internal_revenue_service department of the treasury release number release date date date a b cc d certified mail dear taxpayer_identification_number person to contact tel fax 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 you do not qualify as exempt from federal_income_tax under sec_501 of the code effectivedate our adverse determination was made for the following reasons you are not operated exclusively for exempt purposes described in sec_501 of the internal_revenue_code your primary activity consisted of administering and managing a donor advised account on behalf of an individual who established the account using a controlled-entity the funds and other assets credited to this account were distributed or used to benefit the individual and or other private persons in contravention of treas reg c -1 d ii through the creation and operation of this donor_advised_fund you facilitated tax_avoidance by enabling this individual to shelter income and assets from the collection_division of the internal_revenue_service for a period of time moreover you and this sole donor_advised_fund operated by you _ were funded through conducting an unrelated_trade_or_business in contravention of sec_1_501_c_3_-1 you allowed distributions from the account that were not in furtherance of sec_501 purposes thus you are operated for a substantial non-exempt purpose because you more than insubstantially served private interests and operated a trade_or_business for a nonexempt 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 if you were a private_foundation as of the effective date of the adverse determination you are considered to be taxable private_foundation until you terminate your private_foundation_status under sec_507 of the code in addition to your income_tax return you must also continue to file form_990-pf by the 15th day of the fifth month after the end of your annual_accounting_period 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_states court the taxpayer_advocate can however see that a tax matters _ that may not have been resolved through normal channels get prompt and proper handling if you want taxpayer_advocate assistance please contact the taxpayer_advocate for the irs office that issued this letter you may call toll-free for the taxpayer_advocate or visit www irs gov advocate for more information if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter sincerely yours karen a skinder appeals team manager enclosure publication notice helpful contacts for your notice_of_deficiency internal_revenue_service department of the treasury tax exempt and government entities date date org address taxpayer_identification_number form tax_year s ended person to contact id number contact numbers telephone fax certified mail - return receipt requested we have enclosed a copy of our report of examination exphining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter pou co not agree with our proposed revocation you must submit to us a written request for consideration within days from the date of this leter to protest our decision your protest should office statement of the facts the applicable law and arguments in support of your position include a 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 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 letermination letter to you based on technical_advice no further administrative appeal is available to you within he irs regarding the issue that was the subject of the technical_advice letter rev catalog number 34809f ination ns shown in the report of examination if you do not protest this proposed dete if we do not hear from you within days from the date of this letter we will process your case based on the recomme within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time 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 if you write please provide a telephone number and the most convenient time to call if we need to contact you issue a final revocation leuer we will also notify thank you for your cooperation enclosures publication publication report of examination sincerely director eo examinations letter rev -2003 catalog number 34809f department of the treasury taternal revenue service form 886a name of taxpayer explanation of items org ra-1 address city state a wt ot hee schedule no or exhibit year period ended 20xx 20xx 20xx 20xx legend org - organization name state - state poa - poa xx - date address - address city - city director - director president - ' president president-1 - president-1l vice-president - vice president treasurer - treasurer dir-1 through dir-4 district - district treasurer-1 - treastirer-1 secretary - secretary ra-1 through ra-17 officer - officer co-1 through co-25 ref-1 through ref-6 ‘ issue whether org sometimes referred to as org operates exclusively for exempt purposes facts formation of org background according to the spring 19xx issue of the co-1 co-3 at co-2 co-3 co-2 was established to encourage each district to set up a foundation at co-2 the newsletter explained that co-3 co-2 would at some point in the future establish itself as a separate organization with its own staff and its own facilities co-2 co-2 is currently located in city state at the same address as org co-2 is a large donor_advised_fund that was incorporated in by dir-1 in 19xx but the history of the director family's involvement with donor advised funds extends back to the late 19xx's the co-4 co-4 is a foundation at co-2 only co-4 members can receive officer commissions for assisting persons who set up foundations at co-2 articles of incorporation the articles of incorporation for org originally known as co-3 were filed in the state of state by its registered agent dir-2 on december 19xx amended articles of incorporation were filed august 20xx to report that the name of the organization had been changed to org the name was amended a second time on october 20xx to org the stated purpose of org was to encourage philanthropy for charitable purposes by individuals and entities and in general the corporation shall be authorized to conduct any lawful activity permitted by a state not-for-profit corporation consistent with sec_501 of the internal_revenue_code amended or the corresponding section of any future united_states internal revenue law attachment a to the articles of incorporation provided purpose powers and dissolution clauses that are limited to ones allowable under internal_revenue_code code sec_501 form 886-a rev department of the treasury - internal_revenue_service page -1- department of the treasury - internal_revenue_service form 886a name of taxpayer explanation of items schedule no or exhibit year period ended 20xx 20xx 20xx 20xx org ra-1 address city state paragraph a required that upon dissolution the assets would be distributed to organizations exempt under sec_501 paragraph b stated that org would operate exclusively for sec_501 purposes paragraph c promised that no asset would inure to the benefit of members officers directors or other private persons except that the corporation may at its discretion pay reasonable_compensation for services rendered and make payments and distributions in furtherance of the purposes set forth herein bylaws on january 20xx dir-1 as the sole incorporator of org appointed president treasurer and secretary as it's first board_of directors the officers were elected on that same date president was elected to serve as the president treasurer would serve as treasurer secretary was elected to serve as secretary when asked to provide information about these officers org identified secretary as a long time employee of co-2 who provided bookkeeping services on behalf of org ra-2 supplied technology and other services to org no detailed information related to president who is now deceased was available the current bylaws of org were adopted by the new board on the same date the directors