government entities division release number release date department of the treasury internal_revenue_service teige eo examination uil date - date employer_identification_number person to contact id number contact numbers certified mail - return receipt requested dear in a determination_letter dated october 20xx you were held to be exempt from federal_income_tax under sec_501 of the internal_revenue_code the code based on recent information received we have determined you have not operated in accordance with the provisions of sec_501 of the code accordingly your exemption from federal_income_tax is revoked effective january 20xx this is a final adverse determination_letter with regard to your status under sec_501 c of the code we previously provided you a report of examination explaining why we believe revocation of your exempt status is necessary at that time we informed you of your right to contact the taxpayer_advocate as well as your appeal rights our adverse determination was made for the following reasons sec_501 c of the intemal revenue code 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 earings of which inures to the benefit of any private_shareholder_or_individual uil sec_1_501_c_3_-1 states 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 sec_1_501_c_3_-1 provides that an organization is not organized or operated exclusively for charitable purposes unless it serves a public rather than a private interest it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests you have not established that your are operated exclusively for exempt purposes described in sec_501 of the code specifically you have not shown that a substantial part of your activities does not serve the private interest of your officers and other individuals additionally you have not demonstrated that no part of your net_earnings inures to the benefit of private shareholders or individuals specifically you have not shown that various payments you made have not resulted in net_earnings flowing to your officers and their related businesses contributions to your organization are no longer deductible under sec_170 of the internal_revenue_code you are required to file federal_income_tax returns on form_1120 those returns should be filed with the appropriate service_center ' processing of income_tax returns and assessment of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the internal_revenue_code if you decide to contest this determination in court you must initiate a suit of declaratory_judgment in the united_states tax_court the united_states claims_court or the district_court of the united_states for the district of columbia before the day after the date this determination was mailed to you contact the clerk of the appropriate court for rules for initiating suits for declaratory_judgment you may write to the tax_court at the - foltowing address united_states tax_court second street nw washington d c uil you also have the right to contact the office_of_the_taxpayer_advocate you can call and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at internal_revenue_service taxpayer_advocate taxpayer_advocate assistance cannot be used as a substitute for established irs procedures formal appeals processes etc the taxpayer_advocate is not able to reverse legal or technically correct_tax determinations or extend the time fixed by law that you have to file a petition in the united_states tax_court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling we will notify the appropriate state officials of this action as required by sec_6104 of the internal_revenue_code if you have any questions in regards to this matter please contact the person whose name and telephone number are shown in the heading of this letter thank you for your cooperation sincerely yours mary a epps acting director eo examinations department of the treasury internal_revenue_service uil tax exempt and government entities oivision date taxpayer_identification_number form tax_year s ended december 20xx and 20xx person to contact id number contact numbers telephone fax certified mail - return receipt requested dear 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 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 for 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 if we issue a determination_letter to you based on technical_advice no publication further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice letter catalog number 34809f uil 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 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 taxpayer_advocate office if you have any questions please call the contact person at the telephone number shown in the heading of this letter the most convenient time to call if we need to contact you if you write please provide a telephone number and thank you for your cooperation enclosures publication publication report of examination form_6018 sincerely nanette m downing director eo examinations letter catalog number 34809f form_886 a name of taxpayer department of the treasury - internal_revenue_service explanation of items schedule no or exhibit year periods ending december 20xx and december 20xx final revised report revised report note the examination_report for tax period ending december 20xx and this report is a revision in order to incorporate the tax period ending december 20xx the report is now for the examination of tax periods ending december 20xx and december 20xx was previously issued for while the 20xx form_990 was prepared by records prepared by the bankruptcy trustee based on bankruptcy trustee the intervening years of tax periods ending december 20xx and 20xx prepared by the organization were not examined as the records and source documents for these years are limited provided to the irs examiner the 20xx year form_990 was ’s records available to the and the examination based on ’ revised report note non-essential attachments have been eliminated issue sec_1 whether foundation failed to operate exclusively for exempt purposes because its net_earnings inured to the benefit of its founder and president by paying for workers for the founder’s privately held telemarketing business whether foundation failed to operate exclusively for exempt purposes because it operated primarily to benefit the private interests of the founder’s telemarketing business i facts background information is the founder of foundation is sole owner of a telemarketing business that he incorporated in 19xx generates profits by soliciting sales and money for clients expenses of a telemarketing company generally include lists mailing o form 886-aiev department of the treasury - internal_revenue_service page -1- f ‘orm a department of the treasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year periods ending december 20xx and december 20xx addresses and telephone numbers data management telemarketer labor phone scripts and brochures mailed by the telemarketers is located on in an office owned and rented by foundation functioned entirely from this commenced _ office until the irs examination o created foundation in october 20xx to raise awareness and funds for on foundation’s irs application_for exempt status claimed that no professional fundraiser had been considered once exempt status was granted foundation contracted exclusively with professional fundraiser has been foundation’s only professional fundraiser since foundation’ s inception until foundation’s recent foundation is entirely dependent on has been entirely supported by revenue telemarketing receipts and from foundation from 20xx through 20xx foundation collected over dollar_figure million in donations relying exclusively on year examined over dollar_figure in donations for were collected by employees assets services and location in 20xx the telemarketing receipts for foundation represent the majority of years 20xx and 20xx and the entirety of 20xx receipts for years 20xx through receipts in while the vast majority of donations collected by foundation reported to the public and government that’ was spent for exempt charitable purposes under sec_501 as explained below the examination shows less than was paid directly to ‘ went to health care grants records show ‘s telemarketing business and the remainder went to went to ’s prior employee or to expenses that were substantially unsupported by records application and incorporation form_1023 application_for recognition of exemption under sec_501 of the internal_revenue_code was filed by foundation by on october 20xx foundation’s form_1023 states the following form 886-amev page -2- department of the treasury - internal_revenue_service schedule no or exhibit year periods ending december 20xx and december 20xx form_8 a department of the treasury - internal_revenue_service name of taxpayer explanation of items foundation is dedicated to p raising awareness and education of the general_public about promoting encouraging providing funds to pay for providing funding for for uninsured women and and early detection of research foundation will raise awareness and education of the general_public through direct contact via mailings telephone and e-mail activities the contacts will promote early detection and educational literature on how to other and this will be the sole funding source excess funds will be distributed to organizations that provide will be distributed individuals contacted will be asked to contribute to help pay for uninsured women and these activities will be conducted from the organization’s principal offices in while the organization will design manage and oversee all activities it may contract with experts in the direct mail email and telephone sectors to help it achieve its goals the president sole officer director and trustee receive dollar_figure annual compensation ts to no members of the governing board and none have a business or family relationship with disqualified persons are disqualified persons foundation is not controlled by another organization and foundation does not have a relationship with another organization because of interlocking directorates or other factors foundation will not engage in reimbursement arrangements performances of service fundraising solicitations or sharing of facilities mailing lists assets or employees with another organization_expenses include printed educational materials to be utilized by foundation website address is marked n a prior to the irs’ recognition of exempt status the irs required foundation take corrective actions and provide information on its fundraising activities letter dated april 20xx required the following form 886-arev department of the treasury - internal_revenue_service page -3- form_886 a department of the treasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year periods ending december 20xx and december 20xx expand the number of board members and directors from one person to at least three unrelated people provide specific detail to explain how funds are to pay for provide specific professional fundraiser detail to identify the professional fundraiser that the eo intended to use a b answer whether any board members are related to the professional fundraiser disclose c i whether any directors or officers work for the professional fundraisers that foundation will use and the amounts of compensation or benefits the individuals would receive ii whether the