein ein 20xx 20xx was to any of the related parties or to co-8 so there is no explanation as to why co- 9’s debt obligation is reduced from those of co-8 or the related parties the alleged loan is then further discounted inexplicably by another dollar_figure as interest forgiveness and then again by another dollar_figuredollar_figure the dollar_figuredollar_figure discount is supposed to be in satisfaction of an alleged loan that the organization took out from trustee there is no evidence that the organization ever took out such a loan from trustee there are no historical quotes for co-12 stock available prior to april 20xx the only information available for the fair_market_value of the stock at the time of the transfer is disclosed in co-12’s 20xx and 20xx form s 10-ksb that are filed with the security and exchange commission the service's numerous requests for the organization to provide proof of co-12’s dollar_figure value at the time of the transfer were ignored the organization never provided any such records the co-7 also transferred big_number shares of co-12 stock with an alleged valued of dollar_figure per share in an attempt to satisfy in one transfer loans totaling dollar_figuredollar_figure to development ra-2 ra-9 ra-8 and ra-6 apparently the co-7 was willing to satisfy these loans because development and the named individuals had some sort of a relationship this relationship was never clarified there is also no evidence that these payments were actual loans and again the alleged value of these stocks could not be verified most of the alleged investments loans and lines of credit were actually just payments to trustee and donor as the facts clearly show the organization’s primary purpose was to operate as an entity to personally benefit trustee and donor the family did this by creating the organization and then using its tax exempt status to personally enrich themselves by transferring what would otherwise be tax generating income to the organization hence avoiding income taxes and then taking tax deductions as charitable donations for those transfers organization’s funds through alleged investments and loans lines of credit the organization's partnership interests in co-5 also had an added benefit of flowing through partnership income to the organization family then drained the the family tried to give the appearance of propriety by recusing themselves on the record of voting for these loans and investments except for the purported loans and investments to which they did not have such obviously apparent interests in an for attempt to make these transactions appear as if they were done at arm’s-length example the board minutes all state that any investment would be accompanied by an independent appraisal of its value the organization was not able to provide any evidence of value appraisals for any of the alleged investments form 886-a rev department of the treasury - internal_revenue_service page -20- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ein ein schedule no ot exhibit year period ended 20xx 20xx 20xx further even some of the alleged third-party loans were not even to actual third parties even though trustee and donor did not recuse themselves from approving those loans the payments to ra-6 ra-9 ra-8 and ra-2 appear to have been payments to the co-7 as the co-7 ended up repaying the loans to these individuals in addition while the board minutes and the forms would report alleged loans and state some of the loans’ terms the organization was not able to provide any written proof of the alleged loans or any payments on these alleged loans the organization issued unsecured lines of credit and loans to three partnerships wholly owned by trustee and or donor the returns indicate there was some interest payments received on the loans but it is unclear as to how much and for which loans the payments were made the organization did not provide any promissory notes or other documentation to support evidence_of_indebtedness there was no indication that the profitability or the income stream of the partnerships was considered prior to issuance of the loans the loans were paid back by a donation of co-12 the value of which was never substantiated by the organization from the trustee and donor remainder trust the facts show that the partnerships had no intention of paying back the loans and the organization had no intention of enforcing payment a significant portion of trustee’ initial contributions were loaned back to his wholly owned partnerships and disqualified persons the purported loans do not meet the critieria for bona-fide loan for federal_income_tax purposes charity's investments are decided in part by the needs of private interests indicate the charity may not be operated exclusively for exempt purposes 73_tc_196 affd 631_f2d_736 cir facts that show a the facts show that the organization is not operated exclusively for a tax exempt charitable purpose rather trustee donor operated the organization for their own personal benefit the facts also show that family allowed his wholly owned partnerships and other private individuals to financially benefit from the assets that he transferred to the organization the organization which is controlled by trustee donor was established and operated to enable them to engage in financial activities which are beneficial to them accordingly it is operated for a substantial non-exempt purpose see revrul_67_5 an organization is described in sec_501 only if no part of its net_earnings inures to the benefit of any private shareholder the inurement prohibition is designed to insure that charitable assets are dedicated to exclusively furthering public purposes department of the treasury - internal_revenue_service form 886-a rev page -21- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ein ein schedule no or exhibit year period ended 20xx 20xx 20xx an organization is not operated exclusively for exempt purposes if its net_earnings inure to the benefit of private shareholders or individuals a gift to a charitable_organization must be a voluntary transfer of money or property without the receipt of adequate_consideration made with charitable intent - 490_us_680 to claima deduction under sec_170 a donor must surrender dominion and control_over the gift 202_f3d_1093 cir the family transferred assets to the organization and claimed a deduction under sec_170 a charity's assets are required to be irrevocably dedicated