were appointed the bylaws contain provisions for the operations of org that include the following article iii grants the board blanket powers and authorities with the exception of authorities forbidden by the articles of incorporation and any substantial activity that do not further the purposes of the corporation sec_3_2 requires a minimum of directors sec_3_3 provides that directors will serve until the next annual meeting a director may be elected to succeed him or herself article iv sec_1 of the bylaws states that the only notice for the annual meeting would be the date provided in the bylaws that date is blank special meetings required days advance notice to the board members directors can waive notice of meetings but the waiver must be in writing two directors may constitute a quorum article vi states that the secretary shall prepare and keep minutes of board meetings the president may sign with other officer of the corporation deeds mortgages bonds contracts and any other instruments unless expressly delegated to some other officer the treasurer is required to give a bond for surety article vii requires the corporation to keep books_and_records of account and keep minutes of the proceedings of its board_of directors article xiii gives the board_of directors the power to modify any restriction or condition on the distribution of funds if in the sole judgment of the distribution committee without the approval of any participating trustee custodian or agent such restriction becomes inconsistent with the charitable needs of the community served application_for exemption org filed form_1023 application_for exemption under sec_501 of the internal_revenue_code sec_501 application with the irs in form 886-a rev department of the treasury - internal_revenue_service page -2- department of the treasury - internal_revenue_service form_8 a explanation of items name of taxpayer org ra-1 address city state schedule no or exhibit year period ended 20xx 20xx 20xx 20xx january 20xx the applicant stated that the organization would encourage generosity philanthropy and charitable giving sometimes referred to herein as gpcg both inside and outside the district in order to restore maintain and extend our national heritage of individual corporate and community social responsibility and action org had no assets but did intend to acquire office furniture supplies and equipment org reported that donors would be allowed to establish funds for exclusively charitable purposes as described in code sec_501 the document also included a statement that the donor can offer the foundation his or her advice about what to do with the funds but the final_decision rests with the foundation the application stated that fhe foundation may receive and review requests for contributions from sec_501 organizations and will monitor the amounts distributed to verify that the funds are used for charitable purposes described in sec_501 the applicant went on to state that while payment of commissions is frowned on by the - charitable community it org would encourage members of the financial community etc to undertake a greater role in directing the resources to the private philanthropic sector by paying reasonable_compensation for services rendered while restricting those payments to a reasonable portion of the gifts made attached to the application was a resolution adopted on january 20xx in which the board_of directors commits itself to obtain information and take other appropriate steps with the view of seeing that any participating trustee custodian or agent administers each restricted trust or fund and the aggregate of unrestricted trusts or funds of the ref-6 the resolution was signed by president treasurer and secretary as directors based on the information supplied by the applicant letter was issued by the internal_revenue_service on february 20xx recognizing org as an organization whose stated activities qualified for exemption from tax under the provisions of sec_501 org governance on june 20xx org's board_of directors directors president treasurer and secretary took two actions by written consent first the board approved the organization's name change to co-3 second the board accepted the resignations of the three directors president treasurer and secretary did not sign their resignations until july 20xx july 20xx and july 20xx respectively in conjunction with the resignation of the original board the following persons were elected to serve as the officers and directors of org dir-2 title president relationship son of dir-1 and director spouse of vice president form 886-a rev department of the treasury - internal_revenue_service page -3- form_886 a name of taxpayer department of the treasury - internal_revenue_service explanation of items org ra-1 address city state schedule no or exhibit year period ended 20xx 20xx 20xx 20xx vice president vice president spouse of the dir-2 treasurer-1 dir-3 dir-4 mother of dir-2 and spouse of dir-1 treasurer director director none none those five individuals served as the officer directors of both the co-2 and org from that date through december 20xx dir-1 served as the ceo no minutes for any meetings of the board_of directors related to this change in governance have been provided in fact no minutes of any board meetings were recorded prior to december 20xx - all administrative accounting and financial activities of org continued to be conducted at the offices of co-2 before and after the change in directors review of the officer signatures on the 20xx 20xx and the original 20xx forms found that president continued to be listed as the president in each of those years and secretary signed all those returns as secretary when asked to explain why secretary signed the forms more than years after she resigned as an officer dir-1 stated that secretary signed those documents because both org and she had simply forgotten that that she had earlier resigned as an officer org operations prior to establishment of co-5 according to its president dir-2 org was established to provide a variety of charitable educational scientific and religious activities in the ref-6 during the first years 20xx and 20xx the organization did not receive sufficient revenues to engage in any substantive activities and no expenses were incurred however per information included in the same correspondence co-2 co-2 transferred dollar_figure from six of its subaccounts to org at the direction of dir-1 in january 20xx on or about march 20xx dir-1 directed ra-3 to transfer dollar_figure back to co-2 dir-1 attributed the second transfer to requests by the donors who preferred to have those funds administered directly by co-2 on january 20xx dollar_figure was transferred into the org checking account as a donation from co-2 this donation was reported on org's 20xx form_990 when questioned about the timing of the reporting the officers stated that the donation had been pledged in 20xx therefore it was reported on the 20xx form_990 however org has a cash_basis accounting system also on january 20xx org received dollar_figure from ra-4 and dollar_figure from two other sources four days later checks totaling dollar_figure were issued from the org checking account to the co-6 the co-7 and the department of the treasury - internal_revenue_service form 886-a rev page -4- department of the treasury - internal_revenue_service explanation of items form_886 a name of taxpayer org ra-1 address city state schedule no or exhibit year period ended 20xx 20xx 20xx 20xx co-8 all subaccounts held at co-2 an additional dollar_figure check was paid to the co-9 and dollar_figure was paid to co-10 at that same time all of these checks were endorsed and deposited into co-2's account at co-11 in may 20xx an additional dollar_figure was transferred from co-2 to org there is no evidence of any other activity until july 20xx when discussions with ra-5 