fundraiser will receive a percentage and iii the net received the amount turned over for charitable activities and the basis for the fees to the fundraiser and any contracts foundation’s reply letter dated may 20xx provided the following amended bylaws that added two persons as directors and as president remained the only offi icer no director or r offi icer is receiving any compensation_for their services while foundation has stated it may hire professional fundraisers to conduct fundraising it has not identified any potential professional fundraising firms at this time volunteers and board members will conduct all initial fundraising activities yes foundation will only make donations to c organizations assistance will be provided to women of age or up who are uninsured to help pay fora at a location in your area assistance will be publicized through relationships with screening facilities website to be created media radio newspaper etc and in cooperation with other c organizations that provide support to victims records will be maintained to show the assistance given circumstances surrounding the need for assistance names of recipients and any relationship of the recipients october 20xx foundation filed articles of incorporation with the that show the following no part of net_earnings will inure to the benefit or be distributable to its trustee officers or other private person except for distributions in furtherance of its purpose it's purpose is education prevention research distributions to organizations that qualify as exempt under sec_501’ ' and funding of department of the treasury - internal_revenue_service page -4- form 886-aev form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year petiods ending december 20xx and december 20xx the board_of directors consisted of upon dissolution assets after payment of liabilities shall be distributed for of exempt purposes within the meaning of the internal_revenue_code or to state_or_local_government the date of incorporation is october 20xx of signed as the incorporator and is the sole person under the board_of directors a may 20xx amendment adds members and as board may 20xx the irs issued letter recognizing foundation as exempt under federal_income_tax under sec_501 of the code and to be treated as a public charity under an advanced ruling period august 20xx foundation’s initial activities as email address expenditure authority fundraising through telemarketing and direct mail are checked director and no other officers at this time application states signature is dated july 20xx related entities foundation’s current board members 20xx to 20xx 20xx to 20xx 20xx to 20xx 20xx to 20xx foundation’s past members 20xx - october 20xx 20xx - 20xx october 20xx to continue to support the mission as a volunteer volunteered to step down as executive director but elected december 20xx director interviewed for a part time position as executive form 886-a rev department of the treasury - internal_revenue_service page -5- form_886 a department of the treasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year periods ending december 20xx and december 20xx was added as an officer for foundation after irs required that for exempt status someone besides only director needed to be an officer and oo o was president of a printing and mailing and marketing consultant company was located in advertised that he was a marketing consultant and could use a donor's gift history to ask for a greater gift his website stated see 20xx designed foundation’s website october 20xx was added as an officer at the same time o - isa and works in the professional fundraising business corporation was incorporated april 19xxas - at before relocating to as based on reports filed with the other charity clients include office out of over dollar_figure million of donations collected over five years less than to charitable programs and nearly all of the money was used to pay fundraiser fees salaries and benefits packages donors were falsely told their money would be used to fund a mobile van was also accused of advertising bogus ties with the research and screenings through went was shut down by state foundation was incorporated august 20xx at ’ ‘home manager i is secretary and employee is wife is president address on treasurer while listed _ noted for 20xx that they have not yet finalized their schedule with nor have they signed contracts however no contract was subsequently registered with the state _asaclient form 886-arev page -6- department of the treasury - internal_revenue_service form_8 a department of the treasury - internal_revenue_service explanation of items name of taxpayer schedule no or exhibit year periods ending december 20xx and december 20xx website telemarketing net stated_in part - services include consulting direct mail fax email campaigns and predictive dialing call center applications include appointment setting lead qualifi ication product and technical support customer satisfaction surveys customer service marketing research surveys statistical analysis polling get- out-the-vote direct sales and fundraising the most important factor in the success of a direct marketing program is the list in fact the list accounts for the message ‘_ and the format ' make up the rest i of a campaign’s success while the offer - services can ramp sales quickly with a proven sales process any output from our tsrs must be verified by a supervisor and our auditing department before you ever see the results all of our conversations are monitored or recorded for training and verification purposes foundation’s contracts for __ services two versions of contract contract one october 20xx the fundraising service_contract registration from corporation the types of services are managing or conducting direct mail and telephone solicitations registration signatures are dated september 20xx the one-page contract attached to the registration is the contract released to the public until 20xx office received a telemarketing and on this coniract e foundation will have reasonable access to financial records and operations regarding the solicitations the terms are open ended telemarketing services are to begin october 20xx there is a single cost e o telemarketing dollar_figure per hour form 886-acev department of the treasury - internal_revenue_service page -7- form_88 6a department of the treasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year periods ending december 20xx and december 20xx signed the contract as owner and president and ‘ signed as foundation director contract two in year 20xx the adhering to the 20xx contract contract the foundation to cease collections through ' _ office received a complaint that foundation was not until the contract issue was resolved directed letter foundation sent a december 20xx in response to different six-page contract with on this version is dated september 20xx and contract two states in part signed as foundation board members this contract each contact may include an incidental request for financial support contacts will be to households that include women within the target group these will require telephone representatives to adhere closely to approved scripts will be responsible for all costs of the marketing effort will invoice foundation of all costs but total costs cannot exceed percent of the gross_proceeds actually received less credits for stop payment checks and refunds foundation will receive no less than stop payment checks all proceeds shall be directed to a representative of foundation and deposited into a bank account in the name of foundation arepresentative of will make all arrangements necessary to pay percent of the gross_proceeds after its portion of collections cleared in the account monthly and deposit will pay from its share of the proceeds all proper and bona_fide expenses of the campaign will cooperate fully with foundation to review or audit the terms and conditions set forth in this agreement this shail be a material condition foundation will have reasonable access to to its fundraising activities on behalf of foundation persons on the contact list who respond positively to contact will remain property of both 's financial records relative and foundation form 886-acev department of the treasury - internal_revenue_service page -8- form_886 a department of the treasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year periods ending december 20xx and december 20xx the terms of the contract are years with an-automatic renewal barring- --- either parties’ cancelation selection of and lack of due diligence documentation beginning on foundation’s first 20xx form_990 foundation has consistently claimed was chosen in a competitive bidding process and ‘contract terms are no more than fair_market_value e the examiner requested all documentation of comparison and selection to support these claims idr o o o o - o foundation had no documents related to foundation had not relied on expert reports or any outside data foundation stated that to their recollection no other to their terms officer stated she had no records or notes of the selection of or market rates would agree she believed foundation entered into contract with in good_faith and the telemarketing contract was within the industry standards’ for with charitable organizations however stated as a the necessity to acquaint the public with the benefits of taking action and she believes herself to be ethical and of high integrity and have long believed in is a multi-year member of a rotary club’ and she has spent over years of her working career in fundraising for charities and believes it costs money to raise money idr and after offers of services from other telemarketers were issued reviewed and responded to by reported back to the board_of his findings initial selection any subsequent requests for bids or afterward e e the examiner requested a detailed explanation of what made up their extensive call-to-action campaign to provide assistance to women who are uninsured to get a foundation’s reply o it is to get women to understand the importance of recommend that they receive annual and form 886-acrev department of the treasury - internal_revenue_service page -9- form_886 a name of taxpayet explanation of items department of the treasury teoma revenue service schedule no or exhibit year periods ending december 20xx and december 20xx e e e e e the examiner requested an explanation of what specific expertise to be sole manager of their extensive call-to action campaign to prevent had foundation’s reply had the expertise to conduct this extensive call to action campaign because is a professional fundraising firm the examiner asked for the basis of their persistent public claim that is only part owner of foundation’s reply o foundation has no reason to know whether this is correct because was a separate company from foundation and ownership information is confidential also foundation does not know who other than would be receiving profits from financial status or policies because they do not know their notes o o the public forms claiming all signed by irs and been sole owner of was only a part owner are records show s-corporation and receives has always of net profit distributions working relationship of and foundation foundation’s physical location was at post office boxes in the states of and office at with office until after