to charitable purposes sec_1_501_c_3_-1 the inurement prohibition serves to prevent the individuals who operate the charity from siphoning off any of a charity’s income or assets for personal_use loan a loan that does not meet the criteria of a bona-fide loan for federal_income_tax purposes but as a distribution the organization breached the dedication requirement and its net_earnings have inured to the benefit of the disqualified persons by transferring the assets back to disqualified persons purportedly as a conclusion accordingly the organization's status as an organization described under sec_501 should be revoked because it did not operate exclusively for exempt purposes because its assets inured to and it served the private interests of its creators and other private persons this determination is effective beginning january 19xx the organization did in its exemption application that it would be making loans with a substantial not disclose portion of its assets to disqualified persons at favorable terms thus retroactive revocation is applicable form_1041 u s income_tax return for estates and trusts should be filed for tax years ending december 20xx 20xx and 20xx subsequent returns are due no later than the day of the month following the close of the trust's accounting_period returns should be sent to the following mailing address alternative issue whether the org should be reclassified as a private_foundation facts form 886-a cev department of the treasury - internal_revenue_service page -22- form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no ot exhibit year period ended 20xx org ein ein 20xx 20xx the organization paid out dollar_figure or of its total income to the primary charity in the service has no record 20xx the organization’s total income for that year was dollar_figure of the co-2 the primary charity filing a form_990 for the tax_year ended december 20xx the returns and the records provided by the organization indicate that no payments were made to the primary charity in 20xx or 20xx the organization’s income for 20xx was dollar_figure the organization reported a net_loss for the 20xx tax_year the forms do not reflect the changes in the composition of the board_of directors that purportedly took place at the board meetings law income_tax regulations sec_1_509_a_-4 regarding the organizational_test a a organization must meet provides in general -an organization is organized exclusively for one or more of the purposes specified in sec_509 only if its articles of organization as defined in sec_1 c - b i limit the purposes of such organization to one or more of the purposes set forth in sec_509 ii do not expressly empower the organization to engage in activities which are not in furtherance of the purposes referred to in subdivision i of this subparagraph iii state the specified publicly supported organizations on whose behalf such organization is to be operated within the meaning of paragraph d of this section and iv do not expressly empower the organization to operate to support or benefit any organization other than the specified publicly supported organizations referred to in subdivision iii of this subparagraph income_tax regulations sec_1_509_a_-4 regarding the operational_test a a organization must meet provides permissible beneficiaries -a supporting_organization will be regarded as operated exclusively to support one or more specified publicly supported organizations hereinafter referred to it engages solely in activities which support or benefit the specified as the operational_test only if publicly supported organizations such activities may include making payments to or for_the_use_of or providing services or facilities for individual members of the charitable_class benefited by the specified publicly_supported_organization a supporting_organization may also for example make a payment indirectly through another unrelated organization to a member of a charitable_class benefited by a specified publicly_supported_organization but only if such a payment constitutes a grant to an individual rather than a grant to an organization in determining whether a grant is indirectly to an individual rather than to an organization the same standard shall be applied as in form 886-a ev department of the treasury - internal_revenue_service page -23- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx org ein ein 20xx 20xx sec_53_4945-4 of this chapter similarly an organization will be regarded as operated exclusively to support or benefit one or more specified publicly supported organizations even if benefits an organization other than a private_foundation which is described in sec_501 and is operated supervised or controlled directly by or in connection with such publicly supported organizations or which is described in sec_511 however an organization will not be regarded as operated exclusively if any part of its activities is in furtherance of a purpose other than supporting or benefiting one or more specified publicly supported organizations it supports or permissible activities -a supporting_organization is not required to pay over its income to the publicly supported organizations in order to meet the operational_test it may satisfy the test by using its income to carry on an independent activity or program which supports or benefits the specified publicly supported organizations all such support must however be limited to permissible beneficiaries in accordance with subparagraph of this paragraph the supporting_organization may also engage in fund raising activities such as solicitations fund raising dinners and unrelated_trade_or_business to raise funds for the publicly supported organizations or for the permissible beneficiaries income_tax regulations sec_1_509_a_-4 regarding the nature of relationships required for sec_509 organizations provides in general - sec_509 describes the nature of the relationship required between a sec_501 organization and one or more publicly supported organizations in order for such sec_501 organization to qualify under the provisions of sec_509 to meet the requirements of sec_509 an organization must be operated supervised or controlled by or in connection with one or more publicly supported organizations if an organization does not stand in one of such relationships as provided in this paragraph to one or more publicly supported organizations it is not an organization described in sec_509 types of