commenced as a result of those discussions co-5 became the only donor_advised_fund sub-account at org in october 20xx co-5 was the sole donor_advised_fund at org from that date through december 20xx ra-5 and her business enterprises ra-5 is an author and nutritionist who promotes products through co-12 co-12 co-13 co- co-15 co-16 and other companies co-12 is a multi-level marketing company specializing in health food supplements and health products sales representatives recruit other distributors or sales representatives this recruitment of down-line sellers is necessary to increase a sales representative's sales force and thus generate a greater number of sales down-line interests are generated when distributors sell products and earn income by creating a network of marketers when down-line marketers sell products up- line distributors may earn a commission on the sales the terms down-line interest and multi- level interest are construed to be interchangeable ra-5's involvement with donor-advised funds per correspondence dated april 19xx ra-5 informed ra-6 at co-12 co-12 that she had changed her will to give all of my right title and interest including any of that represented by stock share certificates in co-14 a not-for- profit corporation and co-17 a for-profit corporation to the co-18 a non-profit corporation organized for charitable purposes we according to statements on the co-2 website co-2 purchased a number of accounts from co- in 19xx in 20xx ra-5 contributed co-12 down-line account to the ra-5 f oundation at co-2 background of co-19 co-19 sometimes referred to as company was formed march 20xx prospective members were identified as ra-7 ra-5 and ra-8 with each owning a interest in the company co-20 was identified as the owner of the remaining intended contributions were reported as dollar_figure each for ra-7 ra-7 and ra-8 with co-20 contributing dollar_figure ra-7 is ra-5's companion assistant and caretaker no information concerning ra-8 was available org officers have stated that they were aware that co-20 was formerly a member of the company but no other history or information related to co-20 was provided or found form 886-a rev department of the treasury - internal_revenue_service page -5- department of the treasury - internal_revenue_service form_8 a explanation of items schedule no or exhibit year period ended 20xx 20xx 20xx 20xx name of taxpayer org ra-1 address city state through normal research methods ra-9 exercised signatory authority for co-21 a trustee for co-20 research found no records related to co-21 the limited_liability formation agreement identified the purpose of the co-19 to be engaged in the business of providing business and financial management services and any other business which is allowable for a state limited_liability_company the prospective members also agreed that cash and assets would be pooled so that the company would be profitable those profits would be honestly and equitably allocated to each member and the needs of the customers would be met a separate capital_account would be maintained for each member and would be increased by the value of any additional_contribution and decreased by any distribution so that net profits and net losses could be determined by generally_accepted_accounting_principles then those profits losses would be allocated according to the profit allocation - plan the office of the business where the records would be kept would be address city state ra-7 was designated as the business manager treasurer and tax matters member ra-5 was identified as assistant business manager and the secretary of the company ra-8 would be the company planner per receipt certifying member interest in co-19 dated march 20xx ra-7 received interest in the company for dollar_figure in cash and other valuable consideration on that march 20xx co-20 was allocated a interest on receipt of dollar_figure the remaining interest was received by ra- by a receipt certifying member interest in co-19 dated march19 20xx according to the minutes of an organizational meeting dated march19 20xx ra-7 and ra-8 were all the organizers of the company the receipt certifying member interest in co-19 was reported to have been read at the meeting and adopted as the formation agreement of the company ra-7 ra-5 co-20 and ra-8 presented their contributions for member interest and the receipt certifying member interest in co-19 was issued after the operating_agreement was read and approved by the members ra-8 withdrew as a member of the company and sold his interest to co-19 for dollar_figure ownership_interest was then allocated to ra-7 to ra-5 to co-20 ra-7 was designated as the manager ra-5 was assistant manager ra-5 and ra-7 were granted blanket authority to sign checks on the bank accounts of the company made payable to themselves or entities in which they have a financial interest according to the operating_agreement of the co-19 the company was formed to engage in the business of providing business and financial management services and any other business which a limited_liability_company may do and perform under the state llc acct form 886-acev department of the treasury - internal_revenue_service page -6- department of the treasury - internal_revenue_service forn 886a explanation of items schedule no or exhibit year period ended 20xx 20xx 20xx 20xx name of taxpayer org ra-1 address city state article h sec_3 required that the llc maintain books_and_records which any member might inspect during normal business hours article iii sec_1 of the operating_agreement stated that the company would be managed as set forth in the formation agreement sec_5 of article iii allowed the managers to devote time and efforts to other business interests unrelated to the company provided that managers would not enter into transactions that directly compete with the business of the company article iii section required that manager salaries were to be set by unanimous vote or written consent of members article iv of the operating_agreement required that an annual meeting of the members be held provided that a quorum would be two-thirds of the members as measured by their percentages of ownership stated that a two-thirds majority vote was required for members to take action provided that each member would have one vote or corresponding fraction thereof for each one percent of ownership_interest article x sec_2 of the agreement states any member can withdraw as a member of the llc upon a not less than ninety days’ written notice to the other members or b obtaining written consent of the members address city sate was reported as the address for co-20 and address city state was reported as the principal_place_of_business for co-19 co-19 appears to have held a down-line co-12 interest account which also appears to have been under the control of ra-5 as a managing member of the llc establishment of co-5 at org in july 20xx ra-5 and ra-7 began discussions with dir-1 dir-1 and ra-3 concerning the co-12 down-line interest held by co-19 dir-1 is the founder of co-2 co-2 and ra-3 served as the co-2 treasurer until 20xx notable among the documents exchanged during those discussions were the following on september 20xx ra-7 transmitted a fax to ra-3 at co-2 in that fax ra-7 outlined a plan to make ra-5's foundation with co-2 or the other one founder mentioned owner take ra-5 out as a member leaving me ra-7 and one other person with and after expenses the income would be the foundations' sic we could hire ra-5 as a manager or something so she could make speeches for co-12 and build a work with her down-line form 886-a aev department of the treasury - internal_revenue_service page -7- department of the treasury - internal_revenue_service form_886 a name of taxpayer explanation of items schedule no or exhibit year period ended 20xx 20xx 20xx 20xx org ra-1 address city state an co-2 memo from ra-3 