irs’s examination explained to the examiner april 20xx telephone foundation operated entirely from commenced contact that the irs examination could not be conducted at foundation no longer functioned from seeking a new location requested data from foundation november of 20xx she stated a stirring up trouble for foundation and she assumed the irs had also received a complaint from ' months later when foundation filed for bankruptcy during the exam a new location was found but was vacated stated the attorney general’s ag's office office because office and they were in the process of had been form 886-aev department of the treasury - internal_revenue_service page -10- form_886 a name of taxpayer department of the treasury - internal_revenue_service __ explanation of items schedule no or exhibit year periods ending december 20xx and december 20xx the properties the rent value was donated to foundation by office is owned by and rented to from and foundation shows that it owns no assets other than cash the cash is in bank accounts under ' 20xx and all collections deposits transfers to and accounting were performed employees foundation’s donations for years 20xx through 20xx exceeded dollar_figure and foundation’s names foundation had no employees until received and processed all donations deposited the funds into a transferred its share to another account bank account leaving foundation with the remainder then on foundation’s registration renewal form for year 20xx and also have authority to expend funds and incur obligations on behalf of foundation and - are signed by ’ is the contact for all foundation checks employs telemarketers directly and hires temporary telemarketers from an employment agency through the work of the telemarketers foundation e e through their telemarketing mailing provided free for women who wanted a number listed on the state department of health website the state provides phone numbers to locations with free and low cost the women would then call this number for assistance in setting up an appointment for note no records were kept to support who or how many women were given the telephone number telemarketers gave the women a phone department of the treasury - internal_revenue_service page -11- form 886-aev form 886a department of the treasury - internal_revenue_service explanation of items name of taxpayer schedule no or exhibit year periods ending december 20xx and december 20xx and foundation revenue compared and foundation reported receipts and expenses as shown below foundation donation receipts per forms paid to per forms donations paid to used for charitable services line divided by line grants paid_by foundation per forms donations to grant line divided by line gross donations per retained by charities of gross from foundation line divided by line clients pe net retained by foundation foundation direct charitable services per discrepancies in amounts reported for most of the years that foundation was gross_receipts line are more than foundation’s reported receipts line the excess in receipts line less line not reported as foundation’s are dollar_figure year 20xx only client form 886-acev department of the treasury - internal_revenue_service page -12- form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer schedule no or exhibit year periods ending december 20xx and december 20xx dollar_figure year 20xx dollar_figure year 20xx and dollar_figure year 20xx the year prior to 20xx were not examined by irs and the actual recipient or owner of these amounts is unresolved foundation reported amounts paid directly to charitable services line sec_5 far above the amounts of grants that they paid out line this is partly explained by foundation’s improper practice of allocating a substantial percentage of to direct charitable services see fundraising costs later ‘ for example in year 20xx foundation reported that’ was spent directly on charitable services while actually donation revenue and zero grants were given of donation revenue received ' of for the same year 20xx receipts retained only dollar_figure of the dollar_figure collected by total receipts of dollar_figure include dollar_figure of foundation reports dollar_figure of dollar_figure was retained by its charity clients yet foundation if dollar_figure of dollar_figure of dollar_figure yet foundation alone paid them dollar_figure receipts was retained by charities would receive only communications false claims on script and joint costs issued a letter challenging foundation’s june 20xx the instructed joint fundraising costs to program services costs the rejected over foundation to follow the coded allocation rules in and million of reported program service expenses because the expenses were actually classified as fundraising expenses per foundation to amend its forms code the allocation of asked responded with several emails containing various protests questions and ’ directions of allocations were too -explanations including complaints that the complicated and amendment of the form_990 would cost a lot of money 7s for uninsured women states that foundation pays for dollar_figure and we are asking folks if they can help women at dollar_figure a copy of a 20xx telemarketer script this script cost about advised by july 20xx the script still needed to identify the caller as from the charity further the script falsely states that foundation pays for where they actually make donations to health programs which do this by august was still requesting corrections to false statements and advised 20xx the that the first line of their telemarketer telemarketers and not as a caller provided form 886-acrev department of the treasuty - internal_revenue_service page -13- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year periods ending december 20xx and december 20xx and foundation that foundation’s script still contained the claim that the telemarketer is with the other november 20xx news reported its attempts to interview about a conflict of interest between foundation and telemarketer told the news reporter that they typically start off by asking for a donation of dollar_figure they tell prospective donors that dollar_figure would help two women and that they believe the money is for just one thing for women to get foundation share the same post office box and storefront and foundation has been insiders with the and to inquire a only nonprofit client since 20xx the relationship has made millions according to the charity's irs filings since 20xx foundation has paid out almost dollar_figure for for uninsured women but over that same period the charity through nearly telemarketing raised nearly dollar_figure after expenses the charity has paid telemarketer dollar_figure an individual was clear about where his donation would go during the phone call they assured me all the money would go to pay for past and one current confirm they were told to say one woman who asked to remain she was told to say that we're raising money so that anonymous told the uninsured women can receive -_ who was asked for a donation said the that's what two employees one foundation’s first year october 20xx the address website was created the admin and owner phone’ is per the telephone number listed belongs to located at foundation’s initial website through year 20xx stated the foundation was founded in 20xx by in response to the need for affordable when several of he educated himself about the disease learning that has the highest_rate of __ former employees for uninsured women in were diagnosed with in the country his concern about the health of his employees coupled with his impending retirement led him to explore what he could-do-to-help women - particularly those with no health insurance form 886-aev department of the treasury - internal_revenue_service page -14- form_8 a department of the treasury - internal_revenue_service explanation of items name of taxpayer schedule no or exhibit year periods ending december 20xx and december 20xx during 20xx the outreach effort of the foundation reached women and referred many to their local health clinics for foundation distributed foundation’s 20xx financial activities income expenses grants or assistance balance carried forward dollar_figure dollar_figure dollar_figure statistical information rates of diagnoses and death from cancer several sections and automatic functions of the website solicited donations recent website accessed january 20xx posts the department of health's telephone numbers for free telemarketers was not posted for the public on foundation's website instead a link for provided by the led to a form for personal information and a claim that may be able to pay the total cost or help supplement the cost of at a location in your area’ notes the examination findings show that foundation has not and does not pay for instead a portion of the net profit in most years was given to a health organization and some portion of that may be used for and foundation claimed to the examiner that they did not have also while data on who or how many women were contacted or referred by website form collected a great deal of specific and personal data of the person who wanted form_990 for year 20xx the examiner issued idr april 20xx requested all books_and_records including an unaltered copy of foundation’s accounting software quickbooks and all foundation’s representative did documents received from and contracts with not provide the quickbook records because it-contained data outside of the-examination year form 886-acrev department of the treasury - internal_revenue_service page -15- form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year periods ending december 20xx and december 20xx to prove the millions in expenses paid to the monthly invoices created by its founder’s company foundation could only provide the examiner made several attempts to secure documentation to support the expenses the examiner referenced foundation’s contract's condition that foundation will have financial records relative to its fundraising activities reasonable access to on behalf of foundation and asked foundation if it had ever requested any information from foundation responded that they had never had a reason to question charges financial audit results the results of the irs audit of the form_990 for the tax period ending december 20xx follow revenue 20xx revenues per per audit difference gross contributions collected _ donations grant income total contributions collected investment_income other revenue recovered income grant deducted in prior year and returned to foundation in 20xx year dollar_figure o o j o l o the gross_income on form_990 was underreported by dollar_figure form_990 reported dollar_figure as gross collected the bank_deposits of donation grant income total dollar_figure foundation’s accounting_records show fundraising income of dollar_figure before nsf deductions of dollar_figure foundation’s form_990 only dollar_figure the actual interest_income reported by the bank totals dollar_figure total revenue department of the treasuty - internal_revenue_service page -16- form 886-acev form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year periods ending december 20xx and december 20xx while the contract did not address it and the finances did not account for it requested donors add shipping_income the telemarketers’ donation form requests that