internal-revenue setvice appeals_office department of the treasury taxpayer_identification_number number release date date date certified mail dear ad person to contact employee id ne contact hours tax period s ended uil ‘this is a final adverse determination regarding your exempt status under sec_501 of the internal_revenue_code the code it is determined that your qualification for exemption from federal income ‘tax under sec_501 of the code is revoked effective date the tevocation of your exempt status was made for the following reason s you are not operated exclusively for exempt purposes within the meaning of internal_revenue_code sec_501 and sec_1_501_c_3_-1 you do not engage primarily in activities that accomplish one or more of the exempt purposes specified in internal_revenue_code sec_501 c you are operated for the primary purpose of carrying on unrelated commercial activities through your taxable subsidiaries and disregarded entities which is not an exempt_purpose contributions to your organization are not deductible under sec_170 of the code you are required to file federal_income_tax returns on forms for the tax periods stated in the heading of this letter and for all tax years thereafter file your return with the appropriate internal_revenue_service center per the instructions of the return for further instructions forms and information please visit www irs gov processing of income_tax returns and assessments of any taxes due will not be delayed should a petition for declaratory_judgment be filed under sec_7428 of the code if you decide to contest this determination you may file an action for declaratory_judgment under the provisions of sec_7428 of the code in one of the following three venues united_states tax_court the united_states court of federal claims or the united_states district_court for the district of columbia a petition or complaint in one of these three courts must be filed within days from the date this determination_letter was mailed to you please contact the clerk of the appropriate court for rules for filing petitions for declaratory_judgment to secure a petition form from the united_states tax_court write to the united_states tax_court second street n w washington d c see also publication you also have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united s that may not have been reso’ tates court the taxpayer_advocate can however see that a tax matters lved through normal channels get prompt and proper handling if you want taxpayer_advocate assistance please contact the taxpayer_advocate for the irs office that issued this letter you may call toll-free for the taxpayer_advocate or visit www irs gov advocate for more information if yoil have any questions please contact the person whose name and telephone number are shown in - the heading of this letter _ sincerely yours appeals team manager enclosure publication ce department of the treasury internal_revenue_service government eanities division _ org address east 7th street suite mc 4900stp saint paul mn date0 taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax - certified mail - return receipt requested dean 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 fi nal 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 publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice catalog number 34809f letter 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 shail 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 offi cials 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 ina 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 - 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 feed to contact you if you write please provide a telephone number and thank you for your cooperation enclosures publication publication report of examination sincerely nanette m downing director eo examinations letter catalog number 34809f form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended org oo 20xx12 20xx12 20xx12 xx - date county - county university - university - legend org - organization name state - state district website cfo - cfo director - director capitol - capitol school - school through ra-24 - through ra companies co-1 through co-74 - as through village - village revenue_agent - revenue_agent dir-1 through dir-12 - through dir chairman chairman bay - bay ra-1 address - address program -- program railway - railway highway - highway manager - manager founder founder country - country river - river - founder-1 city - city district - website - cpa - cpa founder -1 a ten issue whether the org’s exempt status under ilr c sec_501 should be revoked because it is not operated exclusively for exempt purposes facts background the org org was incorporated under the provisions of the state statutes and in particular under chapter - state nonstock corporation law on march 19xx in a determination_letter dated february 19xx org was determined to be exempt from federal_income_tax as an organization described in sec_501 and further defined as not being a private_foundation within the meaning of sec_509 of the code as an organization described in sec_509 and sec_170 a ii as a private school the org office is located at address city state the organization’ s incorporator is dir-1 esq in its articles of incorporation org stated it is organized exclusively for charitable educational scientific ot religious purposes within the meaning of sec_1 internal_revenue_code so1 ens of the the organization’s founder is founder also known as founder who recently legally changed his name to founder according to an article dated october 20xx in the co-1 gave some background of the president of org according to court documents that were part of his legal name change to founder in 19xx he was born founder on april 19xx in the village of district of district state of city state in the petition for a name change filed in county circuit_court founder described himself as a minister and pastor in a religious group know as yr _ form 886-a rev department of the treasury - internal_revenue_service page - form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended org 20xx12 20xxk12 20xx12 founder came to the united_states some time in the 19xx’s and has told followers that he studied nuclear engineering at university he has seldom been seen publicly in county or the town of town his last known public appearance was in 19xx at a town of town planning and zoning committee meeting while the property at address is called founder’s home he is believed to actually live somewhere on the east coast the town of town has been the home of’ for years but a growing number of property purchases i in the last four years has made the group’s leader a prominent figure i ina community that knows nearly nothing ‘about him org uses a portion of founder’s home as its office during the revenue agents tour august 20xx of the facility org’s records were in complete disarray no records filed in cabinets per dir-2 org is not charged rent for use of house however it is very evident that members of the religious group are residing at the residence org states in its form_1023 part ii line past present and planned activities are as follows the purpose of the org is to provide the american system of education to country a land that has been dominated by the country method for centuries we feel that our american system is the best in the world we propose to introduce and influence the youth of country to our way of education we propose sto demonstrate to the young that the american education system is definitely better and superior to the country method thousands of country student’s desire to study abroad but most of them lack a good educational foundation to enter american universities our aim is not to be a stepping stone for students to go abroad but rather to provide the same educational experience right in their own land students will be confronted with the same demand put forth in the american system which has proven to produce productive citizens these enlightened graduates of our institute can raise up their nation out of - poverty and neglect to a place of honor in the advanced technological modern world in part ii of the form_1023 as filed org indicates that its sole support will come from donations -and contributions solicited from the general_public in 20xx and 20xx per form_990 ninety- nine percent of revenue was derived from the operation of wholly owned disregarded entities form 886-a rev department of the treasury - internal_revenue_service page -2- a fe orm name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended org 20xx12 20kx12 20xx12 change state of corporate status - state to state org filed new articles with the secretary of state of state as a non-stock corporation on february 20xx the third article states the purpose of the corporation is to engage in any igwful act or activity for which corporations may be organized under the general corporation law of state the corporation is organized exclusively for the furtherance and advancement of charitable educational and scientific purposes including for such purposes the making of distributions to organizations that qualify as exempt_organizations within the meaning of sec_501 of the internal_revenue_code or corresponding section of any future federal tax code org filed with the state of state certification of conversion from a foreign_corporation toa state corporation pursuant to section of the corporations act february 20xx o n y a _ the jurisdiction where the foreign_corporation first formed is state the jurisdiction immediately prior to filing this certificate is state the date the foreign_corporation first formed march 19xx the name of the foreign_corporation immediately prior to filing this certificate is org - the‘name of the state corporation as set forth in the certificate of incorporation is org org on february 20xx filed certificate of conversion with the state of state department of financial institutions which was received on february 20xx prior to conversion org was registered under state’s nonstock corporation statute chapter the plan of conversion _ was approved on february 20xx by the state of state based on records obtained from the secretary of state of state on february 20xx org is - duly incorporated under the laws of the state of state is in good standing and has a legal corporate existence additionally it was found that org used the same determination_letter which granted it tax-exempt status as of february 19xx even though they had reincorporated in another state org has retained its employer_identification_number ein and name along with its assets and liabilities foreign nonstock corporation - certificate of authority application -- org filed with the state - of state authorizing the organization to transact business in the state effective march 20xx school in country fortn 886-a rev pages -3- department of the treasury - internal_revenue_service os - form om 886a name of taxpayer department of the treasury - internal_revenue_service _ schedule no or exhibit year period explanation of items _ _ org ao _ ended 20xx12 20xx12 20xx12 since the inception of the organization in 19xx org has been providing financial assistance to a school in country org the campus is located near the village of village not far from the river that flows to the bay village is about kms from capitol the capital of city and about km from railray a main railway center org provided photos and literature substantiating the existence and operation of the school org’s administrative main office in countryis located in country dist country based on fact sheet provided by org the institute is affiliated with co-2 for science with seats and with university for a degree course with seats courses include - english m i l village local language physics chemistry mathematics biology geology and electronics based on interviews conducted and records reviewed the institute has an enrollment of --80 students - students the school employs - faculty and staff classes held monday thru saturday from 00am to 30pm org provides some scholarships to students based on educational merit additionally org provides hostel facilities to a limited number of students selection for hostel accommodation depends upon the distance a student must travel to the institute percentage of marks and income of parents review of the form_990 showed the following financial support for the stated primary purpose of operating a school in country during a seven-year period org reported gross revenue of dollar_figure per ‘form 990’s and profit and loss statements but only contributed dollar_figure toward the operations of tthe school i in n country p per part iii of form_990 and org financial records _ year total revenue per form_990 school eon part iii form_990 - 19xx 20xx 20xx 20xx 20xx__ 20xx __ 20xx total no return was filed for 0xk information secured from cpa cpa of co-3 co-3 workpapers and profit loss statements provided by org proposed school in the town of town near county state fotm 886-a rev - department of the treasury - intemal revenue service page -4- or department of the treasury intemal revenue service name of taxpayer explanation of items orm 886a org schedule no or exhibit year period ended 20xx12 20xk12 20xk12 per minutes provided by org on march 20xx the board_of directors of org held a special meeting to determine the merits of amending the non-profit mission statement of the corporation to include the mission to build a science and technology school on the corporation’s property in county the board approved amending mission statement however no records v were provided to the irs indicating this change in focus operations per minutes provided by org on march 20xx the board held a meeting and discussed the status of development for the school in the town of town the board minutes state that land had been purchased long ago per minutes provided by org on may 20xx the board discussed the status of the school and rezoning of property where school is planned to be located on november 20xx the board indicates that the organization does not have enough funding to’ hire‘an architectural firm yet on a board meeting held on december 20xx the board decided to purchase a gas station in city state for dollar_figure to increase their financial portfolio per-forms for 19xx through 20xx no funds have been set_aside to build this school almost all business operational proceeds expended to leverage the purchase of additional property -ie land rental property and businesses operated by org through wholly owned disregarded limited_liability companies and corporations and very little goes toward the school i in country i its primary tax-exempt purpose based on news articles org has discussed for a long time the development of a school i in the county area yet it has not progressed further than discussion and some planning as the following atticle suggests ten years have past and little has been done to show that a school will actually be built i in the town of town - in article from the co-1 dated october 20xx contained the following _ plans for an international boarding school in the town of town were first detailed during three meetings of the town