relationships - sec_509 sets forth three different types of relationships one of which must be met in order to meet the requirements of subparagraph of this paragraph thus a supporting_organization may be i operated supervised or controlled by ii supervised or controlled in connection with or iii operated in connection with one or more publicly supported organizations requirements of relationships -although more than one type of relationship may exist in any one case any relationship described in sec_509 must insure that i the supporting_organization will be responsive to the needs or demands of one or more publicly supported organizations and ii the supporting_organization will constitute an integral part of or maintain a significant involvement in the operations of one or more publicly supported organizations general description of relationships -in the case of supporting organizations which are operated supervised or controlled by one or more publicly supported organizations the distinguishing feature of this type of relationship is the presence of a substantial degree of direction by the publicly supported organizations over the conduct of the supporting_organization form 886-acrev department of the treasury - internal_revenue_service page -24- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ein ein schedule no or exhibit year period ended 20xx 20xx 20xx as described in paragraph g of this section in the case of supporting organizations which are supervised or controlled in connection with one or more publicly supported organizations the distinguishing feature is the presence of common supervision or control among the governing bodies of all organizations involved such as the presence of common directors as described in paragraph h of this section in the case of a supporting_organization which is operated in connection with one or more publicly supported organizations the distinguishing feature is that the supporting_organization is responsive to and significantly involved in the operations of the publicly_supported_organization as described in paragraph i of this section income_tax regulations sec_1_509_a_-4 provides guidance on the meaning of operated supervised or controlled by as follows i each of the items operated by’ supervised by’ and controlled by as used in sec_509 presupposes a substantial degree of direction over the policies programs and activities of a supporting_organization by one or more publicly supported organizations the relationship required under any one of these terms is comparable to that of a parent and subsidiary where the subsidiary is under the direction of and accountable or responsible to the parent organization this relationship is established by the fact that a majority of the officers directors or trustees of the supporting_organization are appointed or elected by the governing body members of the governing body officers acting in their official capacity or the membership of one or more publicly supported organizations ii a supporting_organization may be operated supervised or controlled by one or more publicly supported organizations within the meaning of sec_509 even though its governing body is not comprised of representatives of the specified publicly supported organizations for whose benefit it is operated within the meaning of sec_509 a supporting_organization may be operated supervised or controlled by one or more publicly supported organizations within the meaning of sec_509 and be operated for the benefit of’ one or more different publicly supported organizations within the meaning of section it can be demonstrated that the purposes of the former organizations are a a only if carried out by benefiting the latter organizations income_tax regulations sec_1_509_a_-4 provides guidance on the meaning of supervised or controlled in connection with as follows in order for a supporting_organization to be supervised or controlled in connection with one or more publicly supported organizations there must be common supervision or control by the persons supervising or controlling both the supporting_organization and the publicly supported organizations to insure that the supporting_organization will be responsive to the needs and requirements of the publicly supported organizations therefore in order to meet such requirement the control or management of the supporting_organization must be vested in the same persons that control or manage the publicly supported organizations a supporting_organization will not be considered to be supervised or controlled in connection with one or more publicly supported organizations if such organization merely makes payments mandatory or discretionary to one or more named publicly supported organizations even if the obligation to make payments to the named beneficiaries is enforceable under state law by such beneficiaries and the supporting organization's governing instrument contains provisions whose form 886-a rev department of the treasury - internal_revenue_service page -25- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ein ein schedule no or exhibit year period ended 20xx 20xx 20xx effect is described in sec_508 and b such arrangements do not provide a sufficient connection between the payor organization and the needs and requirements of the publicly_supported_organization to constitute supervisions or control in connection with such organizations income_tax regulations sec_1_509_a_-4 provides guidance on the meaning of operated in connection with as follows general_rule i except as provided in subdivisions ii and iii of this subparagraph and subparagraph of this paragraph a supporting_organization will be considered as being operated in connection with one or more publicly supported organizations only if it meets the responsiveness test which is defined in subparagraph of this paragraph and the integral part test which is defined in subparagraph of this paragraph responsiveness test i for purposes of this paragraph a supporting_organization will be considered to meet the responsiveness test if the organization is responsive to the needs or demands of the publicly supported organizations within the meaning of this subparagraph in order to meet this test either subdivision ii or subdivision iii of this subparagraph must be satisfied ii a one or more officers directors or trustees of the supporting_organization are elected or appointed by the officers directors trustees or membership