made no record of donors add dollar_figure to each donation to defray shipping costs’ these receipts to cost to the dollar_figure of shipping charged to foundation as shown on the monthly invoices neither of the contracts and none of foundation’s documents address the approval or treatment of this shipping_income solicited by on behalf of foundation reduce for any shipping nor did department of the treasury - internal_revenue_service ' page -17- form 886-aev form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year periods ending december 20xx and december 20xx expenses expenses audit sub- totals audit totals per 20xx difference doh doh health-t total grants seminar tuition tuition other salaries and taxes and fees fees information_technology per form_990 charge data list purchase per form_990 list purchases data entry per form_990 f to data fees american professional phone verizon office exp paid to fees for services total dollar_figure debits total expenses subtotal lines misc license fees nailing services misc po box labor t form 886-acev department of the treasury - internal_revenue_service page -18- form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer schedule no or exhibit year periods ending december 20xx and december 20xx disallowed expenses explained fe line foundation’s form_990 reports dollar_figure of contractor fees paid to other payees where dollar_figure of this was paid to total fundraising expenses dollar_figure and is correctly includible in the for grant writing services foundation’s only line foundation expensed the remaining dollar_figure dollar_figure - dollar_figure contractor fees based on payments to documents are invoices for consulting services addressed to foundation of the dollar_figure in payments the first recorded payment of dollar_figure is not supported by the bank records and of the remaining payments of dollar_figure bank records show these as cash withdrawals bank debits of june september october and december and no form_1099 misc or other type information_return was issued for the expense of dollar_figure ' line form_990 reports office expenses of dollar_figure of this dollar_figure was paid to dollar_figure the remaining dollar_figure was recorded as phone and bank card expenses charge card fees on a bankcard and american express card services totaled dollar_figure yet no records for these charged expenses were provided to explain how these furthered foundation’s purposes verizon phone charges of dollar_figure were similarly unsupported also foundation worked exclusively out of office and foundation already paid dollar_figure in phone charges supported only by the invoice produced by line form_990 reports miscellaneous expenses of dollar_figure which were recorded as license and po box fees however the recorded p o box fees of dollar_figure are only supported by cash withdrawals line form_990 shows zero bank fees yet nsf bank fees of dollar_figure for insufficient or reversed check charges on donations secured_by telemarketers were supported by the bank statements foundation deducted the fees prior to reporting the gross revenue the examination results reflects the increase in gross revenue see 20xx revenue above bank collection revenue total of dollar_figure and in expenses of dollar_figure nsf bank debit expense february 20xx foundation explained due to the move and transition in staff the organization is unable to find the files to support the expenses paid in 20xx please note that the majority of of the expenses are paid to and itemized on oe -_jnvoices --------_--- a foundation temporarily hires employee form 886-acev 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 periods ending december 20xx -and december 20xx in 20xx foundation’s first employee employee was ' fong time foundation stated there were no differences in duties from when she worked for and foundation and that moving her to a foundation position seemed logical because she was spending all of her time on foundation march 20xx foundation decided that april 20xx per foundation minutes would re-hire by records show held the following positions oo o employee contractor 20xx - 20xx 20xx - 20xx treasurer 20xx foundation employee 20xx - 20xx employee 20xx - 20xx founded in 20xx by ' when foundation began paying had performed as a employment data entry mail services etc costs that charge foundation documents show that ' to evaluate her work employee full wages she continued the same duties she made no adjustment to reduce any continued to of was is signed by foundation’s position description for and following on december 20xx the position description duties show the e e auditing processing and mailing of daily pledges and reminders opening and processing deposits and credit card receipts ‘responding to requests of prospects donors sponsors etc geerdinating-with staff providing administrative support to data entry of pledge card errors fulfillment maintaining and updating dnc log and update in computer stamping assembling and delivering mail print reminders correct pledge card errors staff as needed form 886-acrev department of the treasury - internal_revenue_service page -20- form_8 a name of ‘taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year periods ending december 20xx and december 20xx e other duties as assigned grant recipients per foundation all grant recipients were first vetted by submitted his recommendations to the board then the 20xx year form_990 states foundation paid out dollar_figure in grants to pay for this dollar_figure total does not take into consideration a reduction for the dollar_figure refused by and returned from in december 20xx foundation ‘returned to foundation dollar_figure of a grant received from letter stated that the reality is that the services provided by owner of are unparalleled no adjustment was made to the total grant amount nor to receivables on the 20xx or 20xx forms no explanation was documented in meeting minutes foundation made adollar_figure grant to private and for profit company owed by referenced by in 20xx year isa was not a grant or payment toward also dollar_figure unidentified individual to attend a class the business_purpose was not explained foundation states it does not issue grants to individuals but a tuition payment for an incorrect use of joint costs rules- aicpa statement of position sop foundation reported fundraising expenses paid to the founder's company as amounts paid for charitable purposes by claiming that they qualified to use joint cost based on this claim foundation filed public reports showing millions as paid to direct charitable services that actually went directly to revenue compared chart shown earlier foundation’s reasonable allocation of joint cost under sop resulted in their re-assigning fundraising costs and into money spent on direct charitable service_costs out of see of and to use joint costs the criteria of accounting sop must be met per_ if any of the criteria of purpose audience and content are not met all costs of the activity should be reported as fund-raising costs states that when a compensation contracts provides that compensation_for performing the activity is not to exceed a specified portion of contributions raised as is the case in foundation’s stated maximum percentage is met as was the case for foundation then compensation is considered based on amounts raised and the activity fails the purpose of contributions limit and the form 886-a rev department of the treasury - internal_revenue_service page -21- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year periods ending december x and december 20xx criterion therefore based on this factor the compensation or fees test the activity fails the purpose criterion and the special rules of allocating joint cost can not be used per costs exceeding forward and offset in future months marketing service agreement part ii received by in 20xx of the gross revenue received by the client can be carried and the stated maximum percentage was met foundation’s excess costs for labor exceeded and were carried forward for months february through october collected starting with january's charges that include a deferred payment of dollar_figure from the prior year and totaling dollar_figure for january monthly invoices also show the stop loss of’ of the total per fundraisers as fundraising costs not as amounts spent on charitable purposes if the rules are not met charities must show all costs paid to foundation’s 20xx year form_990 published that foundation reached referred and scheduled many of these women for services’ women and the irs examiner asked foundation for documentation of the women that they reached and for documentation of the women who they referred and scheduled for foundation stated e e the number of women reached is based on households reached the women who are called may be referred to a clinic that provides reports of but neither foundation nor actually schedules appointments the examiner asked foundation to define the assistance program and pro bono media message or coordination with other c organizations as claimed on their form_990 for tax period ending december 20xx of the irs examination the bankruptcy trustee arranged for preparation of the 20xx form_990 based on records made available to the trustee by the date of the trustee’s filed chapter bankruptcy july 20xx prior to the close form 886-acev department of the treasury - internal_revenue_service page -22- form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer schedule no or exhibit year periods ending december 20xx and december 20xx appointment all of the officers and directors had resigned the trustee provided the prepared form to the examiner this shows total revenue of dollar_figure from contributions and total expenses of dollar_figure leaving net revenue of dollar_figure the types of expenses resembled those on the 20xx year form_990 joint cost were not utilized ll applicable law exempt status internal_revenue_code sec_501 of the irc provides for exemption from income_tax for corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes or to foster certain national or international amateur sports competition or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1_501_c_3_-1 provides that in order to be exempt as an organization described in sec_501 cx3 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 sec_1_501_c_3_-1 provides that an organization will not be regarded as operated exclusively for exempt purposes if more than an insubstantial part of its activities is not in furtherance of exempt purposes 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 regulations specifically forbid the inurement of earnings to private the irc_and shareholders or individuals reg sec_1_501_c_3_-1 the prohibition of inurement in its simplest terms means that a private_shareholder_or_individual cannot misappropriate the organization's funds to himself except as reasonable payment for goods or services 4inurement of-contributions is-as fatalto-exempt status as inurement of ‘netearnings see 75_tc_127 in addition this court has held that net_earnings may inure to an individual in ways other than through the distribution of dividends see 74_tc_507 form 886-acev department of the treasury - internal_revenue_service page -23- form_886 a department of the treasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year