title vice president investments accounting on september 20xx introduced ra-5 to attorney ra-10 as a person whose federal tax_liabilities exceeded dollar_figure ra-3 explained that the liability stemmed from ra-5's decision to stop filing tax returns to report her income on september 20xx a memo from ra-3 advised ra-7 that ra-11 has indicated that the irs has its sites sic on co-19 ra-11 is identified as the officer for co-5 ra-3 suggested that ra-7 might want to abandon this one and start again without ra- 5's name associated with it at all in the light of these possibilities i would not leave the down-line in co-19 but transfer to co-3 and operate out of there with a fresh new llc and avoid any connections until ra-5 and ra-10 are able to resolve the irs issues to org on october 20xx co-19 co-19 submitted an application financial was the proposed name the donor was identified as co-19 ra-5 and ra-7 signed the application as the managers of the llc ra-11 was named as the officer officer the application provided a pro forma proposed charitable purpose any charitable educational scientific or religious activities that may be approved from time to time the applicants chose to provide additional detailed purposes to maintain the nutritional and marketing business through co-12 for the purpose of generating income for nutritional education and research the co-19 will continue to manage the business and advise the foundation they will be paid reasonably for their services and ra- sec_5 will continue to be the spokesperson magi sic with co-12 corp additional funds may be used to support other charitable organizations and ministries on the same date that the application transfer of ownership for co-12 account id from the company to district foundation fbo co-5 ra-5 manager and successor instructions were submitted to org by ra-5 to name ra-7 friend and companion to serve as the ref-2 in the event of ra-5's death or disability was submitted ra-5 signed the on october 20xx the members of co-19 by resolution amended the profit allocation agreement to provide that effective november 20xx all income of the company received from co-12 would be charitably donated to org the resolution reserved the right of the membership of the company to change the foundation receiving this gift the resolution was signed by ra-9 ra-5 and ra-7 ra-3 of co-2 signed an agreement to accept co-12 membership dated october 20xx on behalf of org via a fax from co-12 on october 20xx secretary confirmed a conversation with ra-5 friday the 11th secretary stated that ra-5's successor instructions had been received secretary form 886-aev department of the treasury - internal_revenue_service page -8- department of the treasury - internal_revenue_service explanation of items form_886 a name of taxpayer org ra-1 address city state schedule no or exhibit year period ended 20xx 20xx 20xx 20xx explained that for ra-7 and ra-10 ra-17 to be listed on your membership they must relinquish any co-12 membership they currently hold the fax went on to state that we received a transfer of ownership from you today but as we spoke before you are to be the listed applicant for the new membership name _ we also received successor instructions for co-2 which we currently have the listed applicant or contact name as ra-3 changes to this membership with co-12 would need to be made by ra-3 on october 20xx ra-9 authorized signatory agreed to transfer all the right title and interest of a member interest held by co-20 to org project the resolution was signed by ra-7 and ra-5 on october 20xx co-3 project is the co-5 subaccount at org on that same date ra-5 with co-19 of address city state co-12 id no requested that co-12 membership name be changed to co-3 whose federal tax identification_number is ra-5 went on to acknowledge that under the new name and federal tax identification_number i will be receiving a commission check instead of using direct deposit ra-9 signed the october 20xx resolution for co-20 on october 20xx on october 20xx ra-3 signatory for co-3 org accepted the membership interest in the company minutes of a board_of directors meeting reportedly held by phone on october 20xx listed ra-7 ra-5 and ra-9 as attendees ra-9 in his role as signatory for co-20 stated that he wished to transfer the interest of co-20 back to the llc and withdraw as a member of the llc and wished to receive as compensation therefore the sum of dollar_figure the members of the company agreed to accept the withdrawal and pay the requested compensation upon execution of a bill of sales the board members then resolved that the interest be redistributed to org for the sum of dollar_figure ra-3 signed the document to accept the company membership for org ' operations of co-5 revenues and expenses from october 20xx through july 20xx org received monthly income from co-12 interest monthly payments from co-12 were credited to the co-19 ref-1 sub-account from november 20xx to july 20xx on receipt of the co-12 monthly payment the org routinely sent of the amount of the co-12 check to the co-19 from july ' a meeting of the members of the company was held on 20xx dir-2 signatory for org' transferred the interest back to the company and withdrew as a member on that date the bill of sales executed on 20xx transferred org' s interest to the company for a payment of dollar_figure form 886-a ev department of the treasury - internal_revenue_service page -9- form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20xx 20xx 20xx org ra-1 address city state 20xx through july 20xx org changed the regular monthly distributions to the llc to these payments were recorded as charges against the co-5 sub-account on org accounting_records see attachment i for a schedule of the deposits and withdrawals from the org bank account from january 20xx to december 20xx when questioned about these payments org provided the following explanations in correspondence november 20xx - there was an informal agreement that co-3 later renamed org would retain of the revenues received in regard to the multi-level interest to pay unrelated_business_income_tax within the meaning of code sec_51 in connection with co-3' s ownership of the multi-level interest that was the extent of the understanding may 20xx - in addition to itemized expenses the company incurred in connection with the operation of the down-line interest org paid approximately dollar_figure per month to the company which represented compensation to be paid various personnel of the company that operated the down-line interest in subsequent correspondence org identified ra-7 and ra-21 as employees who received compensation from the company september 20xx org explained that there was no agreement rather org voluntarily began paying dollar_figure per month to the company because paying a fixed rather than a fluctuating amount would enable the llc to'-plan adequately for the number of employees it could hire and retain to maximize the revenues the down-line could generate for the ultimate benefit of org and co-2 october 20xx ' org believed that by limiting its support of the company to of the income org received from the down-line it could adequately support the down-line for the ultimate benefit of co-2 and org and leave a balance which could also be used to support its charitable purposes during that same time period additional payments were made to co-19 by org based on monthly transaction forms submitted by ra-s these transaction forms were normally accompanied by a listing of actual and projected expenses from co-13 ref-3 or invoices for labor and expenses for ra-12 state corporate records identify ra-5 ra-7 and ra-12 as the managers of co-13 those expenses included salary consulting fees paid to ra-12 lease payments at the address of co-13 various office expenses including dollar_figure per month for office supplies and the same amount for fedex fees