zoning and planning committee in 19xx when founder requested a rezoning of his residential property on address according to the minutes of those meetings representatives of founder told -- ‘the committee that the ultimate plan was for a k-12 facility that would be - housed in three buildings on acres of property owned by founder oe they said the school would emphasize math science and engineering - with foreign languages to be added at some point - and would be the only one of its kind in the midwest form 886-a rev - page department of the treasury - internal_revenue_service oo orm 886a department of the treasury - intemal revenue service fe name of taxpayer 20xx12 20xxk12 explanation of items schedule no or exhibit year period ended 20xx12 org the school which would be strictly secular would cater to gifted students and be a non-profit venture representatives said there was a tremendous need for such a school fashioned like the prestigious east coast schools to be located in the midwest _ expectations were that the maximum number of students that could be - accommodated was big_number with employees on the staff sketches showed that the campus would stretch across highway to the south with a proposed skywalk to be built over the road two buildings were to be located on the south side one housing kindergarten through third grade and the other housing fourth through eighth grade a high school was to be located north of the highway the dimensions of the buildings were described as 200x200 feet town chairman said monday while reviewing the sketch that he recalled representatives saying there would also be dormitories located at the northern end of the property they are not shown on the sketch the committee tabled the matter twice before taking it up again in november 19xx at which time co-4 and air photo maps were presented showing approximate locations and sizes of buildings and driveway and sidewalk locations according to minutes from that meeting - the committee ultimately voted to recommend that the request for the zoning change be denied the following reasons were listed in the minutes not enough project information was provided the proposed project and reason for the zone change would have too great an impact on the township because of the large number of students and faculty ‘the zone change would be unfair to nearby residents because it would devalue their property _ the request includes too large an area for the amount of proposed construction the area is already zoned so that the project could take place with the issuance of a conditional use permit rather than a rezoning of the entire block of land _ according init planning committee e with any alternative proposal for the school ‘ the group has never returned to the zoning and form_886 kansan department of the treasury intemal revenue service page -6- form om be6f explanation of items department of the treasury - internal_revenue_service name of taxpayer schedule no or exhibit year period ended oper org 20xx12 20xx12 20xx12 ra-1 of co-5 said the consulting firm was approached by representatives of _ founder's group for advice about building a school he said the group - insinuated during one of its presentations before the committee that it was working with the consulting firm ‘ra-1 sent town officials a letter clarifying that situation we had no contact with them ra-1 told the leader in a recent interview we had a couple of discussions describing how you created a school so i wrote that letter to make sure the town board knew we had no professional or contractual relationship ra-i said the meetings were informal and held in a coffee shop and that epresentatives of the group asked questions such as what it might cost to - _ build a school and how it would be organized _ lthink they were just trying to tap our pool of knowledge and weren't _ intending to retain us ra-1 said they were researching and exploring think they were neophytes with a goal and purpose of trying to meet the long range ‘goal of some sort of science technology school although they were ' talking about a residential elementary_school which seemed to me highly impractical and they took a lot of notes he said i ra-1 said he doubted parents would send their children away toa residential school i in the second grade - the group has said it still plans to build the school and that commercial - properties it has purchased are intended to everttually fund its construction and operation failure to disclose required information on form_990 based on review of the forms from 19xx to 20xx org failed to disclose changes in their operations to the irs line of form_990 asks whether the organization has engaged in any activity not previously reported to the irs and if yes to attach a detailed description to the return org responded no to this question on each of the forms it filed for the tax years 20xx through 20xx cfo chief fiscal officer during 20xx 20xx signed the returns declaring that he had examined the returns and schedules for completeness and accuracy cfo resigned form 886-a rev page -7- department of the treasury - internal_revenue_service form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended org oo 20xx12 20xx12 20xk12 from org’s board_of directors on june 20xx x according to an affidavit he signed and filed i in county ‘circuit court on june 20xx on its application_for exemption form_1023 question part ii activities and operational information org indicated that its sole support would come from donations and contributions solicited from the public beginning late in 20xx and up through the present the majority of the funds raised by the organization were from various business operations and a very small amount from fundraising prior to 20xx the majority of funds raised by org were from contributions from org group members and construction services and some rental income org failed to disclose that it had disregarded entities on its forms for the tax years 20xx and 20xx org had at least limited_liability companies llc registered in state and state by 20xx although not all were operational form_990 part ix information regarding taxable _ subsidiaries and disregarded entities requires the disclosure of the names addresses and employer identification numbers ein of taxable subsidiaries and if the entity is a disregarded _ entity the organization is obligated to-indicate if the disregarded_entity is using the ein of the parent organization further the organization is required to disclose percentage of ownership nature of activities total income and end-of-year assets the failure to include this information is a material omission on the return org failed to disclose on its forms that it operated a fudge gift store gas stations a go-kart amusement park and a property investment_company which held rental property and land and a department store lastly based on cpa workpapers supplied by cpa of co-3 and provided by dir-1 to cpa on january 20xx reported loans from individuals of dollar_figure the following officers and board members provided ‘loans to org in 20kx included i in the loan amount from individuals loan amount _ officer board dir-3 - dir-2 dir-4 founder loan founder loan total line of form_990 requires the disclosure of loans from officers and board which was left blank for 20xx failure_to_file form_990 990t - demand letter based on review of irs records no form_990 or 990t has been filed for the tax period s ending december 20xx 20xx 20xx 20xx or 20xx further information secured from co-3 indicates that the form_990 for 20xx and 20xx have not been completed co-3 had - commenced work on the form_990 for 20xx but ceased when cpa firm had not been paid_by form 886-a rev department of the treasury - internal_revenue_service page -8- nee a form_8864 name of taxpayer explanation of items department of the treasury- intemal revenue service schedule no or exhibit year period ended i org 20xx12 20xx12 20xx12 org lastly co-3 had not received the necessary documents to prepare the f orm for 20xx and rescinded its power_of_attorney form_2848 representation of org on december 20xx irs received a letter sent by org ceo dir-2 the letter was dated december 20xx and addressed to director of exempt_organizations director and revenue_agent requesting additional time to file due to a number of extreme extenuating circumstances and diligently working on the preparation of the returns on j anuary 20xx manager responded to the letter dated december 20xx and received on december 20xx indicating that returns are past due including extensions for periods ending december 20xx through 20xx and need to be filed in order to retain tax-exempt status and subject org to additional penalties for failure_to_file additionally org was advised to work with revenue_agent to resolve the delinquent_return filings on j uly 20xx revenue_agent sent a letter to org requesting the filing of form_990 and form 990-t for periods ending december 20xx through december 20xx within days this letter was sent to serve a notice_and_demand as required by sec_6652 of the internal_revenue_code failure_to_file the form_990 and 990-t or respond in writing will result in the termination of org tax-exempt status for failure to observe the conditions required for continuation of under tax-exempt status under sec_501 and sec_501 additionally org was made aware of possible penalties for failure_to_file and the person responsible for filing the returns _ - on august 20xx revenue_agent received a letter dated august 20xx from co-6 who represent org in‘the chapter bankruptcy proceedings part of the letter states please be advised that s ls t and co-7 collectively the companies filed their bankruptcy petitions pursuant to chapter of the united_states bankruptcy code in the united_states bankruptcy court for the district of state on march 20xx additionally ra-2 states any inquires or requests for information regarding the companies now that they areina bankruptcy proceedings needs to be done through proper channels of the bankruptcy court on august 20xx revenue_agent discussed by telephone with org dir-1 that bankruptcy proceedings did not apply to an audit by irs pertaining to the notice of tax_deficiency or demand for tax returns on september revenue_agent received a response from org regarding the failure_to_file the tax returns for years 20xx through 20xx dir-2 ceo declared that due to chapter bankruptcy proceedings were required to file a motion and seek permission of the court to retain an accounting firm to prepare the request returns org requested an additional days to retain an accountant to prepare the returns and obtain permission from the courts form 886-a rev page -9- department of the treasury - internal_revenue_service a form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended - org sp 20xx12 20xx12 20xx12 over six months has passed and no form_990 or 990-t has been filed for periods ending december 20xx through 20xx per irs records list of known org controlled limited_liability companies and corporations controlled limited_liability companies - disregarded entities - - co-8 20xx state stil active co-9 20xx state terminated - xx 20xx state forelgn llc 20xx bankruptcy chapter state 20xx co-10 120xx state terminated - x 20xx state foreign llc 20xx state llc 20xx bankruptcy chapter - state 20xx co-11 20xx state terminated - 0290020xk state foreign llc state llc 20xx bankruptcy chapter - state 20xx state llc 20xx co-12 51e 20xx state terminated - xx 20xx state foreign corp 20xx state llc 20xx co 120xx state terminated - kx 20xx state foreign corp 20xx state llc 20xx bankruptcy chapter - state 20xx - co-14 71120xx admin dissolved - xx 20xx - co 20xx terminated - x120xx state 20xx state llc 20xx bankruptcy chapter - state 20xx co- 20xx state terminated - 20xx ' state foreign llc state llc 20xx co-17 er13r20xx admin dissolved - xx 20xx co-18 20xx state - currently delinquent co-19 s 20xx state - currently delinquent co-20 s 20xx state currently delinquent ws ‘controlled corporations - co-7 10w20xx state ein bankruptcy chapter - state 20xx co-21 20xx state ein co-22 20xx state ein co-23 20xx state ein co-24 tam 7i20xx state ein purchase of businesses rental property and land by org and its wholly owned related entities on ji anvary 20xx org purchased a commercial building for dollar_figure at address in county through a land_contract which it ultimately intends to lease out toa fabric business during the form 886-a rev page -10- department of the treasury - internal_revenue_service re form_8864 name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended org 20xx12 20x x12 20x12 - tour on august 20xx agent noted that some renovations had been done on building but was not complete and currently is not operational on february 20xx org purchased a vacant residential lot for dollar_figure for investment purposes as well-as a restaurant building for dollar_figure at address in county which has a long-term_lease with co-25 restaurant the owner of the co-25 franchise and org who leased the property could not reach an agreement and the co-25 closed operations on august 20xx based on information provided by org on its profit and loss statement detail and through cpa cpa org received dollar_figure in-rental income from the property i in both 20xx and 20xx the building is currently vacant and personal_property such as signage and equipment was removed from the building by franchise owner of co-25 this now vacant building is causing a drain on cash flowoforg charitable assets - on april 20xx org purchased a residence at address for dollar_figure that is adjacent to the land on which org indicated that it intends to build the school org has stated this property will -_ ultimately be used to house a school faculty or staff but in the meantime the organization hopes to lease it out for extra revenue dir-2 ceo of org has stated that no members who work in their businesses reside at this residence based on org records reviewed and information org provided to the bankruptcy court no record of rental income being derived from property on the report dated march 20xx schedule a - real_property org lists the value at dollar_figure and a _ secured claim of dollar_figure on june 20xx org purchased a commercial building located at address in county for dollar_figureon a land_contract the property seller continued to lease the building as a co-26 based on form 990t for 20xkx org received dollar_figure i in rental income from property map ' org set up a subsidiary - co-12 in may 20xx for the purpose of owning and operating the amusement park and go-kart racing facility it subsequently purchased in june 20xx on a land_contract for dollar_figure the intention per org is that this facility will be able to generate substantial revenue for the school in the future co-27 was typically open from may through october and is located at address just outside the city of county on the east side the park during 20xx 20xx as stated by org was ‘open daily from 00am to 00pm managed and operated by volunteers org has attempted to extend hours to 00pm or 00pm on weekends the facility includes a video arcade refreshments water bumper boats and outdoor heated pool it also includes