periods ending december 20xx and december 203cx affd without published opinion 647_f2d_163 2d cir 66_tc_850 sec_1_501_c_3_-1 provides that an organization is not organized or operated exclusively for charitable purposes unless it serves a public rather than a private interest it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests sec_1_501_c_3_-1 example describes a situation where artists directly benefit from the sale of their art therefore the principal activity serves the private interests of these artists the organization give sec_90 percent of the proceeds from its sole activity to the individual artists the direct benefits to the artists are substantial and the organization's provision of these benefits to the artists is more than incidental to its other purposes and activities this arrangement causes the organization to be operated for the benefit of private interests in violation of the restriction on private benefit in paragraph d ii of this section based on these facts and circumstances the organization is not operated exclusively for exempt purposes and therefore is not described in sec_501 ’ example describes an educational_organization o whose purpose is to train individuals in a program developed by its president all of the rights to the program are owned by company k a for-profit corporation owned by the president prior to the existence of o the teaching of the program was conducted by company k o licenses from company k the right to conduct seminars and lectures on the program and to use the name of the program as part of o's name in exchange for specified royalty payments under the license agreement company k provides o with the services of trainers and with course materials on the program o may develop and copyright new course materials on the program but all such materials must be assigned to company k without consideration if and when the license agreement is terminated company k sets the tuition for the seminars and lectures on the program conducted by o o has agreed not to become involved in any activity resembling the program or its implementation for years after the termination of o's license agreement o's sole activity is conducting seminars and lectures on the program this arrangement causes o to be operated for described in sec_501 revenue rulings private benefit paragraph d ii of this section regardless of whether the royalty payments from o to company k for the right to teach the program are reasonable based on these facts and circumstances o is not operated exclusively for exempt purposes and therefore is not ag form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year periods ending december 20xx and december 20xx in revrul_70_186 an organization was formed to preserve a lake as a public recreational facility and to improve the condition of the water in the lake to enhance its recreational features although the organization clearly benefitted the public there necessarily was also significant benefit to the private individuals who owned lake front property it was determined that the private benefit was incidental in a qualitative sense any private benefit derived by the lake front property owners did not lessen the public benefit flowing from the organization's operations in fact it would have been impossible for the organization to accomplish its purposes without providing benefits to the lake front property owners in revrul_76_152 1976_1_cb_151 a group of art patrons formed an organization to promote community understanding of modern art trends the organization selected modern art works of local artists for exhibit at its gallery which was open to the public if an art work was sold the gallery retained a commission of ten percent and paid the remainder to the artist direct economic benefit was conferred on the individual artists by the gallery's sale and rental of the art works that defeated exemption even though the organization's other activities furthered the arts an organization must not engage in substantial activities that fail to further an exempt_purpose tn 326_us_279 the supreme court held that the presence of a single if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes nonexempt purpose in 92_tc_1053 the court held that an organization that operated a school to train individuals for careers as political campaign professionals but that could not establish that it operated on a nonpartisan basis did not exclusively serve purposes described in sec_501 because it served private interests more than incidentally the court found that the organization was created and funded by persons affiliated with a particular political_party and that most of the organizations graduates worked in campaigns for the party's candidates consequently the court concluded that the organization conducted its educational activities with the objective of benefiting the party’s candidates and entities although the candidates and entities benefited were not organizational insiders stated that the conferral of benefits on disinterested persons who are not members of a charitable_class may cause an organization to serve private interests within the meaning of sec_501 c -1 d ii the court concluded by stating that even if the political party's class _ the organization the burden of proving that is activities benefited members of the class in a non-select manner american campaign academy’ t c pincite ___ ___gandidates-and entities -did-comprise a-charitable department of the treasury - internal_revenue_service form 886-acrev would page -25- the court - bear_______ __ __ department of the treasury - internal_revenue_service form_886 a name of taxpayer explanation of items schedule no or exhibit year periods ending december 20xx and december 20xx in kj's foundation raisers v commissioner t c memo aff'd u s app lexis 2d cir the tax_court held and the second circuit affirmed that an organization formed to raise funds for distribution to charitable causes did not qualify for exemption under sec_501 c because its activities resulted in a substantial private benefit to its founders the founders of the organization were the sole owners of kj's place a lounge at which alcoholic beverages were served the founders served as officers of the organization and at times also controlled the organization’s board the tax_court found and the second circuit agreed that the founders exercised substantial influence over the affairs of the organization the organization's business consisted of selling lucky or similar instant win lottery tickets to patrons of kj's place the organization derived most of its funds from its lottery ticket sales the organization solicited no public donations the lottery tickets were sold during regular business hours by the owners of the lounge and their employees from the proceeds of the sales of the lottery tickets the organization made grants to a although supporting charitable organizations may variety of charitable organizations be a charitable activity the tax_court nevertheless upheld the commissioner's denial of exemption to the organization on the ground that the organization’s operation resulted in more than incidental private benefit the tax_court held and the second circuit affirmed that a substantial purpose of ku's activities was to benefit kj’s place and its owners by attracting new patrons by way of lottery ticket sales to ku's place and by discouraging existing customers from abandoning kj's place in favor of other lounges where such tickets were available thus the organization was not operated exclusively for exempt purposes within the meaning of sec_501 in wendy l parker rehabilitation foundation inc v c i r tcmemo_1986_348 the tax_court upheld the service's position that a foundation formed to aid coma victims including a family_member of the founders was not entitled to recognition of exemption approximately of the organization's net_income was expected to be distributed to aid the family coma victim the court found that the family coma victim was a substantial beneficiary of the foundation's funds it also noted that such distributions relieved the family of the economic burden of providing medical and rehabilitation care for their family_member and therefore constituted inurement to the benefit of private individuals in est of hawaii t c pincite the court identified certain kinds of contractual ------provisions as indicating non-exempt purposes these include-agreements not to -------_-___-- compete significant control by a for-profit of an exempt organization's activities a requirement that the exempt_organization maintain exempt status a lengthy term and any other provisions that appear to favor the for-profit all of these factors are present between and legacy the court held that an association formed in a private real_estate development to operate parks swimming pools boat docks and other recreational facilities did not form 886-a cev department of the treasury - internal_revenue_service page -26- form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer schedule no or exhibit year periods ending december 20xx and december 20xx qualify as sec_501 organization although the organization provided some benefit to the general_public the primary intended beneficiaries were the residents and property owners of the private development thus the organization operated for a substantial non-exempt purpose rather than for exclusively charitable purposes 88_tc_1 affd a number of courts have held that unaccounted for diversions of a charitable organization's resources by one who has complete and unfettered control can constitute inurement 365_f2d_792 8th cir 318_f2d_632 7th cir church of scientology f 2d pincite- in 765_f2d_1387 cir the ninth circuit held that a church that conducted its activities by mail did not qualify for exemption under sec_501 because a substantial purpose of its activities was to benefit a for- profit corporation controlled by the church’s insiders the church employed an advertising agency controlled by its insiders to provide all of the printing and mailing services for the church's mass mailings the advertising agency devoted approximately two-thirds of its time to the work for the church the majority of the church’s income was paid to the advertising agency although the advertising agency claimed to have clients unrelated to the church it did not advertise its services and refused to identify its other clients the ninth circuit held that the church was operated for the substantial non-exempt purpose of providing a market for the advertising agency's services and thus primarily served the private interests of the advertising agency and its owners rather than a public purpose in so holding the ninth circuit rejected the church's argument that the income paid_by the advertising agency should not be included in the determination of reasonableness and treated this income as indirect inurement of the church’s earnings to the church's insiders the prohibition on inurement in sec_501 c is absolute the service has the authority to revoke an organization’s exempt status for inurement regardless of the amount of inurement see spokane motorcycle club supra the founding church scientology f 2d pincite of - __---onlyarrinsubstantial portion of the activity of an-exempt organization may furthera-- _----- nonexempt purpose as the supreme court held in 326_us_279 the presence ofa single