of the publicly supported organizations b one or more members of the governing bodies of the publicly supported organizations are also officers directors or trustees of or hold other important offices in the supporting organizations or c the officers directors or trustees of the supporting_organization maintain a close and continuous working relationship with the officers directors or trustees of the publicly supported organizations and d by reason of a b or c of this subdivision the officers directors or trustees of the publicly supported organizations have a significant voice in the investment policies of the supporting_organization the timing of grants the manner of making them and the selection of recipients of such supporting_organization and in otherwise directing the use of the income or assets of such supporting_organization iii a the supporting_organization is a charitable_trust under state law b each specified publicly_supported_organization is a named beneficiary under such charitable trust's governing instrument and c the beneficiary organization has the power to enforce the trust and compel an accounting under state law integral part test general_rule form 886-acrev department of the treasury - internal_revenue_service page -26- schedule no or exhibit year period ended 20xx 20xx 20xx department of the treasury - internal_revenue_service form 886a name of taxpayet explanation of items org ein ein i for purposes of this paragraph a supporting_organization will be considered to meet it maintains a significant involvement in the operations of one or the integral part test if more publicly supported organizations and such publicly supported organizations are in turn dependent upon the supporting_organization for the type of support which it provides in order to meet this test either subdivision ii or subdivision iii of this subparagraph must be satisfied ii the activities engaged in for or on behalf of the publicly supported organizations are activities to perform the functions of or to carry out the purposes of such organizations and but for the involvement of the supporting_organization would normally be engaged in by the publicly supported organizations themselves iii a the supporting_organization makes payments of substantially_all of its income to or for_the_use_of one or more publicly supported organizations and the amount of support received by one or more of such publicly supported organizations is sufficient to insure the attentiveness of such organizations to the operations of the supporting_organization in addition a substantial amount of the total support of the supporting_organization must go to those publicly supported organizations which meet the attentiveness requirement of this subdivision with respect to such supporting_organization except as provided in b of this subdivision the amount of support received by a publicly_supported_organization must represent a sufficient part of the organization's total support so as to insure such attentiveness in applying the preceding sentence if such supporting_organization makes payments to or for_the_use_of a particular department or school of a university hospital or church the total support of the department or school shall be substituted for the total support of the beneficiary organization b even where the amount of support received by a publicly supported beneficiary organization does not represent a sufficient part of the beneficiary organization's total support the amount of support received from a supporting_organization may be sufficient to meet the requirements of this subdivision if avoid the interruption of the carrying on of a particular function or activity the beneficiary organization will be sufficiently attentive to the operations of the supporting_organization this may be the case where either the supporting_organization or the beneficiary organization earmarks the support received from the supporting_organization for a particular program or activity even if such program or activity is not the beneficiary organization's primary program or activity so long as such program or activity is a substantial one it can be demonstrated that in order to d all pertinent factors including the number of beneficiaries the length and nature of the relationship between the beneficiary and supporting_organization and the purpose to which the funds are put as illustrated by subdivision iii b and c of this subparagraph will be considered in determining whether the amount of support received by a publicly supported beneficiary organization is sufficient to insure the attentiveness of such organization to the operations of the supporting_organization normally the attentiveness of a beneficiary organization is motivated by reason of the amounts received from the supporting_organization thus the more substantial the amount_involved in terms of a percentage of the publicly supported organization's total support the greater the likelinood department of the treasury - internal_revenue_service form 886-a rev page -27- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ein ein schedule no or exhibit year period ended 20xx 20xx 20xx that the required degree of attentiveness will be present however in determining whether the amount received from the supporting_organization is sufficient to insure the attentiveness of the beneficiary organization to the operations of the supporting_organization including attentiveness to the nature and yield of such supporting organization's investments evidence of actual attentiveness by the beneficiary organization is of almost equal importance an example of acceptable evidence of actual attentiveness is the imposition of a requirement that the supporting_organization furnish reports at least annually for taxable years beginning after date to the beneficiary organization to assist such beneficiary organization in insuring that the supporting_organization has invested its endowment in assets productive of a reasonable rate of return taking appreciation into account and has not engaged in any activity which would give rise to liability for a tax imposed under sec_4941 sec_4943 sec_4944 or sec_4945 if such organization were a private_foundation the imposition of such requirement within days after date will be deemed to have retroactive effect to date for purposes of determining whether a supporting_organization has met the requirements of this subdivision for its first two