legal expenses described as trademark application redo corporate structure inventions and patents trademark fees form 886-a cev department of the treasury - internal_revenue_service page -10- department of the treasury - internal_revenue_service form_886 a explanation of items name of taxpayer org ra-1 address city state schedule no or exhibit year period ended 20xx 20xx 20xx 20xx preparation of ref-4 co-13 tax returns revision of a business plan for a potential investor auto insurance and maintenance and mileage reimbursements at the standard rate see attachment ii for a schedule of the expenses reported on the listings the list is not all inclusive since documents related to some disbursements to the company were not provided when asked to provide detailed documents to verify company expenses dir-2 provided oral testimony during the xx interview dir-2 stated that org had requested vendor invoices and purchase receipts from the company but none had been provided further dir-2 indicated that because org was a limited_partner org could not force the company to produce those documents later in it's response to information_document_request on december 20xx org defended its disbursements of the income from the down-line interest by quoting the uniform management of institutional funds act the response stated that the board_of directors of state charities is required to act with care skill prudence and diligence ra-11 was paid a commission of approximately through co-24 for serving as the officer and of each co-12 check was allocated to org as marketing service fees irs levy on july 20xx co-12 notified ra-5 that a notice of a tax levy against her next co-12 commission check had been received from the internal_revenue_service the levy was in fact issued against co-3 ein as nominee transferee and or holder of a beneficial_interest of ra-5 ra-5 contacted co-2 org on july 20xx to request assistance that same day dir- sent a letter to ra-13 at the internal_revenue_service stating this project of org was authorized on october 20xx on july 20xx in a letter from ra-5 to dir-2 on co-14 letterhead ra-5 declined to have dir-2 contact her friends for a gift and ra-5 questioned whether dir-2 would give the money received to her instead of paying his own tax obligation her analogy was it seems to me that you have asked co-2 to pay co-3 bill co-2 is the account number for the ra-5 foundation at co-2 co-3 is the account number assigned to the co-5 at org in an email to ra-14 at co-12 on august 20xx attorney ra-15 identified his law firm as the representative of org ra-15 requested any documents in ref-5's possession such as an assignment etc that demonstrates that the down-line interest was conveyed from ra-5 to co- later that day ra-14 requested ra-5's approval to provide those documents to ra-15 one of those documents was a fax on 20xx from ra-5 to ra-16 at co-12 in that fax ra-5 thanked ra-16 for helping her with her estate problems she also stated that she was ready to sign the transfer of membership to org of city state with one exception i want to be able to be the manager of my down-line and the foundation agrees that that is fine with them form 886-a crev department of the treasury - internal_revenue_service page -11- department of the treasury - internal_revenue_service explanation of items form_8 a name of taxpayer org ra-1 address city state schedule no or exhibit year period ended 20xx 20xx 20xx 20xx in a second letter dated august 20xx poa power_of_attorney for ra-5 and ra-15 representing org requested a collection_due_process_hearing with the internal_revenue_service the letter pointed out that e e e e ra- sec_5 had made an offer_in_compromise but the irs had continued collection activity a levy had been issued to the co-12 companies on the belief that ra-5 had transferred a down-line interest to org in 20xx ra-5 was not an officer a director nor an employee of org ra-5 receives no compensation or other_payments from org the levy relates to property owned by org not ra-5 from july 20xx to october 20xx the co-12 checks issued to org for account were mailed directly from co-12 to the irs to reduce ra-5's tax_liability during that time co- org officers ra-5 and their attorneys gathered records and formulated strategies in an attempt to release and reverse the levy during that same time period with the exception of dollar_figure from the final liquidation of an investment account the only income received by co-5 sub- account resulted from transfers donations from the ra-5 foundation at co-2 on october 20xx ra-7 as manager of co-19 provided a notice of a potential claim against org for its failure to make payments to co-19 according to that letter we hereby demand that you immediately reinstate the funding mechanism to support the work of co-19's employees for your benefit a subsequent notated copy of ra-7' letter advised ra-7 that dir- dir-1 had spoken to ra-5 and had been assured that there was no intention to sue dir-1 warned ra-7 that in the event that the letter was in fact a notice of intention to sue distributions from the account would be frozen to save for a potential lawsuit ra-5 bankruptcy finally in october of 20xx ra-5 declared bankruptcy bankruptcy laws prevented irs levies against the co-12 payments to org for the remainder of 20xx payments from the co-12 account to org resumed that month and org resumed its monthly disbursements to co-19 in march 20xx org distributed dollar_figure reported to be the total of residual co-12 payments held by org to ra-5's bankruptcy account the co-12 membership interest was also forfeited to the bankruptcy account on january 20xx the internal_revenue_service filed an adversary complaint against ra-5 requesting that the bankruptcy court determine that her federal_income_tax was non- dischargeable and to determine the extent and validity of federal tax_liens the complaint stated that ra-5's tax_liability for 19xx through 20xx with interest and penalties was dollar_figure per that complaint in the early 19xxs ra-5 became involved with promoters of abusive tax_avoidance schemes involving sham trusts to shelter income the irs audited ra-5 and assessed over dollar_figurein taxes as the result of an irs audit ra-5 agreed to collapse the trusts but continued to avoid department of the treasury - internal_revenue_service form 886-a rrev page -12- department of the treasury - internal_revenue_service explanation of items form_886 a name of taxpayer org ra-1 address city state schedule no or exhibit year period ended 20xx 20xx 20xx 20xx payment of her outstanding taxes holding assets in the name of and diverting income to various nominees such as co-25 co-2 and co-3 the irs also alleged that ra-5 was attempting to shelter substantial income from irs collection by transferring her down-line interest in a multi-level marketing plan to org now according to the debtor ra-5 she has diverted her income to an entity known as co-2 that she failed to disclose in her schedules or statement of financial affairs this case on july 20xx ra-5 filed an original disclosure statement for case number in the united_states bankruptcy court eastern district of state marshall division according to that document the debtor has been an author lecturer and noted nutritionist for over years she has been instrumental in helping to develop various nutritional and health products which are generally marketed by and through her co-22 organization which is managed by co-12 companies located in city state the co-22 is generated through co-19 a state limited_liability_company of which the debtor held a previously conveyed organization in city state this transfer occurred following the date when the irs had actually filed a federal_tax_lien against the debtor as a result of the previously mentioned adversary proceeding with the irs the debtor has requested that co-3 turn over the interest conveyed