non-exempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes even if taxpayer---- p’s dpa program were directed to exclusively low-income individuals or disadvantaged communities organization's total reliance for financing its dpa activities on home f om ev department of the t reasuty - internal_revenue_service form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year periods ending december 20xx and december 20xx sellers or other real-estate related businesses standing to benefit from the transactions demonstrates that the program is operated for the substantial purpose of benefiting private parties other form_990 instructions line joint costs allow fundraising cost to be allocated only if a charity follows sop the instructions states do not check the box unless the organization followed sop asc in allocating such costs aicpa accounting statement of position sop and joint costs states in part the purpose criterion must be met to use joint costs and provides the following directions a b c d dollar_figure the following factors should be considered in the order in which they are listed to determine whether the purpose criterion is met a whether compensation or fees for performing the activity are based on contributions raised the purpose criterion is not met if a majority of compensation or fees for any party's performance of any component of the discrete joint activity varies based on contributions raised for that discrete joint activity some compensation contracts provide that compensation_for performing the activity is based on a factor other than contributions raised but not to exceed a specified portion of contributions raised for example a contract may provide that compensation_for performing the activity is dollar_figure per contact hour but not to exceed percent of contributions raised in such circumstances compensation is not considered based on amounts raised unless the stated maximum percentage is met in circumstances in which it is not yet known whether the stated maximum percentage is met compensation is not considered based on amounts raised unless it is probable that the stated maximum percentage will be met emphasis added the compensation or fees test is a negative test in that it either a results in failing the purpose criterion or b is not determinative of whether the purpose criterion is met therefore if the activity fails the purpose criterion based on this factor the compensation or fees test the activity fails the purpose criterion and the factor in paragraph 10b should not be considered if the purpose criterion is not failed based on this factor this factor is not determinative of whether the purpose criterion is met and the factor in paragraph 10b should be considered emphasis added ill government’s position department of the treasury - internal_revenue_service page -28- form 886-aev form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year periods ending december 20xx and december 20xx our position is that foundation does not qualify for exemption from tax under sec_501 because it has failed to operate exclusively for exempt purposes as is required by sec_501 and sec_1_501_c_3_-1 first foundation was not operated exclusively for exempt purposes because its net_earnings inured to the benefit of its founder and president by paying for workers for the founder's privately held telemarketing business in contravention of sec_501 c and c -1 c second foundation was not operated exclusively for exempt purposes because it was operated primarily to benefit the private interests of the founder's telemarketing business in contravention of sec_1_501_c_3_-1 primary and substantial activities per sec_1_501_c_3_-1 of the regulations an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities that accomplish one or more of such exempt purposes further only an insubstantial part of non-exempt purpose activities are allowed foundation is not operated exclusively for exempt purposes because its primary activity as measured by financial income and costs and by actual services performed is collecting donations and paying purpose of increasing the founder's profits to himself and his for-profit fundraising business - and this accomplishes the private more than an insubstantial part of foundation’s activities furthered private purposes rather than purposes described in sec_501 its substantial activity is performed through its contract with itself an exempt activity nor is it made into an exempt activity by occasionally providing a phone number and persuading people to donate money is not in foundation’s true purpose was to provide its creator with a more desirable business environment from inception the founder essentially captured the exempt status of foundation to increase the founder’s profits foundation’s founder provided an exclusive service that generated the majority of his _ _pusiness provides all year 20xx foundation is similarly dependent on of foundation’s income and foundation’s expenses are almost exclusively generated by income in years 20xx and 20xx and exclusive source_of_income since -_____ ______ while grants were made at a minimum department of the treasury - internal_revenue_service page -29- form 886-acrev form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year periods ending december 20xx and december 20xx while evidence of private benefit activities are abundant there is a paucity of those that support an exempt_purpose and any that do exist are controlled by the founder any fragments of perfunctory educational material is presented only as a means to legitimatize the telemarketers’ appeals for donations this is further supported by the lack of structured intentional education and absence of educational materials and services provided to the public while some educational activities may further exempt purposes here the only educational activity was conducted by telemarketers in the form of distribution of educational materials such as the shower cards and provision of a government provided telephone number while the website contains scary diagnosis and death statistic it does not even provide the telemarketer’s government provided telephone numbers for foundation does not conduct any exempt_activities itself but merely makes grants to other organizations according to suggestions is a savvy and experienced professional fundraiser and was purposeful as was the flow of private benefit to foundation’s public misrepresentation to hide the actual profits to its founder they did that misrepresented the terms and hid this when they filed a contract with the the true beneficiaries of profits and they did this when they filed annual reports with irs and program activities when in actuality they were going directly to the founder's telemarketer regardless that foundation did not qualify to use joint cost allocation because the stop loss was met and government into thinking the charity was spending legitimate amounts of money on that grossly overstated donations amounts used for exempt used this allocation to trick the public and to hide the amounts going to even in its application_for exempt status foundation did not disclose information that would have caused the irs to apply careful scrutiny to ensure an applicant organization is not under the influence of private interests and is benefiting to those same private interests this too appears intentional the founder signed his completed form_1023 stating they had no website on the day the website was created by while all phone address website data belonged to asa applications foundation continued to claim they had not considered fundraiser by may 20xx foundation still did not acknowledge either the website nor _consideration of foundation asa fundraiser yet without any documentation had on foundation’s and costs were below fair market and hammer out managed to determine that two contracts with department of the treasury - internal_revenue_service form 886-aev page -30- form_886 a department of the treasury - internal_revenue_service explanation of items name of taxpayer schedule no or exhibit year periods ending december 20xx and december 20xx as stated in 74_tc_531 affd 670_f2d_104 9th cir where the applicant was controlled by the founder it provides an obvious opportunity for abuse of the claimed tax-exempt status it calls for open and candid disclosure of all facts bearing upon petitioner's organization operations and finances so that the court should it uphold the claimed exemption can be assured that it is not sanctioning an abuse of the revenue laws if such disclosure is not made the logical inference is that the facts if disclosed would show that petitioner fails to meet the requirements of sec_501’ the interrelationships and common_control between your organization and the for-profit entity support a substantial non-exempt purpose similar to the operations of the organizations in international postgraduate medical foundation v commissioner and old dominion box co v united_states your existing relationship with the commonly controlled for-profit entities also constitutes a specific non-exempt purpose which precludes exemption consistent with the decision in better business bureau of washinaton d c inc v united_states the underlying objection to exemption of the organization is that its activities were oriented to its own founders benefit rather than to the general_public issue inurement foundation’s earnings inure to the benefit of private individuals this is prohibited in sec_1_501_c_3_-1 cx2 a private_shareholder_or_individual cannot misappropriate the organization's funds to himself except as reasonable payment for goods or services regs c -1 c foundation is like the organization in 765_f2d_1387 cir where a substantial purpose of its activities was to benefit a for- profit corporation controlled by the church's insiders like the church foundation employed an agency controlled by its insiders to provide all of the services for the foundations mass telemarketing and mailings where that agency devoted provided all approximately two-thirds of its time to the work for the church of its time for foundation and like the church the majority of the foundation’s income ‘was paid to the agency like the church foundation was operated non-exempt purpose of providing a market for the agency's services and thus primarily served the private interests of the agency and its owners rather than a public for the substantial ' form 886-acrev 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 schedule no or exhibit year periods ending december 20xx and december 20xxk purpose and as the ninth circuit treated that income as indirect inurement of the church’s earnings to the church’s insiders the income here is indirect inurement to and its owner while foundation added expenses salary bonuses and benefits to its enormous list of continued to reap the benefit of their long time employee’s work without the cost of her salary during the period foundation paid - wages she continued to perform the same duties as she had for continued working from and control of monthly invoices correction fulfillment and data being charged for on entry of pledge cards update and input of dnc logs printing reminders stamping assembling and delivering mail responding to complaints processing and depositing donation receipts and providing administrative support to the office continued under the