taxable years beginning after date the imposition of such requirement is however merely one of the factors in determining whether a supporting_organization is complying with this subdivision and the absence of such requirement will not preclude an organization from classification as a supporting_organization based on other factors e however where none of the beneficiary organizations is dependent upon the supporting_organization for a sufficient amount of the beneficiary organization's support within the meaning of this subdivision the requirements of this subparagraph will not be satisfied even though such beneficiary organizations have enforceable rights against such organization under state law government's position as set forth above it is the government's primary position that the tax exempt status of the trustee and donor charitable support foundation the organization’ should be revoked alternatively the organization should be reclassified as a private_foundation due to congressional concerns about wide-spread abuses of their tax-exempt status by private_foundations private_foundations were defined and subjected to significant regulations and controls by the tax reform act of the definition of a private_foundation is intentionally inclusive so that all organizations exempted from tax by sec_501 are private_foundations except for those specified in sec_509 through roe foundation charitable_trust v commissioner tcmemo_1989_566 603_f2d_1274 cir the organization currently is excepted from private_foundation_status because it is currently classified as an organization described in sec_509 which defines supporting organizations form 886-a crev department of the treasury - internal_revenue_service page -28- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ein ein schedule no or exhibit year period ended 20xx 20xx 20xx public_charities organizations described in sec_501 that meet the requirement of sec_509 or are excepted from private_foundation_status on the theory that their exposure to public scrutiny and their dependence on public support keep them from the abuses to which private_foundations are subject supporting organizations are similarly excepted from private_foundation_status supporting organizations are excepted if they are subject_to the scrutiny of public_charities that provide sufficient oversight to keep supporting organizations from the types of abuses to which private_foundations are prone quarrie f 2d pincite to be classified as a sec_509 organization the organization must meet all of the following tests organizational and operational tests under sec_509 relationship_test under sec_509 lack of disqualified_person control test under sec_509 overall these tests are meant to ensure that a supporting_organization is responsive to the needs of a public charity and intimately involved in its operations and that the public charity or publicly_supported_organization is motivated to be attentive to the operations of the supporting_organization and that it is not controlled directly or indirectly by disqualified persons organizational and operational tests the organization is not organized to benefit one or more specified publicly supported organizations pursuant to sec_4 a -4 c iii and iv an organization's governing instrument must state the specified publicly_supported_organization s on whose behalf the organization is to be operated and cannot expressly empower the organization to support or benefit any organizations other than the specified publicly_supported_organization s the organization’s dissolution clause allows distributions to organizations other than the specified publicly supported organizations upon termination of the organization the possible beneficiaries are not limited to co-2 or to the organizations specified on schedule a therefore the organizational_test is not met see quarrie supra holding that the organizational_test was not satisfied where the trustee had the power to substitute beneficiaries when in the judgment of the trustee the uses of the named beneficiaries became unnecessary undesirable impracticable impossible or no longer adapted to the needs of the public of the organization's declaration moreover the operational_test set forth in sec_1_509_a_-4 is not satisfied a supporting_organization will be regarded as operated exclusively to support a form 886-a rev department of the treasury - internal_revenue_service page -29- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit yeat period ended 20xx org ein ein 20xx 20xx specified publicly_supported_organization s only if or benefit the specified publicly supported organizations s as was discussed under the primary issue above the organization has served private interests therefore it has not established that it operated exclusively for the benefit of the publicly supported organizations it engages in activities which support the operational_test requires the organization to exclusively engage in activities that benefit specified publicly supported organizations in this case the organization made a contribution to the primary charity that totaled of its total income for the tax_year 20xx and in 20xx and 20xx the organization made no payments to the primary charity the declaration states the organization will grant at least of the net_income of the trust the 20xx form_990 indicates grants were made to six different organizations one of which included the primary charity the remaining five organizations were not specified on the declaration the organization made no grants - in 20xx and yet received dollar_figure in income inadequate grants to the primary charity and grants to an organization not specified to receive grants violates the operational_test relationship_test as set forth in sec_1_509_a_-4 there are three permissible relationships a operated supervised or controlled by b supervised or controlled in connection with and c operated in connection with one or more publicly supported organizations the relationships operated supervised or controlled by and supervised or controlled in connection with presuppose a substantial degree of direction over the policies programs and activities of the supporting_organization by a publicly_supported_organization the operated supervised or controlled by relationship is established by the fact that a majority of the officers directors or trustees of the supporting_organization are appointed or elected by the governing body members