to her through her disbursing agent which has been agreed by co-3's counsel to the co-3 co-3 a non-profit tax exempt percent interest prepetition she had the document went on to state the debtor's significant problems arose as a result of her acceptance of poor advice from individuals and groups concerning tax reporting and income_tax liabilities the agreed final judgment found that ra-5's federal_income_tax liability was non dischargeable the court also found that the irs had valid tax_liens that attach to all property and interest in property regardless of record ownership the judgment continued by ordering that ra-5's federal tax_liabilities attach to the down-line interest co-12 id previously held in the name of co-19 for the debtor's benefit financial data calculations during the period from january 20xx through december 20xx the sole checking account for org was held at co-11 in city state in account number no separate checking account was established for the co-19 receipts from all sources including co-12 payments were deposited into this account and all checks written including checks to the company were issued from this account the only other financial_account held by org was an investment account that was established at co-23 in city state the account was initially funded with a dollar_figure withdrawal from the checking org checking account to purchase of shares on march 20xx form 886-a cev department of the treasury - internal_revenue_service page -13- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ra-1 address city state schedule no or exhibit year period ended 20xx 20xx 20xx 20xx dollar_figure revenues total org revenue 20xx through 20xx for annual detail see attachment iii co-2 contributions other donations subsequently transferred to co-2 co-12 acct receipts co-2 donations from ra-5 foundation income from ra-5 interest investments earnings on co-19 see k-1 schedule below total revenues dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure org's income from company operations as reported on forms and k -1 ordinary_income short term capital_loss charitable_contributions sec_179 expense net after deductible expenses non deductible expense net_earnings first copy 20xx dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure amended 20xx dollar_figuredollar_figure dollar_figuredollar_figure 20xx 20xx dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure org provided k-1's for 20xx for its co-19 earnings those documents did not match the 2nd copy was accepted as correct since the amount reported as the ending capital_account balance was reported as the beginning balance on the 20xx k-1 co-19 credited of its 20xx net_earnings to org however org was a partner for only the last quarter of that year expenses total org disbursements 20xx through 20xx for annual detail see attachment iit org operating_expenses accounting annual corporate filings department of the treasury - internal_revenue_service form 886-acev page -14- dollar_figuredollar_figure dollar_figuredollar_figure form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service org ra-1 address city state schedule no or exhibit year period ended 20xx 20xx 20xx 20xx irs late filing penalties dollar_figuredollar_figure expenses associated with co-5 transfers to co-2 ra-5 foundation to purchase books from ra-7-ra-5 officer expense checks to co-19 llc ra-5 legal fees postage bank charges u bit_tax penalty on co-12 income dollar_figuredollar_figure donations total org expenses dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure dollar_figuredollar_figure comparison of org income from co-12 payments to total ra-5 company related expenses income from co-12 payments paid directly to co-19 llc ra-5 and levy related legal expenses paid to vendors transfers to ra-5 fdn to buy books from ra-7 ra-5 enterprises dollar_figuredollar_figure dollar_figuredollar_figure amount returned to ra-7 ra-5 control other related expenses dollar_figuredollar_figure dollar_figuredollar_figure total ra-5 co-19 expenses dollar_figuredollar_figure percent of co-12 income to distributed to the ra-5 company expenses dollar_figuredollar_figure dollar_figuredollar_figure percent of org donations out to total department of the treasury - internal_revenue_service form 886-a mev page -15- form_886 a name of taxpayer department of the treasury - internal_revenue_service explanation of items org ra-i address city state schedule no or exhibit year period ended 20xx 20xx 20xx 20xx income dollar_figure dollar_figure it should be noted that no forms 990-t were filed and no unrelated business tax was paid_by org until august 20xx when delinquent forms 990-t were filed for the tax years 20xx and 20xx the taxable_income reported on those returns was the commission revenue received from co-12 account law sec_501 of the code provides in pertinent part for the exemption from federal_income_tax of corporations and any community chest fund or foundation organized and operated exclusively i c safety literary or educational_purposes or for religious charitable scientific testing for pub to foster national or international amateur sports competition but only if no part of its activities involve the provision of athletic_facilities or equipment or for the prevention of cruelty to children or animals no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual sec_1 c - a of the tax regulations states that in order to be exempt as an organization described in sec_501 an organization must be both organized and operated exclusively for one or more of the purposes specified in such section if an organization fails to meet either the organizational_test or the operational_test it is not exempt sec_1_501_c_3_-1 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 its activities is not in furtherance of an exempt_purpose sec_1_501_a_-1 the words private_shareholder_or_individual in sec_501 refer to persons having a personal and private interest in the activities of the organization sec_1_501_c_3_-1 of the regulations provides that an organization is not organized or operated for an exempt_purpose unless it serves a public rather than a private interest even though an organization serves a public interest it will not qualify for status under sec_501 of the code if it also serves a private interest more than incidentally therefore the organization must establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interest tax-regs sec_1_704-1 partner's_distributive_share part of basic tests as to ownership department of the treasury - internal_revenue_service form 886-a rev page -16- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20xx 20xx 20xx org ra-1 address city state i in general -whether an alleged partner who is a donee of a capital interest in a partnership is the real owner of such capital interest and whether the donee has dominion and control_over such interest must be ascertained from all the facts and circumstances of the particular case isolated facts are not determinative the reality of the donee's ownership is to be determined in the light of the transaction as a whole the execution of legally sufficient and irrevocable deeds or other instruments of gift under state law is a factor to be taken into account but is not determinative of ownership by the donee for the purposes of sec_704 the realities of the transfer and of the donee's ownership of the property attributed to him are to be ascertained from the conduct of the parties with respect to the alleged gift and not by any mechanical or formal test tax-regs sec_1_6033-2 requires every organization which is exempt from tax whether or not it is required to file an annual information_return to submit such additional information as may be required by the internal_revenue_service for the purpose of inquiring into its exempt status and administering the provisions of subchapter_f sec_501 and following