evaluative supervision staff work that foundation is already performed staff yet no allocation of her salary was made for reduction in invoiced labor mailing shipping data input or any type of charges for which it billed foundation work and made no ’ while this increased costs for foundation and reduced funds to the public this alleviated the salary expense from profit foundation 's earnings have inured in-substantial part to the benefit of thereby owner ' and increased their business income and this violates sec_1_501_c_3_-1 of the treasury regulations as in wendy l parker rehabilitation foundation inc v c r tcmemo_1986_348 where private_inurement occurred because of net_income went to the founder of the organization thus alleviating the economic burden of its founders and resulting in an economic benefit to the founders issue private benefit foundation is not operated exclusively toward one or more exempt purposes because more than an insubstantial part of its activities benefits the private interests of its founder sec_1_501_c_3_-1 ii and his company _ foundation is like the organization in kj's foundation raisers v commissioner t c _ memo aff'd u s app lexis 2d cir that did not qualify for exemption under sec_501 because its activities resulted in a substantial private benefit to its founders the founder exercised substantial influence over the form 886-acrev department of the treasury - internal_revenue_service page -32- form_886 a department of the treasury - internal_revenue_service name of taxpayer explanation of items schedule no or exhibit year periods ending december 20xx and december 20x affairs of the organization although supporting charitable organizations may be a charitable activity the tax_court nevertheless upheld the commissioner's denial of exemption to the organization on the ground that the organization's operation resulted in more than incidental private benefit a substantial purpose of kj's activities was to benefit kj’s place and here to benefit foundation is like the organization in revrul_76_152 1976_1_cb_151 where the gallery retained a commission of ten percent and paid the remainder to the artist there direct economic benefit was conferred on the individual artists by the gallery's sale and rental of the art works that defeated exemption even though the organization's other activities furthered the arts here the direct economic benefit was conferred to it substantially benefits extend their commercial activities this is supported by the following and his business entities to expand and o o o _ of and foundation generated 20xx and 20xx and for years 20xx through current further while foundation was dollar_figure more than it reported to foundation see donation revenue reported to the public foundation did not question foundation’s lack of oversight has allowed at least these amounts to go missing the extent that this unreported income economically benefited more revenue respectively for years revenue collected at least earlier while these records are available to figures therefore only client is likely gross ' of _ can and has charged millions each year in fees based solely on invoices it creates without back up documents and without a single question from foundation if the charity did not participate and lend its tax exempt status to the transactions there would be little if any revenue collected by foundation is like the organization in example of sec_1_501_c_3_-1 where the principal activity served the private interests of the artist the public benefit from any grants was insignificant compared to that received by the founder the large amounts paid to the percentage of revenue spent on public interests from the first year of 20xx when leave little for any public benefit this is illustrated in was the sole beneficiary and the public received zero through 20xx when less -than -- -went-topay grants co mo form 886-acev department of the treasury - internal_revenue_service page -33- form_886 a department of the treasury - internal_revenue_service - name of taxpayer explanation of items schedule no or exhibit year periods ending december 20xx and december 20xx foundation collections paid to grants paid paid to collections by grants _- _tax year __20xx-20xx totals foundation collections paid to grants paid paid to grants collections foundation claimed in its application that assistance will be provided to women who are uninsured to help pay for a with the state of used for public benefit of paying for grossly overstate the amount of donations yet forms and documents filed contrary to their public claims this part of the program while foundation publicly claimed it referred and scheduled many of the women it reached when asked for records it admitted neither foundation nor the telemarketers scheduled any was so negligible they weren't even able to show how many women the telemarketer’s referred to clinics for all of claims of tracking customer’s data it did not even record women who were helped or how many women were contacted yet as in so many of their claims this is inconsistent with facts as foundation’s website form collects personal data for anyone who wants a can track all data for its clients registration the services are limited to conducting direct mail and telephone solicitations not surprisingly the personal data collected by the form is valuable for telemarketing lists sold throughout the telemarketing business advertises that it as stated on contract and -foundation allowed telemarketers to falsely tell potential donors that all of their donation would go to paying for department of the treasury - internal_revenue_service page -34- form 886-acev form_8 a department of the treasury - internal_revenue_service explanation of items name of taxpayer schedule no or exhibit year periods ending december 20xx and december 20xx the grants that were paid may or may not have gone to clinics and some to private for-profit practices even the total grants shown is suspect just in the year examined ucla returned almost dollar_figure yet no adjustment for this amount - was recorded as some went to the private benefit to an exempt_purpose and is not incidental to accomplishing for private benefit to be qualitatively incidental the benefit to the public must not be able to be achieved without benefiting certain private parties benefits include certain payments for goods or services or steering business to a for-profit company the private benefit organization’s operation certainly the organization may contract for management expertise however it has the option to hire employees with experience in receives is not a necessary result of the or health care professionals or even to hire any employee who is not selected or controlled by or his company unlike most exempt_organizations who deal with different entities to purchase goods and services foundation purchased all services from supervised by even their only employee was selected from and and their consultant was interviewed and selected by all supplies and mailing lists were purchased by purchase records were not supplied to the examiner as that it incurred the any of the actual costs it charged foundation yet even could not prove foundation’s relationship with of hawaii foundation purchases virtually everything it needs to operate from is similar to the structure that described in est foundation’s ability to remove itself from the management and oversight is severely impaired if foundation wanted to remove management and education program and its permanent facility pincitexx until recently during the examination in fact shortly after stepped down from officer to volunteer of foundation it filed for bankruptcy as in est of hawaii foundation is totally dependent on one for-profit organization for its operation contributions it would lose its funding lose its business office from foundation is unlike that described in revrul_70_186 1970_1_cb_128 because any private benefits derived by and his business actually do reduce any public benefits flowing from the organization's operations the exclusive contract with and the control of the founder has the effect of transferring to organizations and his business a benefit intended for actual c exempt form 886-acrev department of the treasury - internal_revenue_service page -35- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year periods ending december 20xx and december 20xx despite persistent claims that and contract terms are no greater than fair_market_value foundation was unable to provide any evidence of comparable cost for similar services or that the arrangement with was arrived at in a manner that was economically fair to foundation was chosen in a competitive bidding process further no evidence supports that with his business to the contrary his signature is on the contract registered with the state in year 20xx removed himself from the initial contract here the contract was made with an insider and caused the organization to enter into a transaction that is economically detrimental to the exempt_organization and good for the insider and this becomes an inurement issue rev_rul c b the situation is similar to example of sec_1_501_c_3_-1 where foundation’s arrangements of its primary activity is fundraising and telemarketing cause foundation to be operated for the benefit of is regardless of whether the contracted payments from foundation to reasonable and as in example this and are all financial activities were performed through including collection accounting and deposit of donations - telemarketers and staff no evidence supports that either named director added by influence or exercised any oversight no evidence supports that they championed the best interests of any charitable activity rather one made his living by selling telemarketing supplies and services and the other made her career in fundraising had any foundation has failed to provide specific information or safeguards regarding its selection of or its oversight or control_of its cancer project internal - controls were virtually absent the founder was in control of the lucrative income from the organization he founded and of the expenses he could charge for his fundraising services the books_and_records were kept at office under the control of and his employees all checks are signed solely by and records shows only the fundraiser contact as signed by efforts and were processed and deposited by an account controlled by foundation paid whatever - charged no questions asked all contributions were received through have expenditure authority and identify these foundation registrations are employee into a bank form 886-aev page -36- department of the treasury - internal_revenue_service form_8 a department of the treasury - internal_revenue_service explanation of items name of taxpayer schedule no or exhibit year periods ending december 20xx and december 20xx foundation’s true purpose like the court found in the american campaign academy's case was to benefit private interests by providing them with a captive client to increase revenue the organization has the burden_of_proof to establish that it is not operated for the benefit private interests in order to meet the requirements of reg c -1 d ii it has not proven this on the contrary the facts above support that the organization was organized and operated for just that conclusion foundation is not an organization described in sec_501 because it is not operated exclusively for exempt purposes first foundation is not operated exclusively for exempt purposes because its net_earnings inured to the benefit of private shareholders or individuals by paying for the costs of one of foundation provided an impermissible benefit to the founder and president's telemarketing company workers _second foundation is not operated exclusively for exempt purposes because it failed to show that it serves a public rather than a private interest and specifically that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests instead foundation’s activities are oriented to its founder’s benefit rather than to the general_public here the entire enterprise is carried on in such a manner that the for-profit organization owned by the founder substantially benefits from the operation of foundation for the foregoing reasons foundation is not an organization described in sec_501 and revocation of its exempt status is proposed effective january 20xx forms returns should be filed for the tax periods ending on or after january 20xx informational note an corporate organization whose tax-exempt status is revoked is brought current on its filing and tax_liabilities by transferring the forms data to converted forms and filing the forms irm describes taxable contributions this notes that gifts acquired by misrepresentation or fraud is included in gross_income of the recipient form 886-acrev page -37- department of the treasury - internal_revenue_service