of the governing body officers acting in their official capacity or the membership of the publicly_supported_organization only one board member out of a member board was appointed by the supported_organization so the requirements to have an operated supervised or controlled by relationship are not met the supervised or controlled in connection with relationship is established by the fact that there is common supervision or control by the persons supervising or controlling both the supporting and the publicly supported organizations ie that control or management of the supporting_organization is vested in the same persons that control or manage the publicly_supported_organization the same persons do not control or manage both organizations so this relationship is not met form 886-a crev department of the treasury - internal_revenue_service page -30- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ein ein schedule no or exhibit year period ended 20xx 20xx 20xx the third and final relationship possible for sec_509 organizations is the operated in connection with relationship which requires that the supporting_organization be responsive to the needs or demands of the publicly_supported_organization and constitute an integral part of or maintain a significant involvement in the affairs of the publicly_supported_organization this relationship is satisfied where the supporting_organization meets both the responsiveness and integral part tests the organization meets the responsiveness test the responsiveness test gurantees that the publicly_supported_organization can influence the activities of the supporting_organization dir-1 has been a board member of the organization since its inception and throughout that same time frame he held the position of treasurer of the designated charity see subdivision ii of sec_1_509_a_-4 the integral part test ensures that the publicly_supported_organization will be motivated to attend to the operations of the supporting_organization the integral part test has not been met in this case the integral part test is considered to have been satisfied if the supporting_organization maintains a significant involvement in the operations of one or more publicly supported organizations and the publicly supported organizations are in turn dependent upon the supporting_organization for the type of support which it provides sec_1_509_a_-4 _ sec_1 i ii or iii must be satisfied in order to meet the integral part test either sec_1_509_a_-4 provides that the activities engaged in for or on behalf of the publicly supported organizations must be activities to perform the functions of or to carry out the purposes of such organizations and but for the involvement of the supporting_organization would normally be engaged in by the publicly supported organizations themselves thus this part of the integral part test applies in those situations in which the supporting_organization actually engages in activities which benefit the publicly supported organizations as opposed to simply making grants to the publicly supported organizations compare to sec_1_509_a_-4 which sets forth the rules of the integral part test applicable to supporting organizations that make payments to or for_the_use_of publicly supported organizations see also roe foundation tcmemo_1989_566 cuddeback memorial fund v commissioner tcmemo_2000_300 the organization does not meet this test because while it made some grants to publicly supported organizations it did not perform any activities for or on behalf of the publicly supported organizations because the organization did not perform any activities for publicly supported organizations the applicable rules for satisfying the integral part test are in sec_1_509_a_-4 this section of the regulation has the following basic requirements payment of substantially_all of its income to publicly supported form 886-a crev department of the treasury - internal_revenue_service page -31- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ein ein schedule no or exhibit year period ended 20xx 20xx 20xx organizations the amount received by one publicly_supported_organization must be sufficient to motivate it to pay attention to the operations of the supporting_organization and a substantial amount of the total support of the organization must go to those publicly supported organizations that meet the attentiveness requirement the first and second requirements are not satisfied because it has not met the second requirement it cannot meet the third requirement the regulations do not specify what percentage of a supported organization's support must be received from a supporting_organization to meet the integral part test the requirement is that facts and circumstances show that the support is sufficient to ensure that the supported_organization is attentive to the operations of the supporting_organization reg a -4 i iii sec_1_509_a_-4 provides that a supporting_organization can meet the attentiveness requirement even where the amount of support received by the publicly_supported_organization does not represent a sufficient part of the publicly supported organization's total support if demonstrated that support is earmarked for a substantial program of the publicly_supported_organization that would be interrupted without the supporting organization’s support factors a publicly_supported_organization is sufficient to insure the attentiveness of such organization to the operations of the supporting_organization it goes on to note the importance of the percentage of the income received from the supporting_organization is in determining if the publicly_supported_organization will have the requisite degree of attentiveness and concludes that evidence of actual attentiveness is almost as important and finally sec_1_509_a_-4 provides that a ll pertinent will be considered in determining whether the amount of support received by it can be the organization contributed of its income to the co-2 in the 20xx tax_year and made no contributions to the primary charity in the 20xx tax_year the organization's net_income for 20xx was dollar_figure the organization incurred a loss in 20xx the tax returns for the co-2 indicate they received dollar_figure in total revenue for the 20xx tax_year and dollar_figure in 20xx there is no record that the co-2 filed a tax_return for the 20xx tax_year the organization did not produce any evidence that shows that the co-2 would be