an18-hole mini-golf and four go-kart courses per interview with dir-2 the amusement park staff included six workers during week and twelve on the weekends no records provided to substantiate volunteer labor or records of scheduling staff form 886-a rev page -11- department of the treasury - internal_revenue_service form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended org 20xx12 20xx12 20xx12 org has renovated the amusement park into a co-28 co-28 a world-class go-kart and motorcycle track outside of county the racetrack is the newest longest and best of all tracks in the co-29 based on their website for racetrack the co-30 held its annual race at co-28 for the third consecutive year this event brings people from all over the country and has been supported by events such as a car show a circus and a celebrity race benefiting the co-31 and featuring retired co-32 players ra-3 and ra-4 and snowco-10 champion racer ra-5 information about the racetrack can be found at website additionally information about the _ yacetrack was found in 20xx at www website and website co-28 isa paved road course for karts located just east of county the raceway was designed by ra-6 who is vice president of the co-29 road to say that what was created isa masterpiéce i is an understatement the raceway is a tremendous challenge from the high-banked _ comers to the big sweeper to the slightly off-camber turns to the big_number straight-a-way down - two deep ravines this track will leave the driver breathless here’s what racers have to say about this phenomenal track after the completion of the raceway ra-6 was quoted as saying there is not another track like this in the whole country - it's unparalleled it's a world class co-33 track said co-33 contender ra-8 of co-28 it’s a mile long 24-turn track team owner and co-33 racer ra-7 everyone told me how great the track and facilities were but it went beyond my expectations there are elevation changes and in some areas spectators should be able to see _ nearly the entire track we're lucky to have a track like this as part of the series as visitors check out not only the races but also the program they will suit you up give you a kart to drive ane you will experience the ultimate thrill call for more information address city state per cpa cpa’s workpapers org reported sales from the co-27 of dollar_figure for 20xx and dollar_figure for 20xx the balance_sheet provided by org to cpa indicates capital improvements of dollar_figure subsequent additional capital improvements niade since 20xx income generated from this disregarded_entity not used for charitable purposes there is no reliance that these sales figures are accurate as no sales records provided or any break down in types of revenue generated by the various activities within the amusement park the bank_deposits for the amusement park account do not match the reported income for 20xx the bank_deposits show dollar_figure and the reported sales are dollar_figure based on bankruptcy court transcript of proceedings on september 20xx dir-2 testified that not all monies from gate receipts are deposited in bank accounts rather cash is put in a safe at one of its gas stations located at address in county per transcript the bank statements had a discrepancy i in excess of dollar_figurecompared with gate receipts in 20xx based on org profit and loss statement co-27 reported rental and sales revenue of dollar_figure _ in 20xx org spent dollar_figureon various forms of advertising the amusement park and racetrack ‘form 886-a rev department of the treasury - internal_revenue_service page - form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service org schedule no or exhibit year period ended 20xx12 20xk12 20xx12 additionally based on 20xx detail of profit and loss statement org paid dollar_figure in temporary help at the co-28 namely ra-9 who managed the racetrack org expended in excess of dollar_figure dollars on building property improvements and equipment purchases mainly during 20xx and 20xx in 20xx org formed co-7 a state corporation to hold title to property at address city state based on information provided by org on march 20xx in bankruptcy court it showed ownership in asset located at address city state known as co-27 the property is given a _ value by org of dollar_figure a secured claim of dollar_figure co-7 collects rent through a lease agreement and uses proceeds to reduce outstanding debt on property co-27 is not listed as a debtor entity but the operating entity of racetrack and amusement park on jj uly 20xx a sec_5 part of bankruptcy proceedings proposed finding of facts and conclusions of co-38 of co-34 co-35 co-36 and co-37 included the testimony of ra-10 employed by co-39 expert for the lenders ra-10 testified that org and related entities provided sales figures relating to the operation of the amusement park and racetrack the following figures were provided - 20xk 20xx 20kx - - - dollar_figure dollar_figure dollar_figure on une 20xx org organized a subsidiary co-40 to be a holding_company for additional ‘investment properties to date this entity is not active and holds no assets the entity administratively dissolved on november 20xx v was - in july 20xx org organized four additional entities co-10 to be the operating c company for the-station at address co-12 - to be the operating company for the gift and fudge store co-13 _ to be the holding_company for additional investment ptoperties purchased in the county area and co-14 - which was intended-to handle the construction and remodeling projects for org’s various projects on october 20xx org approved a purchase by co-13 of commercial lot for dollar_figure at address in county and a dollar_figure for a residence at address the lot will be used by the tenant at address and is an additional school investment on november 20xx co-13 also purchased a small commercial office building for investment purposes for dollar_figure at address this property is leased and org reported rental income of dollar_figure for 20xx and dollar_figurei in 20xx on january 20xx org purchased property at address in county for dollar_figure with a mortgage at - co-41 of dollar_figure listing co-13 as buyer using the ein of org also on january 20xx org purchased a vacant lot for dollar_figure at address in county fonn 886-a revt-68 page -13- department of the treasuty - internal revenue service’ form 886a name of taxpayer explanation of items _ department of the treasury - internal_revenue_service schedule no or exhibit year period ended org 20xx12 20xx12 20xx12 on june 20xx org purchased an eight unit rental property for dollar_figure at address in county with a loan from co-41 for dollar_figure org reported rental income received from this property in the amount of dollar_figure for 20xx and dollar_figure for 20xx property is not listed as owned by org or related entities per bankruptcy summary schedules or any record of revenues are provided on july 20xx org purchase land building for dollar_figure at address in county with a mortgage from ‘co-41 of dollar_figuredollar_figure also on july 20xx org purchased a rental apartment building at address in county for dollar_figuredollar_figurein a land_contract with co-42 org reported rental income received from this property of dollar_figuredollar_figure for 20xx on october 20xx org purchased a single-family residence for dollar_figuredollar_figure at address in county i in a land_contract with co-45 on october 20xx org closed on the purchase of vacant land next to hotel co-43 for dollar_figuredollar_figure at address i in county i in a land_contract with co-44 fo on november 20xx org purchased a vacant land at address in county for dollar_figureland contract with co-46 on november 20xx org through co-45 purchased land for dollar_figuredollar_figurein a land_contract with co-47 on november 20xx org through co-45 purchased building on a land_contract from co-46 for dollar_figuredollar_figure at address in county rented to co-48 in 20xx org reported rental income of dollar_figuredollar_figure on the property that is debt financed org on march 20xx reported commercial rental income on bankruptcy report of dollar_figuredollar_figure for 20xx dollar_figuredollar_figure for 20xx on december 20xx org through co-45 purchased a lake home for dollar_figure at address in county ona land_contract with co-44 during bankruptcy proceedings on september 20xx dir-2 stated that this property is used for overflow lodging i in situations in which patrons would stay long term at one of org hotels such as big racing events the last time per dir-1 the property was rented in 20xx for a large race in which they rent out multiple properties for overflow of ‘hotels this property was not included in the chapter 11bankruptcy filing by org and related entities gas stations store co-49 was purchased in july 20xx in county state the gas station and convenience co-49 at address in county is open to the public hours and year round - org states that at present time the station is managed and run by volunteers the gas station contains a small convenience store co-50 bus stop and a co-51 wire transmitter currently org has two additional gas stations in the county area located at address and address these gas stations are operated under co-10 reported sales from co-10 including co-50 co-51 lottery and atm were dollar_figure for 20xx and dollar_figure for 20xx only one gas station was operational in 20xx and 20xx the information below was obtained from the website website form_8 86-a rev page - department of the treasury internal_revenue_service form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended org 20x12 20xx12 20xx12 the co-52 gas station offers a wide variety of services and is open hours not only that they provide free coffee soda and cappuccino for the town's _ residents this is much appreciated by many customers especially those from low-income areas who often come in with change to make their purchases take a look at these great services at our main location gas -- cigarettes -- gourmet snack foods - coffee --- cappuccino -- hot chocolate -- soda large grocery selection -- popcorn specialty foods such as fudge and caramels great lunch and snack items -- nacho's sandwiches pizza and more ib bags of ice for only unique gifts ideas beanie babies ups fed ex -- dhl us postal service drop off location _ we offer copy print fax services there's no in town co-51 postage stamps endless in-store discounts for senior citizens souvenirs of the green bay packers and the county state area shuttle service -- inquire about rates and destinations lottery on december 20xx org organized co-11 which it later registered to do business in the ‘state of state the purpose of this entity was to hold ownership of a convenience store and gas station the organization was planning to purchase in city state for generation of revenue similar to that of the station operating in county state on january 20xx org purchased the city gas station for dollar_figure located at address and secured a loan through co-53 for dollar_figure per cpa records - gas station was not operational until 20xx based on org profit and loss statement for period ending december 20xx it recorded bross profit from this gas station of dollar_figure - on december 20xx org through co-11 purchased a gas station with a sales_price of dollar_figure ‘with a mortgage of dollar_figure through co- the gas station is located at address city state it was operational in 20xx based on org profit and loss statement for period ending december 20xx it recorded total income of dollar_figure on february 20xx org through cco-11 purchased a gas station at address city state with a sales_price of dollar_figure and a co-55 of dollar_figure with a mortgage through co-56 for dollar_figure and co-53 for dollar_figure for a form 886-a rev - department of the treasury - internal_revenue_service page - e form 886a name of taxpayer explanation of items department of the treasury - intemal revenue service schedule no or exhibit year period ended org 20kx12 20xx12 20xx12 total of dollar_figurein financing org reported income of dollar_figure for gas station operations and dollar_figure in income from co-55 operations based on detail of profit and loss statement co-55 had temporary help totaling dollar_figure from march through november of 20xx in ved org through co-11 purchased another gas station at address city state for dollar_figuredollar_figure no records provided by org to show date of purchase financing when operational or a profit and loss statement however based on records secured co-57 had delivered fuel to co-58 station for dollar_figure profit and loss statements s secured from org for 20xx from june through september in which no records of sales of fuel reflected on from 20xx through present org operated as many as seven gas stations three in the county state aréa and four in state the state gas stations were located in the city of city city city and co-58 all operated in direct competition with for-profit gas-stations four state gas stations were operational in 20xx there has been much litigation over the price org gas stations were charging customers in state and state suites were filed by competing gas stations and regulatory agencies in state and state these gas stations generated in excess of dollar_figure dollars in revenue in 20xx for org an atticle i in the cq-59 dated february 20xx states in part the following the state commerce department on thursday announced plans to fine a gas station oo chain dollar_figure for repeatedly selling gas below the state's legal minimum price the fine against co-10 of state is twice as large t as any imposed on a company since ' 20xx when the state established a formula based on wholesale prices fees and taxes to determine a daily floor for gas prices oo the price law was intended to prevent large oil companies from driving smaller _ a competitors out of business but some critics argue it fails to protect consumers according to the commerce department the midwest-owned stations in city co-58 and city sold gas below the minimum price on days in 20xx ' _ra-11 deputy commissioner of the department called the violations willful continuing and egregious and warrant a substantial penalty another article from the co-1 dated march 20xx contained the following co-10 of state has been ordered by the state department of commerce to pay a dollar_figuredollar_figure civil penalty for charging too little for gasoline at three stations in the state form 886-a rev page -16- department of the treasury - intemal revenue service - e department of the ‘treasury - intemal revenue service schedule no or exhibit explanation of items ‘name of taxpayer - year period - om 886a org ended 20xx12 20xx12 20xx12 _ the subsidiary of the org org was accused of violating the unlawful gasoline sales act enacted in 20xx which prohibits retailers in the state from offering gasoline for sale at a price below cost the record-indicates instances of below cost pricing and at least two failures to respond to the department’s requests for information stated a memorandum from department of commerce deputy commissioner ra-11 respondent’s violations