chapter of subtitle a of the code sec_6033 and chapter of subtitle d of the code see sec_6001 and sec_1_6001-1 with respect to the authority of the district directors or directors of service centers to require such additional information and with respect to the books of accounts or records to be _ kept by such organizations in national found inc v united_states cl_ct nfi the court found that the plaintiff demonstrated the structural controls necessary to retain its exempt status where the evidence showed that the organization would refuse to administer a project if it did not meet five stringent standards that it be consistent with a the charitable purposes specified in sec_501 that it have a reasonable budget that it be adequately funded that it be staffed by competent and well trained personnel and that it be capable of effective monitoring and supervision by nf' the court also found that donors had relinquished all ownership and control_over the donated funds or property to nfi and that nfi exercised its discretion in authorizing charitable distributions of the funds new dynamics foundation inc v united_states no 99-197t provides a case in which the donor_advised_fund demonstrated inadequate controls new dynamics foundation inc ndf was initially operated as a sub-account under the national heritage foundation nhf ndf was later spun-off into a west coast version of nhf in that case the court distinguished nfi finding no indication that new dynamics foundation had a set of standards designed to prevent abuse of its funds or that donors relinquished all ownership and custody of the donated funds or property in denying ndf's request for a declaratory_judgment that it was exempt under sec_501 the court commented that unlike nf1 there is no indication in the case sub judice department of the treasury - internal_revenue_service form 886-a rev page -17- department of the treasury - internal_revenue_service form_8 a explanation of items name of taxpayer org ra-1 address city state schedule no or exhibit year period ended 20xx 20xx 20xx 20xx that plaintiff had let alone enforced a comparable set of standards -- a strong indication in this court's view that it was not serious about preventing the abuses of its funds in addis v commissioner t c affd 374_f3d_881 9th cir and weiner v commissioner tcmemo_2002_153 the tax_court held that national heritage foundation form 886-a r ev department of the treasury internal_revenue_service failed to provide a good-faith estimate of the value of goods and services that the taxpayer received in consideration for contributions the taxpayer made to nhf in connection with a charitable split dollar life_insurance arrangement and therefore denied the taxpayer's charitable_contributions for and entirely - in 326_us_279 the supreme court stated that the presence of a single nonexempt purpose if substantial in nature will destroy the exemption regardless of the number or importance of truly exempt purposes the importance of this finding was emphasized by the addition of sec_1_501_c_3_-1 to the tax regulations which 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 of the code thus the operational_test standard prohibiting a substantial nonexempt purpose is broad enough to include inurement private benefit and operations that further nonprofit goals outside the scope of sec_501 of the code an organization will not be so regarded if more than an insubstantial part of its activities are not in furtherance of an exempt_purpose 78_tc_280 concluded that prohibited private benefit may include an advantage profit fruit privilege gain or interest in 92_tc_1053 the tax_court held that an organization that as its primary activity operated a school to train individuals for careers as political campaign professionals was not operated exclusively for exempt purposes as described in sec_501 of the code because the school's activities conferred impermissible private benefit the court defined private benefit as nonincidental benefits conferred on disinterested persons that serve private interests in 675_f2d_244 9th cir affd per curiam 74_tc_1324 a nonprofit arts organization furthered its charitable purposes by participating as sole general_partner in a partnership with private parties to produce a play with 49_f3d_1395 9th cir affd t c memo on the other hand the organization that did not qualify as a dollar_figure c organization because its activities performed as co-general partner in for-profit limited_partnerships substantially form 886-acev department of the treasury - internal_revenue_service page -18- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20xx 20xx 20xx org ra-1 address city state furthered a non-exempt purpose and serving that purpose caused the organization to serve private interests it had no management responsibilities and could describe only a vague charitable function of surveying tenant needs in 505_f2d_1068 6th cir harding nonprofit_hospital with an independent board_of directors executed a contract with a medical partnership composed of seven physicians the contract gave the physicians control_over care of the hospital's patients and the stream of income generated by the patients while also guaranteeing the physicians thousands of dollars in payment for various supervisory activities the court held _that the benefits derived from the contract constituted sufficient private benefit to preclude exemption a in 113_tc_47 wl the court found impermissible private benefit resulted from a nonprofit hospital's contract with a physician group giving them a virtual monopoly over care of the hospital's patients and the income stream they represented and providing the physician group with fees for supervising the hospital's medical staff the court went on to state that redlands surgical services has ceded effective_control over the operations of the partnerships and the surgery center to private parties conferring impermissible private benefit in 71_tc_1067 affd in unpublished opinion 647-f 2d 9th cir the tax_court concluded that the for-profits were able to use the non-profit as an instrument to further their for-profit purposes neither the fact that the for-profits lacked structural control_over the organization nor the fact that amounts paid to the for-profit organizations under the contracts were reasonable affected the court's conclusion consequently est of hawaii did not qualify as an organization described in sec_501 of the code a tax exemption is a matter of legislative grace and an organization seeking an exemption must prove that it comes squarely within the terms of the law conferring the benefit sought 30_tc_1151 wl see also fla hosp trust v commissioner 103_tc_140 wl affd 71_f3d_808 11th cir in 823_f2d_1310 9th cu the ninth circuit noted that it found the taxpayer's arguments unpersuasive in large part because the taxpayer presented little documentation to show that the majority of the money was used for church purposes and failed to present the documentation necessary to trace the source and use of church monies the tax_court in 74_tc_531 department of the treasury - internal_revenue_service form 886-a cev page -19- department of the treasury - internal_revenue_service form_886 a explanation of items name of taxpayer org ra-1 address city state schedule no or exhibit year period ended 20xx 20xx 20xx 20xx noted that the taxpayer failed to establish that it was not operated for the private benefit of its founders the taxpayer claimed to have expenditures_for maintenance and supplies office supplies and maintenance and supply inventory the taxpayer made a general statement that the amounts were for hymnals church and office equipment postage etc this was found not to be adequate the taxpayer claimed to follow protestant forms of ritual but there was no direct information about the services conducted or who attended no objective facts were provided to