attentive to its operations the forms are inconsistent with what the board minutes state in regards to who are the members of the board_of directors there is no indication that co-2 ever requested or received any financial reports from the organization the facts show that this organization was not attentive to the operations of the organization form 886-a crev department of the treasury - internal_revenue_service page -32- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20xx 20xx org ein ein control test sec_1_509_a_-4 provides that for purposes of sec_509 an organization will be considered controlled if the person by reason of his position or authority may require the organization to perform any act which significantly affects its operations or prevents such organization from performing such act in determining whether a disqualified_person controls an organization all facts and circumstances are taken into consideration the facts in this case show that most of the organization's assets are tied up in loans or investments owned and operated by the founder trustee and or his wife donor sec_1_509_a_-4 requires a consideration of the organization’s holdings to determine if a disqualified_person exerts direct or indirect control as previously stated most of the organization’s assets are tied up in loans and or investments with the founder and his wife therefore the control test is not satisfied in this case conclusion send your returns to the following mailing address accordingly if its exempt status is not revoked the organization should be reclassified as a private_foundation because it does not qualify as a supporting_organization under the requirements set forth in sec_1_509_a_-4 through i the effect of this determination will be that the organization is required to file form_990-pf return of private_foundation form_990-pf should be filed for tax years ending december 20xx 20xx and 20xx this modification of private_foundation_status is effective beginning january 20xx it failed to disclose that it would distribute substantially_all of its assets to its founder's wholly owned partnerships thus retroactive reclassification is appropriate note form_990-pf is required for each tax_year until private_foundation_status is terminated under sec_507 department of the treasury - internal_revenue_service form 886-a cev page -33- oo insernel revenne seize deparment of the treasury form 886a name of taxpayer explanation of items if the organization is held to be a private_foundation whether the is liable for the tax on net_investment_income under sec_4940 and bin sebedule no or exhibt yeat period ended issues taxes on fallure to distribute income under sec_4942 facts the organization's assets consist of cash sec income the income generated is supposed to organizations urities and recelvables that generate interest be annually distributed to sec_601 the anization’s forms reflect the following ty dollar_figure contributions gifts grants direct public support interest on savings and temporary cash investments dividends other investment_income total revenue grants other expenses total expenses excess or deficit for year ' this amount represents unidentified investment_income -less the losses_incurred from the organizetion’s partnership interests in amount received from the alleged losses that the organization incurred from its partnership interests in form 886-acnev tss department of the treasury - internal_revenue_service page -1- -_ form bb6a name of taxpayer explanation of items sepatanene of the treasury - incerna revenue service schedule no or exhibk - 3l ear feri balance_sheet savings and temporary cash investments ty total assets total liabilities investments - other other liabilities investments securities total liabilities and net assets ffund balances the following grants to charitable organizations have been made a of the treasury - iotemal reveouc service p form aceves departnent age -2- - form n schedule no or exhibit aa paci year perio explanation of items of the treasury imemal revenue servec 886a - department taxpayer ‘ame of f law sec_4940 imposes a on each private_foundation which is exempt from sec_801 for the taxable_year with respect to the carrying on of its activities a tax equal to percent of the net_investment_income of such foundation for the taxable_year taxation under sec_4940 c defines net_investment_income as the amount by which the sum of the gross_investment_income and the capital galn net_income exoeeds the deductions allowed by sec_4940 cx3 sec_4940 c defines the term gross_investment_income as the gross amount of income from interest dividends rents payments_with_respect_to_securities_loans and royaities but not including any such income to the extent included in computing tax imposed by sec_511 ‘ sec_4940 defines deductions as all ordinary and necessary expenses paid_or_incurred for the production or collection of gross_investment_income or for the management conservation or maintenance of property held for the production of such income sec_4942 imposes a tax on the undistributed_income_of_a_private_foundation for any taxable_year which has not been distributed before the first day of the second taxable yoar following such taxable_year a tax equal to percent of the amount of such income remaining undistributed at the beginning of such second taxable_year sec_4942 imposes an additional tax in any case in which an initial tax is imposed under sec_4942 on the undistributed_income_of_a_private_foundation for any taxable_year if ‘any portion of such income remains undistributed at the close of the taxable_period there is hereby imposed a tax equal to percent of the amount remaining undistributed at such time sec_4942 defines the term undistributed_income as with respect to any private_foundation for any taxable_year as of any time the amount by which the distributable_amount for such taxable_year exceeds the qualifying distributions made before such time our of such distributable_amount sec_4942 defines distributable_amount as with respect to any private_foundation for any taxable_year an amount equal to the sum of the minimum_investment_return plus amounts described in sec_4942 fx2 c income modifications reduced by the sum of the taxes imposed on such private_foundation for the taxable_year under sec_4940 form 886-amevsce page -3- department of the treasury - internal_revenue_service 886a deparment of the treasury imernal revenue service form