are willful continuing and egregious and warrant a substantial penalty ra-11 wrote the record indicates that respondent’s below-cost gasoline sales have damaged competitors in city and co-58 causing the loss of as much as one third of their monthly sales ra-11 wrote the record further indicates that because respondents prices were so much lower than other retailers could ‘legally charge some customers concluded incorrectly that other retailers had _ been overcharging for gasoline org had an unfair competitive advantage in that it used its tax-exempt status which enabled it to charge lower gas prices to its customers this article also shows a continued pattern of being uncooperative using delay tactics including failure to respond to the commerce departments - request for documents and failure to respond ts to subpoena which are a violation of state statutes co-22 advertisements found on various websites and brochures for land stop by the co-22 fora sample of their delicious award-winning fudge their fudge is shipped all over the world and is made right at the store this store is in a historic building that was once a one-room schoolhouse take some time to browse their unique gift and home décor collections there is something in this store for everyone we have gifts ranging from wall paintings to native american souvenirs knick knacks and figurines made from pewter china crystal and more ‘they range in theme from sports to nature from teacher's gifts to special occasions and holidays we also have many stuffed animals and hard-to- find ty beanie babies other merchandise includes kitchen decor and blankets or wall hangings designed for family members address -address city state phone nea form 886-a revs- a department of the treasury- internal_revenue_service _ page -17- ae form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended org 20xx12 20xk12 20xx12 website -website hours of operation sunday-saturday 9am-9pm org in 20xx had also sold fudge and other items at various festivals throughout state and state and through internet sales based on financial records for co-22 expenses they expended - dollar_figure in 20xx and dollar_figure in 20xx on various forms of advertising such as radio tv internetand billboards co-22 per cpa adjusted trial balance reported revenue of dollar_figure for 20xx and dollar_figure for 20xx lastly during tour of facilities org ceo dir-2 stated they did not maintain inventory records - the co-60 on december 20xx org through co-45 purchased inventory building and land for dollar_figure through a land_contract with ra-12 location of property is at address in county org reported dollar_figure in gross_profit per profit loss statement for period ending december 20xx per bankruptcy summary provided by org they reported income of dollar_figure and rental income of dollar_figurein 20xx and for 20xx gross revenue of dollar_figure and rental income of dollar_figure no record of i inventory being maintained by org - the co-60 i is a downtown department store in county open from am to pm seven days a week in addition to its unique and wide variety of merchandise co-60 has the distinction of being the only downtown store with these hours this store attracts customers from state and beyond t to browse and purchase the unique items found nowhere else - website states the following website hil welcome to co-60 my name is ra-13 i work in the back receiving area in a minute i am going to give you a guided tour of our store but first let me tell you about the store we are located at address in county - state the building is three store fronts melded together to give a little over big_number square feet on the main floor it is a little-bit-of-everything store from antique hat pins to bathroom décor many visitors are impressed by the great gift selection especially those looking for the ‘unique and hard-to-find gifts - co-60 - this store has a wide variety of gift and home décor items with a - special focus on state thus wildlife and nature are a wonderful theme throughout this store if you only have time for one stop this is a store that comes highly recommended co-60 also provides unique gifs gift form 886-a rev s lo department of the treasury - internal_revenue_service page - ae form 886a ‘name of taxpayer explanation of items department of the treasury - internal_revenue_service -_ org schedule no or exhibit year period ended 20xx12 20xx12 20xx12 baskets and gift ideas as well as country style and co-60 home and cabin decor wall decor bathroom decor and more antiques and consignments - are also a large part of the merchandise it’s hard to walk away without making a purchase address address city state phone hours _ of operation sunday-saturday 9am-9pm purchase and operation of hotels on october 20xx org purchased a 46-unit hotel co-61 for dollar_figure at address in county the method of purchase was a land_contract with compounded monthly with initial loan amount of dollar_figuredollar_figure to be paid monthly at a rate of dollar_figuredollar_figure over months starting on december 20xx and ending august 20xx total payments per the terms of contract is amortization schedule will be dollar_figuredollar_figure with total interest of dollar_figure this co-61 is a franchise operation which advertised to the public similar to other hotels this property business was purchased through co-25 a disregarded_entity wholly-owned by org per cpa’s adjusted trial balance for 20xx org reported income for two-month period of dollar_figuredollar_figure per -dir-2 org volunteer members operate the hotel the hotel is open days a year in 20xx org reported dollar_figuredollar_figurein rental and use revenue per profit and loss statement additionally in 20xx org paid co-62 dollar_figuredollar_figure to operate the hotel per detail of profit and loss statement that contradicts the statement that all volunteers operate the hotel currently based on internet websites and newspaper articles org also owns another hotel in county the co-43 currently named co-43 located at address based on cpa cpas workpapers org purchased the hotel for dollar_figuredollar_figure on april 20xx with a down payment of dollar_figuredollar_figure in 20xx org reported gross rents of dollar_figureand sales of dollar_figure for total revenue of dollar_figure per profit and loss statement provided by org they paid co-62 in the memo section of the detail the payments were characterized as commissions payroll advance and advance for insurance many of the - payments made via a cashier check an excerpt from internet states that the restaurant has the best steaks in the midwest attracting diners from state state city and the city if you've never had pure black angus usda prime beef don't miss out on the dining experience of a lifetime their secret recipe meatloaf and mashed potatoes will have your mouth watering for more the hotel also includes a bar and indoor swimming pool information on both hotels can be located on many internet search sites for hotels these two hotels are competing with other for-profit hotels within county such as form 886-a rev ce department of the treasury - intemal revenue service page -19- - form 886a name of taxpayer explanation of items department of the ‘treasury - intemal revenue service p org schedule no or exhibit year perio ended 20kx12 20x12 20xx12 co-63 co-64 and co-65 the co-43 co-43 and co-61 of county advertise similar room rates and-amenities as other hotels in the area over the past few years the hotels have been embroiled in suites including unpaid real_estate and room taxes operating hotel and restaurant and selling alcohol without the necessary permits the table below shows the extent of org and related_entity purchases of land buildings and businesses during a six year period vacant purchase date - purchase property book cost address building or land business rental description org office - real_estate records __ address county state founder owned property - house farm house - land address town state ‘town state - address town state - address county state 20xx 20xx_ - address tibroxx warehouse xx _ xo jo - i xx _ co-25 description property book cost address real_estate record sec_28 20x x total 20xx purchase purchase - date 20xx 20x xx 20k x business rental vacant - building or land oe vacant vacant restaurant vacant future plan - high-end gift address address vacant building 20x address address x x x ix _ x a form 886-a reve page -20- department of the treasury - intemal revenué service form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended org 20xx12 20xx12 20xx12 20xx - total 20xx dollar_figure house wares 20xx total address - _ 20xx hxx 20xk kx 20xx address address address x xx bldg remodeled planned athletic club per restaurant gas station building - remodeled ‘ news center-- plan not finished _- vacant lot a - _ 20xx total - xk sdollar_figure address unknown unknown total 20xx purchase date description purchase business rental ‘vacant building - _ or land property book cost address real_estate records - _ ue x store per ra-14 int rate - vacant lot co-25 restaurant land_contract address county state planned fabric _ 20xx address address county state - triple net_lease restaurant closed august 20xx 20xx 20xkx co lease terminated address - house being renovated town state address co-66 store county state land_contract 20kx 20kx co-12 - land_contract -_ _ 20kx interest rate address ra-15 x xx xx xx - form 886-a revs page -21- department of the treasury - intemal revenue service vey form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended org 20xx12 20xx12 20xx12 20x ra-16 vacant lot an ae address county state 20x run-down house address _6 20kx a address rental property - county state purchase of lease x purchase purchase date property address business rental vacant building or land - - book cost real_estate records total - 20xx 20xxk address ‘ a - dollar_figureincluded in purchase_price description _ gas station operational 20xx currently rionoperational plan to rent oo _ x xx ae eight unit ‘ paved empty lot es 20xx address ‘county state property per ra- address county state address county state condominium et 20xx 20xx yo 20xx 20xx 20xk xxx eight unit apt building - land_contract co-42 eight unit apt building land_contract co-42 property 20kx 20xx address address county state address county state address single_family_residence - land a xx land building county state property address xx - oo oe ae x - x xx xx xx - form ‘886-a rev page -22- department of the treasury - internal_revenue_service a _ form 886a name of taxpayer explanation of items department of the treasury - intemal revenue service schedule no or exhibit year period ended org 20xx12 20xx12 20xx12 contract co-45 bank loan int rate vacant land - address county state land_contract 20x x x with co-44 interest rate description ee purchase date property purchase book cost address business rental vacant ‘building or land de realestate ___ __ records __ address _ 20x x xx co-61 - hotel - land_contract interest rate xx 20xx xx address county state oo land - land_contract co-34 interest rate a ‘ ' x on ee vacant lot 20kx commercial x xs land_contract int rate address' county state building - co-48 20xx 20xx land_contract - co-67 int rate address ‘home land county state contract with _ total 20xx 20xx - -12 20xk lx - co-44 interest rate gas station operational 20xx gas station operational 20xx address io address xx xx x x oo te form 886-a reve page -23- department of the treasury - internal_revenue_service form 886a name of taxpayer - schedule no or explanation of items department of the treasury - internal_revenue_service exhibit year period ended - org 20xx12 20xx12 20xxi2 - purchase purchase date description business rental vacant building or land property book cost address real_estate - ‘ 20xx purchase of address city gas station co- x - records property dollar_figure co-55 en _ po address operational 20xx ‘duplex apartment contract_for_deed - ra-17 hotel-co-43 address county state co-43 hotel land_contract - co-68 two buildings on ware house - 20xx x 20xx dollar_figuredollar_figure x xx - -_- _ oe x address - purchaser - co- address address address - address gas station gas station building land land_contract - co-69 20xx purchase purchase date’ 20xx 20xx 20xx 20kx -_ total 20xx_ total 20xx - 20xx total purchases of business residential property and land i in the amount of dollar_figure based on known information some properties no records on purchase_price or value was available the list does not include properties purchased after 20xx or 20xx dollar_figure business rental vacant building _ or land __ building land co-70 ‘ property book cost address description ‘ real_estate records improvements to property address dollar_figure x ' - form 886-a rev page -24- department of the treasury - internal_revenue_service - form 886a name of taxpayer department of the treasury- intemal revenue service _ _ explanation of items schedule no or exhibit year period ended org 20xx12 20xx12 20xx12 information based on tour of facilities on 20xx and newspaper article dated october _20xx from co-1 bankrupt cy - proceedings chapt er on march 20kx org and six of i its affiliated entities filed petitions for relief under title i of the united_states bankruptcy code the affiliates are co-7 co-15 co-10 co-11 ‘co-13 go-9 v v dir-2 has stated that she has been associated with the above entities since 20xx and i is familiar with operations business affairs and books_and_records the above entities are corporations and or limited_liability companies incorporated in the state of state and with a principal_place_of_business at address county state _ ina sworn affidavit of dir-2 i in support of chapter petitions and first day orders included the following paragraphs oo - the debtors are in the business of property acquisition and management sales of - gasoline and petroleum products and funding for charitable activities org hereinafter org was incorporated in 19xx its mission was to bring - the american system of education to the people of country and to build a school for the gifted and talented in the midwest ideally state with that vision in mind - in 20xx i was elected chief_executive_officer beginning in 20xx debtor org began acquiring a number of businesses my role with the company was to oversee the business operations of the company as more businesses and properties were acquired for liability tax and financing purposes we set up a number of wholly owned subsidiaries including the following debtor companies co-7 co-15 co-10 co-11 co-13 and co-9 _ ‘due to debtors’ dynamic approach to business and debtors’ diverse business holdings in the early years debtors’ businesses boomed and flourished since form 886-a rev page -25- department of the treasury - internal_revenue_service rean form 886a name of taxpayer explanation of items schedule no or exhibit year period of the treasury - internal_revenue_service department ended org 20xx12 20xx12 20xx12 then the debtors have experienced a material degradation of its operations resulting from intentional business interference organized negative publicity and the general economic downturn in the united_states then in october 20xx