department of the treasury internal_revenue_service washington d c date number cc el gl br3 release date gl-810426-98 uilc memorandum for perry t foster assistant regional_counsel gl from lawrence h schattner chief branch general litigation subject - counsel approval under sec_7429 this responds to an undated memorandum to you from district_counsel southern california this document is not to be cited as precedent issue whether there is a conflict between irm and sec_7429 conclusion there is no conflict between irm and sec_7429 the approval of counsel is not required under sec_7429 when the service makes a levy based upon a finding of jeopardy without giving the taxpayer a new warning that enforcement action may take place and such levy occurs more than days after the last notice_of_intent_to_levy was issued facts district_counsel is concerned that new irm may be in conflict with sec_7429 this section requires the approval of counsel for all jeopardy and termination assessments and for levies made less than days after notice_and_demand for payment the irm contains a requirement for giving another warning when the last notice_of_intent_to_levy is more than days old an exception to this requirement of providing another warning of enforcement action is when collection of the tax is in jeopardy district_counsel argues that the irm does not require counsel approval where there is a finding of jeopardy and a levy is made more than days after a notice_of_intent_to_levy is served without sending another warning letter district_counsel believes that not requiring counsel approval in writing under this exception may be viewed as an attempt to circumvent the statutory requirement that counsel approve jeopardy levies analysis sec_7429 as amended by section of rra provides in part as follows no assessment may be made under sec_6851 sec_6852 sec_6861 or sec_6862 and no levy may be made under sec_6331 less than days after notice_and_demand for such payment is made unless the chief_counsel for the internal_revenue_service or such counsel’s delegate personally approves in writing such assessment or levy irm timeliness of notice provides in part as follows the purpose of the notice_of_intent_to_levy described is to warn the taxpayer that continued failure to respond can be expected to result in enforcement however when a long time passes after the notice is issued and there has not been enforcement the notice loses its effectiveness as a warning if a notice_of_intent_to_levy is over days old it is no longer timely at this point the taxpayer will get a new warning of enforcement action before a notice_of_levy is issued a this warning must be documented in the case file it may be given orally in person or by phone that there is a deadline not necessarily thirty days after which there will be enforcement or given in writing if the taxpayer can not be contacted exception collection is in jeopardy there is jeopardy only if one of the conditions exists that would allow a jeopardy_assessment see policy statement the group the memorandum from district_counsel refers to an earlier revision dated the latest revision makes it clear that only those jeopardy situations described in and require counsel’s approval manager and the next level manager must approve the jeopardy_levy see and to determine if counsel’s approval is required the taxpayer can discuss the levy with the group manager the taxpayer_advocate and the appeals officer sec_7429 on its face only requires that counsel approve jeopardy and termination assessments and levies made less than days after notice_and_demand is made however a levy made more than days after notice_and_demand is made but less than days after notice_of_intent_to_levy has been issued based on a finding of jeopardy under sec_6331 is also subject_to the requirements of sec_7429 we are not sure why congress apparently failed to recognize the distinction between the 10-day notice_and_demand period referred to in sec_6331 and the 30-day notice_of_intent_to_levy period referred to in sec_6331 we note that the same language appears in the earlier version of sec_7429 however the service has always treated a levy made more than days after notice_and_demand is made but less than days after notice_of_intent_to_levy as being a levy for which counsel approval was required moreover although this levy is not technically subject_to the requirement in sec_7429 as amended by rra the irm makes it clear that a levy made more than days after notice_and_demand but less than days after notice_of_intent_to_levy is a levy which requires counsel approval in writing furthermore sec_301_7429-1 takes the position that the taxpayer is entitled to notice and judicial and administrative review of a levy made less than days after the notice required by sec_6331 sec_7429 does not require the approval of counsel in every case where the service has determined that collection of tax is in jeopardy for instance sec_6331 no levy on appearance date of summons and sec_6331 congress and district_counsel seem to confuse notice_and_demand and notice_of_intent_to_levy sec_6303 requires issuance of notice_and_demand within days after an assessment is made sec_6331 requires a notice_of_intent_to_levy be given to the taxpayer at least days before the levy is made irm lists the circumstances under which a jeopardy_levy can occur without a jeopardy_assessment after tax is assessed but before the notice_and_demand is issued after the notice_and_demand is issued but before ten days have passed after the ten day notice_and_demand period ends but before the thirty day notice_of_intent_to_levy sec_6331 and notice of a right to a hearing sec_6330 have been issued or after the notice_of_intent_to_levy and notice of a right to a hearing have been issued but before the thirty days have passed irm restates the requirement in sec_7429 that counsel approve in writing jeopardy levies described in sub sec_3_1 no levy while certain offers are pending or installment_agreement is pending or in effect both contain exceptions for levying when the service finds that collection is in jeopardy in these situations the notice_and_demand for payment and notice_of_intent_to_levy would ordinarily have been sent more than days previously and in some cases more than days in those situations the approval of counsel would not be required under sec_7429 under the regulation or under the service’s own guidelines because the levy would occur more than days after notice_and_demand for payment and more than days after notice_of_intent_to_levy was given prior to its amendment by rra sec_7429 already contained the reference to levies made less than days after notice_and_demand for payment the only change brought about by rra is the requirement that counsel approve in writing such levies it is our position that a taxpayer would not be entitled to judicial review of a levy made more than days after notice_and_demand for payment and more than days after notice_of_intent_to_levy without the approval of counsel where the service made a finding that collection of tax was in jeopardy our position is consistent with judicial decisions on this point see vonderheide v united_states aftr 2d s d ohio - taxpayer not entitled to judicial review under sec_7429 where levy was made more than days after notice_and_demand for payment 26_f3d_1139 d c cir - sec_7429 does not confer jurisdiction to the tax_court to review all levies made while a petition is pending but only jeopardy levies made under sec_6331 less than days after notice_and_demand payment is made it is our position however that under sec_301_7429-1 a taxpayer is entitled to judicial review of a levy made less than days after notice_of_intent_to_levy the day period after which a warning of enforcement action is provided for under irm is a self-imposed administrative requirement there is no statutory requirement that a taxpayer be given a new notice_of_intent_to_levy after days nor do the regulations require a new notice once a notice_of_intent_to_levy is issued complying with the requirements of sec_6331 and sec_30 days has expired a levy may be issued without a finding of jeopardy under sec_6331 and the levy is not subject_to the requirements of sec_7429 the warning provided in the irm after days while it provides in essence the same information as a notice_of_intent_to_levy is not intended as a substitute for the notice requirement in sec_6331 instead the service has decided to give such additional warnings as a matter of good business practices and these warnings should not be construed as triggering statutory obligations under sec_7429 while the service has decided not to issue these warnings if jeopardy exists and labels a levy served under these circumstances as a jeopardy_levy it is clear that these so-called jeopardy levies are not the same jeopardy levies subject_to the requirements of sec_7429 if the service has otherwise satisfied the time periods specified in sec_6330 sec_6331 and sec_6331 before levying counsel’s approval is not required since a levy made after those time periods would not be made less than days after notice_and_demand for payment and less than days after notice_of_intent_to_levy as district_counsel noted counsel has always reviewed and approved all jeopardy and termination assessments and jeopardy levies described in sec_6331 and sec_6331 although we were not required to do so by law when requested to do so counsel should continue to review and approve jeopardy and termination assessments and jeopardy levies under the aforementioned sections however counsel approval of levies made more than days after notice_of_intent_to_levy should not be viewed as being required by sec_7429 and the taxpayer would not be entitled to judicial or administrative review of such levies under sec_7429 or the regulations if you have any questions please call me at