name of t schedule no or exhibit year period ended explanation of items r axpaye it sec_4942 defines minimum investment retum for any private_foundation for any taxable_year a sec_5 percent of the excess of the aggregate fair_market_value of all assets of the foundation other than those which are used directly in carrying out the foundation's exempt_purpose over the acquisition_indebtedness with respect to such assets regulation sec_53_4942_a_-2 defines assets used or held for use in carrying out the exempt_purpose as an asset that is actually used by the foundation in the carrying out of the charitable educational or other similar purpose which gives rise to the exempt status of the foundation or if the foundation owns the asset and establishes to the satisfaction of the commissioner that tts immediate use for such exempt_purpose is not practical based on the facts and circumstances of the particular case and that definite plans exist to commence such use within a reasonable period of time consequently assets which are held_for_the_production_of_income or for investment for example stocks bonds interest- bearing notes endowment funds or generally leased real_estate are not being used or held for use directly in carrying out the foundation's exempt_purpose even though the income from such assets is used to carry out such exempt_purpose regulation sec_53 a b defines the minimum distribution required during start- up period for private_foundations created before date the start-up period is the four taxable years immediately preceding the taxable_year beginning in calendar_year for private_foundations created after date or for organizations that first become private_foundations after that date the start-up period is the four taxable years following the taxable_year in which the private_foundation was created or otherwise became a private_foundation for purposes of this subparagraph a private_foundation will be considered created in the taxable_year in which the private foundation's distributable_amount as determined under sec_4942 first exceeds dollar_figure li start-up_period_minimum_amount the amount that a private_foundation must actually distribute‘in cash or its equivalent during the private foundation's start-up period is not less than the sum of a twenty percent of the private foundation's distributable_amount as determined under sec_4942 for the first taxable_year of the start-up period b forty percent of the private foundation's distributable_amount for the second taxable_year of the start-up period c sixty percent of the private foundation's distributable_amount for the third taxable_year of the start-up period and department form arrest page -4- of the treasury - internal revemue service depanmem of the tressury- latemal revenue service form 886a n ft exhibit year period ended explanation of items schedule no or ame of haxpayer d elghty percent of the private foundation's distributable_amount for the fourth taxable_year of the start-up period ili timing of distributions the requirement that a private_foundation distribute the start-up_period_minimum_amount during the start-up period is a requirement that such amount be distributed before the end of the start-up period and is not a requirement that any portion of such amount be distributed in any one taxable_year of the start-up period governments position issue if the organization is held to be a private_foundation whether the organization is llable for the tax on net_investment_income under sec_4940 and taxes on fallyre to distribute income under sec_4942 the organization's assets consist of cash securities income the income generated is supposed to be annual organizations and receivables that generate interest lly distributed to sec_501 the interest_income is subject_to the net investment tax of imposed by sec_4940 the organization does not qualify for the rate reduction for computing the net investment tax under sec_4940 because the organization did not make any qualifying distributions in the for sec_4942 tax in the base years tax years therefore the organization is liable ‘and i form 886-acrev -6s page -5- of the treasury - latemal revenue service_department depaument of the treasury texernal reverrue service form 886a name of taxpayer explanation of items schedule no or exhibit year period ended the amounts shown in the following computations considers the above and were disclosed on the organization's form s for ‘through the tax for sec_4940 is only applicable for the because the statute of iimitations expiredforthe e x1 and and_--' tax years irc ‘tax years - - s sec_4940 net_investment_income tax_year net_investment_income rate _ _ sec_4942 taxes on fallure to distribute income ee year fair_market_value of assets le sec_1 cash deemed held for charitable activities _ net value of noncharitable-use assets minimum investment retum rate minimum_investment_return less irc dollar_figure a __ - ‘ form acevs-ss depastment ofthe tress -lteeal revenue serves age - - i explanation of items j form_8864 name of taxpayer epartment of the freasury - imeroal reverses service year period ended distributable_amount sec_4942 rate for start_up period start_up period minimum distributable_amount - sec_53 a b less expenses - g __0 adjusted qualifying distributions less start_up period minimum distributable_amount - sec_53 a b excess distributions carryover carryover amount applled to o - oo the tax for sec_4942 and sec_4942 is only applicable for the tax years due because the statute_of_limitations expired for the tax years see sec_6501 ex1 and an minimum distributable_amount less adjusted qualifying_distribution form 886-acrevs-ss page -7- department of the treasury - internal_revenue_service form 886a name of taxpayer explanation of items schedule no or exhibit year penod ended bepanment of the tremury- internal_revenue_service additional tax under sec_4942 in any case in which an initial tax is imposed under sec_4942 on the undistributed_income_of_a_private_foundation for any taxable_year if any portion of such income remains undistributed at the close of the taxable_period there is hereby imposed a tax equal to percent of the amount remaining undistributed at such time year undistributed_income total_tax under sec_4942 conclusion accordingly the organization is liable for the tax on net_investment_income under sec_4940 and sec_4942 department of the treasury - interoal revenue service form 886-arrev -c8 page -8-