debtors were approached by an investor from canada who was going to lend debtors dollar_figure as part of the deal debtors had to pay a significant advance fee debtors paid said fee on october 20xx unfortunately it turned out to be worse than a scam and debtors lost the advance fee this incident started possibly the worst publicity imaginable which obviously has affected our businesses and our loan relationships _ given their current financial situation the debtors concluded that it was in the best interest of their creditors and vendors to seek relief under chapter of the united_states bankruptcy code based on news article the canadian who proposed serving as a promoter for the org owned co-28 and promised org a dollar_figure loan in exchange for an upfront fee of dollar_figure this is the fee dir-2 indicated was paid on october 20xx ' the following excerpts were taken from the transcript of proceedings before the honorable ra- united_states bankruptcy judge on september 20xx these responses to questions wete ‘given under oath by dir-2 ceo of org by the court q let me ask dir-1 if i just for a moment the operating reports that have been filed in the case and i’m looking specifically at the most recent reports file for july show losses for virtually each of the operations and by losses i’m talking about earnings losses what is the situation with respect to the debtors’ operations if you could describe the various businesses and ‘what your business operations are at those - in those businesses page - so _ kind of complicating the fact is that a number of the -- all of the real-estate - holding entities are in bankruptcy but the operating entities are not in bankruptcy for the most part the only operating entity that i is in bankruptcy i is midwest of county page f from last week and i think one thing that may - one thing i would like to clarify midwest of county is not the operating entity for the state stations was not the operating entity for the co-58 location that is solely the operating entity for the three gas stations in county page _ form 886-a rev page -26- department of the treasury - internal_revenue_service form 886a name of taxpayer explanation of items _ department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx12 20xx12 20xx12 _ org usano at this time the sole asset is the racetrack with regards to co- that is the real_estate holding entity for the two hotels both of the operating entities are non-debtor entities page with regards to co-10 of state the - at this time we have one station operating in state which is paying rent to co-10 of state and co-10 of stateisinturn paying two of the lenders the co-58 station of course is not operating and the other one operated for a short_period of time and really is in a position that i mean could be opened any day again city state page co-10 of county is solely an operating entity for the three gas stations page cross examination of org ceo dir-2 by ra-19 - representing city of county county municipal utilities and county of county below are some of the q a of the cross examination q you said that you i guess the corporation or corporations own approximately pieces of real_estate _a fifty-five i believe q okay and are those all listed in your schedules a the ones owed by debtor entities are listed q what type of real_estate do the nondebtors own a some single family residential land that’s about it q are members of the group the residents of those properties a no q which entity is a c a org isa c q does it file a c tax_return each year a it has we have not filed the current returns we’re in the selection process for finding ar an accountant right now r but it will q when i is the last time org filed a return a 20xx form 886-a rev oe department of the treasury - intemal revenue service _ page -27- ae form 886a name of taxpayer department of the treasury - internal_revenue_service explanation of items schedule no or exhibit year period ended -_ org 20xx12 20xx12 20xx12 o p that means you haven’t filed if i understand it 20xx 20xx 20xx or 20xx right we- d p is that correct ’ that’s correct there is other circumstances but yes o p are any of the other entitie sec_501 organizations they are not but they are wholly owned single member entities so they file a consolidated - with the exception of a couple entities they file a consolidated_return with org do you know whether non organizations may file a consolidated_return with a q 501_c_3_organization i know that’s how the accounting firm has filed thém for the last decade a q when you had an accountant was an audit ever done of the - of org a we’ve been in an audit for a couple of years q a by audit you’re talking about the irs right - pm talking about did the company ever do an audited financial statement q a we never had to q but according to our reading of this if you look in may the weekly earnings were dollar_figure and you’ll find that support is the first page in here but yet your bank statement for - that - endsi in the month of may has dollar_figurein it can you explain to us what happenedtothe _- - difference between the money that came in at the gate and the money in the bank account a the cash is in the safe in what safe q a the drop safe on the property o okay so in may if in fact dollar_figure came in the balance between dollar_figure that the balance is a yes sitting in cash ina safe q okay and then for june the records show that there were dollar_figureat the gate does that sound right to you fom scag rev department of the treasury - internal_revenue_service page -28- form om explanation of items department of the treasury-- intemal revenue service name of taxpayer - schedule no or exhibit year period ended ot org 20xx12 20x12 20xk12 a yes q and the bank account only went up by dollar_figure so is the difference also sitting in cash ina a safe right the only thing that was deposited in the account was credit cards which of course automatically go to the account and checks we don’t generally take much for checks so q if you look at the - i think it was in our pleadings actually our review of the materials shows _ that dollar_figure was not in the bank account as opposed to what was brought in at the gate so do you believe that there is approximately dollar_figure of cash at least in the safe a yes q doy you have a ledger for this safe for the contents of it as no just the daily tickets are dropped in the safe and we just left them there dir-2 goes on to explain that the safe is located at a gas station at address in county i in which it is open hours a day with no guard or security _ dir-2 also explains how the cash is handled at the amusement park i in that people working at park reports the cash and counts it and puts the cash in safe she and dir- sec_5 the general manager have access to the safe dir-1 goes on to explain that there is no reason to deposit the cash in the bank because they don’t earn interest on checking account at bank after the court conducted an evidentiary hearing on the show cause order on september 20xx judge ra-18 considered the facts and on september 20xx dismissed the stay order - on the chapter bankruptcy of org and related entities org had over six months to develop a business plan and did not hire an advisor to develop a business plan until august 20xx and only when org was seeking the first extension of exclusivity was about to expire and a request for further extension was pending during this period org and related entities did not respond to a party interested in purchasing valuable real_property which was vacant and therefore a financial drain rather than an income producing asset while org continually had operational losses on the amusement park the court dismissed the case under chapter emphasis supplied for cause which includes substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation gross mismanagement of the estate failure_to_file tax returns due after the date of the order for relief ack form 886-a rev department of the treasury - internal_revenue_service oo page -29- form 886a name of taxpayer explanation of items department of the treasury - intemal revertue service org schedule no or exhibit year period ended - 20xx12 20x12 - 20kx12 org on october 20xx appealed the order of dismissal of stay order org was granted a imotion by the bankruptcy court to extend the exclusive right to file a plan or plans of reorganization until january 20xx and that the period to solicit votes for the plan or plans of reorganization shall be march 20xx - on may 20xx the bankruptcy court in the district of state affirmed the bankruptcy court’s september 20xx order of dismissal the court finds that dismissal was not an abuse_of_discretion and was appropriate for the reasons stated i in the bankruptcy court’s order of dismissal the bankruptey court properly found gross mismanagement warranting termination of the automatic_stay and dismissal of the case upon among other things the debtors failure to consider the purchase offer for the property located in co-58 state the debtors’ failure_to_file tax returns both before and - after filing of their petition and the debtors’ failure to report ‘and account for lin cash that they were holding in a gas station safe the court finds nearly dollar_figure that the appellants’ assertions that the bankruptcy court committed legal error are without merit real_estate_taxes oo based ‘on org records secured for 20xx it was determined based on real_estate documents the following properties listed as owned by founder and founder-1 in which the taxes were paid_by org ' a -- _ value - -- parcel - ‘ date amount of assessed - tax payable 20xx 20xx 20xx owner of property founder founder-1 founder __ founder founder-1 founder founder-1 founder founder-1 founder founder-1 founder founder-1 - founder founder-1 founder founder-1 founder founder-1 total sec_1 20xx 20xx 20xx 20xx 20xx 20xx 20xx _ _ form 886-a rev lene page -30- department of the treasury - totem revenue service i oe department of the treasury - intemal revenue service explanation of items name of taxpayer o_ 886a schedule no or exhibit year period ended _ 20xx12 20xx12 20xx12 org founder is aka as founder president founder and his - real_estate_taxes of dollar_figure paid_by org on property listed as owned by spouse based on state property_tax bill statements failure to provide requested records to revenue_agent during examination org has failed‘on numerous-occasions over a period of time to provide requested records i in order for irs to determine if org continues to qualify for tax-exempt status as a c -school whether org is subject_to unrelated_trade_or_business tax inurement to insiders and whether an excess_benefit_transaction has occurred the following are examples of records requested by revenue_agent on october 20xx revenue_agent submitted information_document_request pr ‘request the following information with no response from taxpayer previously in idr the revenue_agent requested all bank statements for 20k during the re review of the bank’statements it was noted that page of august statement is missing for o-27 account number please provide a copy of missing page of bank statement during review of cancelled checks provided by org it was noted that some checks were not it was also noted that several checks did not have a provided for the org account number check number please provide copies of front and back of all checks or originals for january 20xx _ july 20xx for account number os please provide the following for the list of checks below ' account number a purpose of check - -b invoice or receipt etc to show purpose of check c how expenditure is related to org exempt_purpose date j anuary 20xx _ february 20xx march 20xx april 20xx check - no number check - no number debt memo check - no number - dollar_figure ss dollar_figure form 886-a rev page -31- - department of the treasury - intemal revenue service oo - _ form 886a name of taxpayer _explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period oo ‘org ae - ended 20xx12 20xx12 20xx12 may 20xx june 20xx july 20xx debt memo check - no number check dollar_figure dollar_figure dollar_figure please provide the following information for the deposits listed below accourit number a who are the funds received from b which business activity are these funds derived from - c provide documentation to show source of funds ie loan procesds - loan documents date - january 20xx february 20xx may 20xx june 20xx june 20xx august 20xx deposit dollar_figure dollar_figure deposit deposit dollar_figure dollar_figure deposit dollar_figure deposit deposit dollar_figure on october 20xx revenue_agent submitted idr request the following information - with no tesponse from taxpayer during review of cancelled checks provided by org it was noted that some checks were not provided for the org account number number it was also noted that all checks did not have a check please provide copies of front and back of all checks or originals f for january 20xx - december 20xx for account number please provide the following for the list of checks below account number a purpose of check b invoice or receipt etc to show purpose of check and who was ultimately paid funds c how expenditure i is related to org exempt_purpose _ date - february 20xx february 20xx june 20xx - october 20xx check-nonumber check-no number debit memo telephone transfer - dollar_figure dollar_figure _ dollar_figure dollar_figuredollar_figure- which account are these funds transferred to form 886-a rev page -32- department of the treasury - internal_revenue_service ie form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no -or exhibit year period ended org 20xx12 20xx12 20xx12 please provide the following information for the deposits listed below account number a who are the funds received from b which business activity are these funds derived from - c provide documentation to show source of funds ie loan proceeds - -loan documents date - february 20xx june 20xx october 20xx deposit dollar_figure deposit dollar_figure deposit dollar_figure on october 20xx revenue_agent submitted idr requesting specific information regarding the reported revenue of dollar_figure on line of form_990 for period ending december 20xx no records were provided to establish whether this activity was related to org exempt_purpose or whether the number was accurate per interview with dir-2 ceo the construction volunteers who are members of org conducted services no records provided to establish whether amount reported was a gross figure or net additionally no evidence of what type of work was conducted since invoices or receipts were not provided no documentation was provided as to what forms of payment ie eash or check if check whom the check was written too org failed to provide required_documentation in order for revenue_agent to make a determination as to whether activity is subject_to unrelated_business_income_tax whether related to exempt_purpose whether truly conducted by volunteers or whether any private benefit inurement conveyed to individuals on october 20xx revenue_agent submitted idr regarding journal entry showed a property asset demolition trash removal of dollar_figuredollar_figure taxpayer failed to reply to information requested such as supporting documentation including i invoices closing documents ie on october 20xx revenue_agent submitted idr requesting the following information with no response from taxpayer during my tour of your county properties with dir-2 and ra-20 we had discussed the providing of a sample of daily receipts for the co-10 gas station located in- county please provide daily sales records for the following dates for co-10 co-10 gas station of county january 20xx february 20xx april 20xx may 20xx form 886-a rev ee department of the treasury - internal_revenue_service a page -33- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit _ year period ended -org 20xx12 20xx12 20xx12 june21 20xx july 20xx august 20xx october 20xx november 20xx december 20xx co-73 org purchiased leased three vehicles in 20xx-20xx with a purchase_price over dollar_figuredollar_figure that per dir- _ were rarely used vehicle-one purchased on september 20xx a 20xx vehicle for dollar_figure vehicle-two purchased on december 20xx for dollar_figure vehicle-three purchased on march 20xx a 20xx vehicle for dollar_figuredollar_figure mileage at the time of sale per response to information_document_request idr wa sec_162 162-and miles respectively no mileage log was maintained to track personal and business miles in 20xx three individuals were allowed to use vehicles dir- ceo ra-14 treasurer and ra-21 taxpayer gave no apparent reason for purchasing vehicles stored in a warehouse with no apparent exempt_purpose on october 20xx revenue_agent submitted idr to ask for explanation on the purpose of purchasing co-73 for no apparent charitable purpose org provided no response or explanation to questions asked by revenue_agent ' on august 20xx revenue_agent mailed idr requesting the following dir-1 in your response to information_document_request dr you indicate that org had three vehicles in 20xx a under response 1c you indicate that all vehicles were sold in 20xx is this correct ‘b it appears that i did not receive all page s for the vehicle purchased in september of 20xx could you please provide that information - based on motor_vehicle registration re records and retail installment_sale contract the following information was found 20xx vehicle which was purchased by org for dollar_figure and with five y year finance_charges for a total of dollar_figuredollar_figure based on records org had- previously provided it was purchased on march 20xx from co-74 based o on research of motor_vehicle registrations this vehicle is currently registered to ra-22 who was listed as a board member on the form_990 filed for periods ending december 20xx 20xx by org form 386-a penne department of the treasury - internal_revenue_service a - page -34- f onn explanation of items department of the treasury - internal_revenue_service a name of taxpayer schedule no or exhibit year period ended org 20xx12 20xx12 20xx12 the original registration date was december 20xx please provide the following information for this vehicle a date vehicle was sold leased or gifted to ra-22 b purchase_price and finance agreements between org and ra-22 c title transfer information d if purchased please provide evidence of payment by ra-22 ie a cancelled check money order and evidence that amount was deposited into an org bank account based on n motor_vehicle registration records and retail installment_sale contract the following information was found 20xx vehicle which was purchased by org on november 20xx for a total of dollar_figure including finance_charges based on research of motor_vehicle registrations this vehicle is currently registered to ra-23 who was listed as a volunteer based on previous documents providedbyorg _ please provide the following information for this vehicle a date vehicle was sold leased or gifted to ra-23 b purchase_price and finance agreements between org and ra-23 c title transfer information d relationship between ra-23 and board member ra-24 e if purchased please provide evidence of payment by ra-23 ie a cancelled check money order and evidence that amount was deposited into an org bank account and date it was deposited into account _ org provided no response or explanation to questions asked by revenue_agent on august 20xx revenue_agent mailed idr requesting the following information with no response from taxpayer review of cpa workpapers for period ending december 20xx noted information provided by org ceo dir-2 regarding loans from individuals and board members ‘loan amount n ame dir-3 dir-6 dir-7 og dr2 - dollar_figure dollar_figure dollar_figure - - board officer board member - ceo board member form 886-a rev page -35- department of the treasury - internal_revenue_service os form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended org oo 20xk12 20xx12 20xx12 dollar_figure dollar_figure dir-8 dir-9 dir-4 dir-10 dir-11 dir-12 total board member board member board member dollar_figuredollar_figure dollar_figure gs dollar_figure oo - please provide the following information and documents for each loan listed above date funds loaned to org which org account and date deposited term of loan written_agreement type of assets transferred such as ‘cash noncash property relationship of individual listed above to org’ did org fully or partially repay any of the loans listed above if yes provide detail such as tepayment schedule are all the loans listed above unsecured if'no provide description of collateral on august 20xx revenue_agent mailed idr to org requesting the following information with no response from taxpayer oo please provide a copy of the following documents filed with the state department of financial institutions articles of remmistion for org change_of registered agent for org certificate of conversion for org copy of annual report and certificate of status as a foreign non-stock corporation please provide a copy of the following documents filed with the state of state - department of state atticles ofi ‘incorporation as a non-profit or religious_organization name and address of registered agent please provide a copy of the following documents for all limited_liability_company s ll i in which org has a or more ownership in company please include organizing documents filed with the state of state state and state form 886-a rev department of of the tress internal_revenue_service _ page -36- form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended -org 20xx12 20xx12 20xx12_ articles and bylaw sec_2 articles of termination _ list of officers for all llc revenue_agent secured some documents requested from the state of state and state since org failed to comply with irs request for records on august 20xx revenue_agent mailed to org idr requesting the following information with no response from taxpayer tax - exempt status concerns in your application filed with the irs you stated your purpose as follows the purpose of the org is to provide the american system of education to country a land that has been dorninated by the country method for centuries we feel that our american system the best in the world we propose to introduce and influence the youth of country to our way of education seccccesscccecee i is additionally on your application stated that your main funding source would be contributions which is clearly not the case pet minutes provided by org on march 20xx the board_of directors of org held a special ineeting to determine the merits of amending the non-profit mission statement of the corporation to include the mission to build a science and technology school on the corporation’s property in county the board approved amending mission statement however no records were provided to the irs indicating this change in focus operations formally transpired based on news articles and interviews org has long discussed plans for the development of a school in the town of town yet it has not progressed further than discussion and preliminary planning it has been nearly ten years since the proposed change in mission and no evidence of any progress toward the completion of a school in the town of town per form s for 19xx through 20xx no funds have been set_aside to build this school no evidence is available for 20xx - 20xx since no form 990's have been filed by org almost all business operational ‘proceeds are used to purchase additional property ie land rental property and businesses operated by org through wholly owned disregarded limited_liability companies and very little goes toward the school in country its primary tax-exempt purpose - - since 20xx org's primary activities have been the purchase of land buildings and going businesses of which substantial revenues have been derived from these operations org has ‘established limited_liability company’s to run the businesses form 886-a rev a department of the treasury - internal_revenue_service page -37- form 886a ‘name of ta schedule no or’ exhibit year period department of the treasury - internal_revenue_service explanation of items ayer ' ended py org 20xx12 20xx12 20kx12 review of the form s showed the following financial support for the stated primary purpose of operating a school in country during a six-year period org reported gross revenue of dollar_figure per form s but only contributed dollar_figure toward the operations of the school i in country per part i of form_990 year 19xx 20xx 20xx 20xkx 20xx 20xx total total revenue per form_990 school support part iii form_990 dollar_figure dollar_figure - - ‘dollar_figure dollar_figure dollar_figure dollar_figure although org’s wholly owned disregarded llcs might be disregarded as separate entities they are not disregarded as an activity of its sole owner rather the disregarded llcs’ activities are treated as the activities of the owner therefore if the disregarded entity’s activities are contrary to the tax-exempt purposes of its sole owner they may adversely affect the owner’s tax-exempt status or create tax_liability for the owner the commercial operations of these llcs are substantial in nature and none of the activities are related to org's exempt_purpose there is no record that these llcs are being treated as oe separate entities for tax purposes nor any evidence that they are tax-exempt stand alone entities - at various times org has purchased for investment vacant buildings it intends to renovate and rent or operate many of these buildings sit idle after three or more years from the purchase date these buildings continue to be assessed real_estate_taxes accrue interest and mortgage payments continue to be due which is a substantial drain on assets that could be used for charitable purposes additionally while these buildings remain unfinished org continues to purchase ‘ additional property for commercial purposes incurring additional debt and jeopardizing its charitable assets please provide the following information _ a please provide evidence that you have secured the proper zoning and permits to construct _ aschool in the town of town _ b architectural drawings floor plans _ -c evidence that funds have been set-aside to fund construction of school d evidence as to when this school will be constructed e copy of proposal submitted to zoning committee form 886-a rev _ department of the treasury - intemal revenue service page -38- form 886a name of taxpayer explanation of items department of the treasury - intemal revenue service __ schedule no or exhibit year period ended org 20xx12 20xx12 20xk12 -f curriculum ' g evidence of how you arrived ‘at the number of faculty and students - h who owns land were proposed school is to be built i estimate cost of tuition room and board per student j explain if any scholarships will be offered and is yes explain criteria please explain in detail how the operations of the businesses are in furtherance of your tax- exempt_purpose please explain why org used its funds to purchase vacant buildings of which are in various forms of reconstruction which have remained vacant for over three years incurring real_estate_taxes accrue interest and debt payments with no return on investment so _ please explain how org is safe guarding its assets and not putting them at risk on august 20kx revenue_agent mailed to org idr requesting the following information and again org failed to provided records to the irs a please provide all board and committee meetings for 20xx b please provide a current list of all properties purchased by org and subsidiaries they control and include the following information a date purchased cost property address - description ie jand -building business such as hotel gas station ’ use purpose - going business leased space rental property vacant land building date of operation - beginning date placed in use service and ending date or currently _ operational _ d if property sold - sales_price date of sale and buyer org failed to provide materially important records to the revenue_agent in order for the irs to make a complete and proper determination of tax-exempt status and whether org is subject_to unrelated_trade_or_business tax and whether any excess_benefit transactions occurred with insiders as evidenced by failure to provide requested documents org has not been cooperative with the irs _ law form 886-a rev page -39- department of the treasury - internal_revenue_service so f orm name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended org 20xx12 20xx12 20xx12 sec_501 exempts from federal_income_tax corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific ‘testing for public safety literary or educational_purposes or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation and which does not participate in or intervene in including the publishing or distributing of statements any political campaign on behalf of any candidate for public_office educational_purposes include instruction or training of the individual for the purpose of improving or developing his capabilities and instruction of the public on useful and beneficial subjects sec_1 c -1 d regulation sec_1 e -1 a provides that i in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt regulation sec_1 c -1 c provides that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 an organization will not be so regarded if more than an insubstantial part of i its activities is not in furtherance of an exempt_purpose sec_6001 of the code provides that every person liable for any_tax imposed by the code or ‘for the collection thereof shall keep adequate_records as the secretary_of_the_treasury or_his_delegate may from time to time prescribe sec_6033 of the code provides except as provided in sec_6033 every organization exempt from tax under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purposes of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns - and comply with such rules and regulations as the secretary may from time to time prescribe sec_1_6001-1 of the regulations in conjunction with section c provides that every organization exempt from tax under sec_501 of the code and subject_to the tax imposed by sec_511 on its unrelated_business_income must keep such permanent books or - accounts or records including inventories as are sufficient to establish the amount of gross_income deduction credits or other matters required to be shown by such person in any return of fom 886-a rev ‘department of the treasury - internal_revenue_service page -40- eb om 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended - py - org 20xx12 20x x12 20xx12 such tax such organization shall also keep such books_and_records as are required to substantiate _ the information required by sec_6033 sec_1 e of the regulations states that the books_or_records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law - _in accordance with the above cited provisions of the internal_revenue_code and treasury regulations under sec_6001 and sec_6033 organizations recognized as exempt from federal _ income_tax must meet certain reporting requirements these requirements relate to the filing of a complete and accurate annual information and other required federal tax forms and the retention of records sufficient to determine whether such entity is operated for the purposes for which it was granted tax-exempt status and to determine its liability for any unrelated ‘business i income_tax revrul_59_95 1959_1_cb_627 concerns an exempt_organization that was requested’ to produce a financial statement and statement of its operations for a certain year however its records were so incomplete that the organization was unable to furnish such statements the service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of exempt status in 326_us_279 the united_states supreme court held that regardless of the number of truly exempt purposes the presence of a single substantial non-exempt purpose will preclude exemption under sec_501 the court found that the trade_association had an underlying commercial motive that distinguished its educational program from that carried out by a university see also american campaign academy the benefit of private interests such as designated individuals the creator or his family or petsons directly or indirectly controlled by such private interests the organization by definition does not operate exclusively for exempt purposes 477_f2d_340 4th cir operating for the benefit of private parties who are not members of a charitable_class constitutes a substantial nonexempt purpose vy commissioner 92_tc_1053 when an organization operates for coe under reg b an eligible_entity which includes most llcs with a single owner is disregarded unless it elects otherwise an llc wholly owned by a single exempt_organization exempt under sec_501 may be disregarded as an entity separate from its owner forn 886-a rev department of the treasury - intemal revenue service page -41- form 886a name of taxpayer explanation of items department of the treasury- intemal revenue service schedule no or exhibit year period ended co org 20xx12 20kx12 20xx12 announcement 19xx-43 lr b when an entity is disregarded as separate from its owner its operations are treated as a branch of division of the owner therefore an owner that is exempt from taxation under sec_501 of the internal_revenue_code must include as its own information pertaining to the finances and operations of a disregarded_entity in its annual information_return there are two ways for the eligible_entity to elect separate_entity treatment by filing for separate_entity treatment on form_8832 reg c i or by claiming exemption as an entity separate from its owner as by filing a separate form_1023 or form_990 reg c v a in the latter case the eligible_entity is treated as having made the election for the period it claims exemption or is determined to be exempt in 302_f2d_934 ct_cl the court considered the status of an organization that provided analyses of securities and industries and of the economic climate in general the organization sold subscriptions to various periodicals and services providing advice for purchases of individual securities although the court noted that education is a broad concept and assumed for the sake of argument that the organization had an educational purpose it held that the organization had a significant non- exempt commercial purpose that was not incidental to the educational purpose and was not - entitled to 70_tc_352 the court found that a corporation in bs w group formed to provide consulting services was not exempt under sec_501 because its activities constituted the conduct_of_a_trade_or_business that is ordinarily carried onby commercial ventures organized for profit its primary purpose was not charitable educational - nor scientific but rather commercial the court found that the corporation had completely failed to demonstrate that its services were not in competition with commercial businesses the court found that the organization’s financing did not resemble that of the typical 501_c_3_organization it had not solicited nor had it received voluntary contributions from the public its only source_of_income was from fees from services and those fees were set high enough to recoup -all projected costs and to produce a profit moreover it did not appear that the - corporation ever planned to charge a fee less than cost and finally the corporation had failed to limit its clientele to organizations that were sec_501 exempt_organizations - so - in 950_f2d_365 7th cir the court_of_appeals upheld a tax_court decision cch t c memo 19xx-484 that an organization operating restaurants and health food stores in a manner consistent with the doctrines of the seventh day adventist church does not qualify under sec_501 the court found substantial evidence to support a conclusion that the organization’s activities furthered a substantial nonexempt purpose including a the organization’s operations were presumptively commercial form 886-a rev -68 department of the treasury - internal_revenue_service oe page -42- y form sec_864 name of taxpayer explanation of items_ department of the treasury - internal_revenue_service schedule no or exhibit year period - ended org 20xx12 20xx12 20xx12 b the organization competed directly with other restaurants and food stores the organization used profit-making pricing formulas common in the retail food business the organization engaged in a substantial amount of advertising d e the organization’s hours of operation were competitive with other commercial enterprises and - f the organization lacked plans to solicit donations in united missionary aviation inc v commissioner t c m cch the tax_court held an organization formed to support religious missionary work not exempt under sec_501 because it had a substantial nonexempt commercial purpose the court focused on how the organization carried on its primary activity a tape and equipment supply division although no one factor was determinative the court considered the following particularly relevant a the supply division was operated in the same manner as any profitable commercial __ enterprise ‘b the majority of equipment and tapes sold by the organization were also sold by commercial firms the organization priced its merchandise approximately percent above cost which oe - o e produced net profit margin of approximately eight percent - the organization had substantial annual and accumulated_profits d - in 283_fsupp2d_58 d d c the court relied on the commerciality doctrine in applying the operational_test because of the commercial manner in which an organization conducted its activities courts have found that an organization was operated for a non-exempt commercial purpose rather than for a tax-exempt purpose among the major factors courts have considered in assessing commerciality are competition with for profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of financial reserves additional factors include inter alia whether the organization uses commercial promotional methods eg advertising and the extent to which the organization receives charitable donations in easter house v united_states 846_f2d_78 fed cir affg cl_ct the court found an organization that operated an adoption agency was not exempt under sec_501 of the code because a substantial purpose of the adoption activity was a non-exempt commercial purpose it found that the adoption services did not further the exempt purposes of providing educational and charitable services to the unwed mothers and children rather the services for unwed mothers and children were merely provided incident to the organization’s adoption service business moreover the court found that adoption services do not in and of themselves constitute an exempt_purpose form 886-a rev department of the treasury - internal_revenue_service page -43- department of the ‘treasury - internal ‘revenue service explanation of items f orm 886a name of taxpayer org schedule no or exhibit year period ended 20xx12 20xx12 20xx12 the court also agreed with the irs’ determination that the agency operated in a manner not distinguishable from a commercial adoption agency because it lacked the following traditional attributes of a charity first the agency’s operation made substantial profits and there was a substantial accumulation of capital surplus in comparison to direct expenditures by the agency for charitable and educational_purposes second the agency’s operation was funded completely by substantial fixed fees charged adoptive parents it relied entirely on those fees and sought no funds from federal state or local sources nor engaged in fund raising programs nor did it solicit contributions in fact the agency had no plans nor intention to seek contributions government grants or engage in fund raising relative to its operations third the fixed fees the agency charged adoptive parents were not subject_to downward adjustment to meet potential adoptive parerits’ income or ability to pay fourth the agency’s single life member had near total control ‘of the operations of the agency and fifth the agency functioned by means of a paid staff of to persons with no volunteer help in addition to furthering a substantial non-exempt purpose the court found that a portion of the organization’s net_earnings inured to the benefit of a private_shareholder_or_individual as defined by sec_1_501_c_3_-1 and sec_1_501_a_-1 of the regulations the organization provided a soutce of credit ie loans to companies in which the private shareholder was either employed by or owned the fact that the loans were made showed that the companies controlled by the private shareholder had a source of loan credit in the organization taxpayer’s position at the time of issuance of the report no position statement had been provided by-the organization government's position the sec_501 tax exempt status of the org the organization should be revoked - oo because it is not operated exclusively for tax exempt purposes operational_test the organization provides funds to a school in country which it has done since its inception ‘however over the past several years the organization has been operating mainly as a commercial enterprise running and leasing space for businesses that are unrelated to its stated charitable purpose ceo dir-2 during bankruptcy proceedings indicated that org and affiliates are in the business of property acquisition and management sales of gasoline and form 886-a rev page -44- department of the treasury - internal_revenue_service for department of the treasury - tntemal revenue service a explanation of items _ name of taxpayer orm schedule no or exhibit year period ended org 20xx12 20xx12 20xx12 petroleum products and the funding for charitable activities clearly stating that there main purpose is not charitable the organization has indicated that the reason n for the business operations and investments was for the purpose of building a school in town of town near county state as evidenced by newspaper article from the local newspaper co-1 stated that org discussed the school with - the town of town zoning and planning committee in three separate meetings in 19xx regarding zoning and org was denied rezoning of property however the main reason for denial was for lack of detailed plans of the proposed school and would probably only need a conditional use permit rather than rezoning entire property in ten plus years org has never brought forth another plan for the proposed school to the town board or set-aside any dedicated funds for future construction of proposed school instead of working with town of town and city of county org has been an adversary with frequent lawsuits filed by each additionally org had stated per board minutes in 20xx they would amend their non-profit mission statement to include a school in state no records provided to irs to expand and change proposed purpose for being tax-exempt as evidence by checking box no on line and-77 of form_990 for 20xx through 20xx for changes in activities or changes to organizing documents to date no affiliated school built in the united_states since organization foundingin 19xx lastly revenue_agent requested documents pertaining to the proposed'school in the town of town through idr request number twenty in which organization has not provided any documentation another example of the organization not complying with the requirements needed to retain its tax-exempt status sec_1_6001-1 of the regulations states that the books_or_records required by this section shall be kept at all times available for inspection by authorized internal revenue officers or employees and shall be retained as long as the contents thereof may be material in the administration of any internal revenue law sec_1 c -1 c of the regulations provides that 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 specified in sec_501 an organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt_purpose the existence of a substantial nonexempt purpose regardless of the number or importance of exempt purposes will cause failure of the operational_test the facts demonstrate that the organization has been conducting substantial commercial activities that are not in furtherance of an exempt_purpose substantial nonexempt purpose in 326_us_279 the supreme court held that the presence of a single non-exempt purposes if substantial in nature form 886-a rev oo department of the treasuty - internal_revenue_service page -45- rb orm 886a name of taxpayer explanation of items department of the ‘treasury - internal_revenue_service schedule no or exhibit year period ended org - 20xx12 20xx12 20xx12 will destroy the exemption regardless of the number or importance of truly exempt purposes the court found that the trade_association had an underlying commercial motive that distinguished its educational program from that carried out by a university courts have stated that if a nonexempt purpose is not an expressed goal it will look at the _ manner in which the organization's activities are conducted inferring an end from the chosen means factors to which the courts will look are the manner in which the organization conducts its activities the commercial nature of such activities and the existence and amount of annual or cumulative profits the existence of any of these factors supports a conclusion that an organization was not operated exclusively for an exempt_purpose the courts have applied the operational_test which focuses on the actual purposes the organization advances by means of its activities rather than on the organization's statement of purpose or the nature of its activities - if the organization is engaged in an activity with a single substantial non-exempt purpose the exemption is destroyed _ although org’s wholly owned disregarded llcs might be disregarded as legal separate entities they are not disregarded as an activity of its sole owner rather the disregarded llcs’ activities are treated as the activities of the owner therefore if the disregarded entity’s activities are contrary to the tax-exempt purposes of its sole owner they may adversely affect the owner’s - tax-exempt status or create tax_liability for the owner org has multiple active and inactive llcs and controlled corporations which are set forth below the list is-not all-inclusive but only known entities identified through various public records _ controlled limited_liability companies - disregarded entities controlled corporations a co-8 co-9 co-10 co-11 co-12 co-13 co-14 co-15 co-16 co-17 co-18 co-19 co-20 be _-co-7 co-21 form 886-a rev department of the treasury - internal_revenue_service page -46- qi -- form_8864 name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or -_ exhibit year period ended org 20xx12 20xx12 20xx12 co-22 co-23 co-24 these wholly owned llcs carry out passive activities such as holding real_property act as landlords and actively conduct businesses earning substantial profits passive rental activities income and expenses with debt on the buildings have been reported on the form 990t for 20xx and 20xx the commercial operations of these llcs are substantial in nature such as gas stations hotels commercial leases of property and other businesses none of which are related to the organization’s exempt_purpose there is no record that these llcs are being treated as separate entities for tax purposes nor any evidence that they are tax-exempt stand-alone entities dir-2 during cross examination testified in bankruptcy court that the other related entities are _ wholly owned sitigle member entities so they file a consolidated_return with org with the exception of a couple of entities dir-1 also testified that org is the only entity tax-exempt under c _ the llc businesses operate under org’s employer_identification_number other aspects of org operations are very similar to that of the organization discussed in the easter house v united_states case supra in easter house the organization made substantial profits and accumulated a substantial amount of capital surplus in comparison to direct expenditures_for charitable and educational_purposes similarly org reported gross_income of dollar_figure and a net profit of dollar_figure during the taxable_year 20xx it provided merely dollar_figurein financial support to the school in _ country in 20xx org reported gross_income of dollar_figure and net_income of dollar_figure it provided merely dollar_figure in financial support to the school in country org reported combined gross_income of dollar_figure on its - forms filed for the tax years 19xx through 20xx and profit and loss statement for 20xx yet reported expenditures of dollar_figure during this period toward its exempt_purpose the organization - accumulated assets with a fair_market_value of dollar_figure per org consolidated balance_sheet as of december 20xx ‘the balance_sheet showed total equity of dollar_figure and mortgages of dollar_figure most of the assets expended on the purchase of new properties businesses and improvements to existing properties unrelated to the organization’ s-exempt purpose of operating a private foreign school - although the revenue generated by the organization has substantially increased during this seven-year period funding for the school in country has remained between dollar_figure and dollar_figure per year which is stated purpose of the organization the profit org has derived from these businesses has not been used for charitable purposes but for the growth of its unrelated_trade_or_business operations very little of the charities operations are dependent on public contributions or revenue generated from related activities based on inspection of the organization’s financial records org is using its business earnings and assets to leverage the purchase of additional pieces of property expansion of businesses and rental properties as an example org expended an additional dollar_figurein 20xx and dollar_figure in 20xx on upgrades to amusement park and the racetrack these figures clearly show the activities are not commensurate with the funds needed to sustain its tax- form 886-a rev on department of the treasury - internal_revenue_service page form 886a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period - ended 20xx12 20xx12 20xx12 - org exempt mission many of these properties have been used as collateral in order to purchase additional businesses arid properties further risking the loss of org saseie in 283_fsupp2d_58 d d c the court relied on the commerciality doctrine in applying the operational_test because of the commercial manner in which an organization conducted its activities courts have found that an organization was operated for a non-exempt commercial purpose rather than for a tax-exempt purpose among the major factors courts have considered in assessing commerciality are competition _ with for profit commercial entities extent and degree of below cost services provided pricing policies and reasonableness of financial reserves additional factors include inter alia whether the organization uses commercial promotional methods eg advertising and the extent to which the organization receives charitable donations org through the operation of llcs has been in poe direct competition with for-profit entities of which have filled suit against them ‘in 20xx org through its wholly owned llc co-10 of state operated gas stations in the cities of city city city and co-58 in direct competition with other for-profit gas stations _ these and the gas stations operating similarly in county generated in excess of dollar_figuredollars in - revenue in 20xx the gas stations operated by org advertised in similar matter as other gas stations through local publications internet and signage _ - co-11 was fined dollar_figuredollar_figure in 20xx by the state commerce department for repeated violations of state - law ‘which requires that gasoline prices be set each day based on a formula that includes wholesale prices fees and taxes to determine a daily floor for gas prices because org had the to price its competitive advantages of below-market labor and paid no income taxes it was able gas lower than for-profit competitors could legally charge this caused for-profit competitors in state to lose as much as one third of their monthly sales congress did not intend for tax-exempt entities to éstablish disregarded llcs-to directly compete with for-profit business'afa- competitive advantage se additionally in 20xx 20xx 20xx org operated a fudge and gift store through an llc in which it was open hours similar to other gift stores advertising in newspapers brochures radio _ and tv and a website to sell fudge all over the world org expended'dollar_figure _ 20xx and dollar_figure in 20xx on various forms of advertising such as radio tv internet and billboards ‘which was the highest expenditure except for purchase of merchandise co-22 also enlisted - followers of founder to sell fudge and gifts at festivals throughout state and state no record of sales provided only cancelled checks paying for booth space again because of incomplete _ records provided the validity of the sales figure is questionable since org has a history of not depositing all cash sales in its bank accounts as evidenced by the bankruptcy hearings in 20xx dollar_figure in currently org through wholly owned co-9 operates two commercial hotels in county one is a franchised hotel advertising and charging similar rates as purchased in 20xx the co-61 form 886-a rev department of the treasury - internal_revenue_service page -48- department of the treasury - internal_revenue_service eb wr orm 886a explanation of items name of taxpayer schedule no or exhibit year period ended org 20xx12 2oxx12 20xx12 other hotels in county area again org is claiming volunteer labor exception to avoid being’ subject'to unrelated_trade_or_business tax however in 20xx based on profit and loss statement org paid-co-62 dollar_figure clearly they had paid management to operate hotel in 20xx org purchased another hotel the co-43 which is currently named the co-43 again in 20xx org paid-co-62 dollar_figure in the memo section of the profit and loss statement detail the payments were characterized as commissions payroll advance and advance for insurance the hiring of a management company will constitute paid labor for purposes of unrelated_trade_or_business sinice the operation of a hotel is not in furtherance of its tax-exempt purpose of operating and funding a foreign school clearly all of these business endeavors are unrelated to org exempt_purpose orghas continually blamed bad publicity and ongoing lawsuits and disputes with the local_government _ for their financial problems yet as a c public charity org has not been forthcoming with information and has operated under a cloud of suspicion for a number years which is atypical of a public charity _ at various times org has purchased for investment vacant buildings it intends to renovate and rent or operate many of these buildings sit idle after four or more years from the purchase date these buildings continue to be assessed real_estate_taxes accrue interest and mortgage payments continue to be due which is a substantial drain on assets that could be used for charitable purposes -during the bankruptcy proceedings it was disclosed that org had an opportunity to sell the co-58 property a non-operational gas station but refused to sell even though org had a willing buyer additionally while these buildings remain unfinished org continued to purchase additional property for commercial purposes incurring additional debt from 20xx_ through 20xx based on various sources of information org purchased land buildings and businesses in excess of dollar_figure million which does not include several million in renovations and expansions of said properties in which org incurred substantial debt and used existing properties as collateral - failure to comply with sec_6001 based on irs records org has not filed a form_990 or 990t for tax period ending december 20xxi 20xx 20xx 20xx and 20xx all five periods are past due internal_revenue_code sec_6033 provides except as provided in sec_6033 every organization exempt from tax under sec_501 shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purposesof carrying-out the internal revenue laws as the secretary may by forms or regulations prescribe and keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe ae form 886-a rev department of the treasury - internal_revenue_service department of the treasury - intemal revenue service form 886a name of taxpayer 20xx12 20xx12 explanation of items schedule no or exhibit year period ended 20xx12 org - bo _ irs sent org a notice_and_demand letter on july 20xx requesting the filing of form_990 990-t for periods ending december 20xx through 20xx all of which were past due beyond it was in bankruptcy and needed additional days to secure an any extensions org stated accountant however most of the returns were past due prior to org filing chapter i1 bankruptcy on march 20xx this is another example‘of org delay and not cooperating with governmental agencies which has been going on for several years one of the reasons org was denied chapter bankruptcy reorganization was the failure_to_file tax returns prior and as required by the bankruptcy court org also failed to pay cpa firm co-12 for return preparation work for 20xx 20xx and were subsequently dropped from after filing bankruptcy representing org org failed to provide information and documents for such items as whether construction services was in fact conducted by volunteers or if any part of proceeds inured to insiders additionally org failed to provide documentation regarding a vehicle previously owned by org which is now registered in the name of an officer of org further revenue_agent requested documentation on loans from officers to org organization failed to provide information on its complex organizational structure in order for the irs to determine who conducted the activities and whether activities are subject_to unrelated_trade_or_business tax sec_1_6001-1 states that the books_or_records required by this section shall be kept at all times available for inspection by at thorized internal revenue officers or employees and shall be retained as long as the-contents thereof may be material in the administration of any internal - the determination of tax- revenue law all records requested by revenue_agent were relevant to exempt status inurement and unrelated_business_income_tax further revrul_59_95 c b concems an exempt_organization fhat was requésted to and statement of its operations for a certain year however its produce a financial statement that the organization was unable to furnish such statemenits the records were so incomplete service held that the failure or inability to file the required information_return or otherwise to comply with the provisions of sec_6033 of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on that the organization has not established that it is observing the conditions required fox the continuation of exempt status org has filed materially incomplete form_990 returns for tax period ending december 20xx and 20xx by failing to complete part ix disclosing the operating of multiple llcs as disregarded entities for tax purposes and failure to disclose a change in operations as required by line of form_990 in 20xx it was discovered based on property_tax statements and cancelled checks org paid property taxes on property listed asownedby inurement to an insider and prohibited by a tax-exempt_organization recognized under c g department of the treasury - internal_revenue_service page -50- forin 886-a rev founder-1 which constitutes the grounds - form sec_86 name of taxpayer explanation of items department of the treasury- internal_revenue_service org do schedule no or exhibit _ year period ended 20xx12 20xx12 20xk12 org paid overdollar_figure_ in real_estate_taxes on behalf of the president no documentation provided to show t that the parcels are owned by org con clusion _ accordingly the organization’ ss status as an organization described under sec_501 _ should be revoked effective january 20xx because it did not operate exclusively for exempt purposes it operated for the purpose of serving a private benefit rather than public interests and part of the net_earnings inured to the benefit of a private_shareholder_or_individual form_1120 u s corporate_income_tax return should be filed for tax years ending december 20xx - december 20xx december 20xx december 20xx december 20xx december 20xx and december 20xx refurns should be sent to the following mailing address employee internal_revenue_service form 886-a rev department of the treasury - internal_revenue_service - page -51-