explain the purposes of a trip to germany only vague information was provided making it probable that virtually all of the income benefited the founders inadequate information was given about how compensatiori-was determined and there was virtually no objective information about the services performed in the 71_tc_102 the court concluded that the operational_test was not satisfied where the taxpayer could not adequately document grants that it made the taxpayer stated the grants were made in furtherance of a charitable purpose to wit to assist the poor who were in need of food clothing shelter and medical attention the only documentation for the grants was a list of grants made which included the name of the recipient the amount of the grant and the reason for the grant which was specified as either unemployment moving_expenses school scholarship or medical expense some grants were made to the taxpayer's officers the court found this was inadequate and that there needed to be documented criteria which would demonstrate the selection process of a deserving recipient the reason for specific amounts given or the purpose of the grant in new concordia bible church v commissioner tcmemo_1984_619 the court noted that complete information about disbursements was required to ensure there is no inurement there needs to be details about services provided in exchange for support application of law to org operations the analysis of any organization's qualification for recognition as one described in code sec_501 must begin with the organizational and operational tests discussed in sec_1_501_c_3_-1 that regulation points out that if an organization fails to meet either the organizational_test or the operational_test it is not exempt _ organizational_test the organizational_test requires that the governing instruments limit the purposes of the entity to ones described in code sec_501 and may not expressly empower the organization to engage other than as an insubstantial part in activities which in themselves are not in furtherance of one or more exempt purposes in order to establish that it is operated exclusively for one or more exempt purposes the assets must also be irrevocably dedicated to sec_501 purposes form 886-a crev department of the treasury - internal_revenue_service page -20- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20xx 20xx 20xx org ra-1 address city state therefore upon dissolution such assets would by reason of a provision in the organization's articles or by operation of law be distributed for one or more exempt purposes r to the federal government or to a state_or_local_government for a public purpose review of the original articles of incorporation filed on december 19xx found that the specific purpose was to encourage philanthropy for charitable purposes attachment a to the articles of incorporation provides purpose powers and dissolution clauses that closely follow the standard ones that have been adopted by many organizations and are provided in irs publications as the model for provisions that are adequate to meet the organizational requirements of sec_501 therefore org meets the organizational_test required by sec_501 operational_test preface any charitable educational scientific or religious activities that may be approved from time to time to maintain the nutritional and marketing business through co-12 corp for the purpose of generating income for nutritional education research t he co-19 will continue to manage the business and advise the foundation they will be paid reasonably for their services and ra- sec_5 will continue to be the spokesperson additional funds may be used to support other charitable organizations and ministries - co-5 proposed charitable purpose xx as pointed out in new dynamics foundation inc v united_states no the critical inquiry under the operational_test is on the ‘purposes towards which an organization 's activities are directed in applying tax regulation sec_1_501_c_3_-1 org must engage primarily in activities which accomplish one or more of such exempt purposes specified in sec_501 prior to the pension_protection_act of 20xx the term donor_advised_fund was not defined in the code however the term was understood to refer to separate funds or accounts established and maintained by public_charities to receive contributions from a single donor or a group of donors the charities had ultimate authority over how the assets in each account were invested and distributed but the donors or individuals selected by the donors were permitted to provide nonbinding recommendations regarding account distributions and or investments co-5 was the only donor_advised_fund at org from its inception in 19xx through december 20xx therefore its operation must be the focus of the analysis in evaluating org's activities and whether it operates in an exempt manner and among the historical facts that must be considered in this analysis are org's close association with co-2 and the governing body facilities and staff shared by the two department of the treasury - internal_revenue_service form 886-a crev page -21- form_886 a name of taxpayer department of the treasury - internal_revenue_service explanation of items org ra-1 address city state schedule no or exhibit year period ended 20xx 20xx 20xx 20xx while org had a relatively short history and states that the organization struggled in its early years its directors officers and the co-2 staff that provide services to org had many years of experience operating a donor_advised_fund that is arguably one of the largest in the country - org operations the only documented activities of org and its only sub-account co-5 from 20xx to xx were receipt of three small donations on 20xx that were transferred to co-2 subaccounts four days later receipt of dollar_figure in endowment funds transferred from co-2 communications with ra-5 related to the transfer of the co-12 down-line interest acceptance of that transfer and subsequent co-12 checks and acceptance of the co-19 partnership_interest payments to and for co-19 charitable_contributions totaling dollar_figure as requested by ra-5 manager of the company and attempts to obtain a release of the levy precipitated by ra-5's personal tax_liability org structural control national found inc v united_states supra provides the elements that demonstrate structural controls necessary for a donor_advised_fund to retain its exempt status nfi would not accept a project unless it met five stringent standards that the purpose of the project sub-account be consistent with the charitable purposes specified in c org has provided no evidence that any officer director or authorized representative of org ever questioned ra-5's expectations that the co-5 would maintain the nutritional and marketing business conduct nutritional education research allow the llc ra-5 and ra-7 managed to operate the business with ra- as the spokesperson with co-12 and pay for those services when asked if org examined financial statements earning reports balance sheets etc org officers stated that because the company was newly formed it did not have any history to examine however the co-12 reports stated that account the down-line interest that was transferred to the co-19 and then to org for the benefit of the co-5 sub-account has been an co-12 account since 19xx and has earned nearly dollar_figure since inception form 886-acev department of the treasury - internal_revenue_service page -22- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20xx 20xx 20xx org ra-1 address city state the org co-2 officers had accepted a similar membership transfer to the ra-5 foundation at co-2 the previous year and would have been aware that ra-5 had been involved with co-12 for many years org officers were cognizant of the fact that ra-5 had written several books on nutrition and the officers were aware that ra-5 had an outstanding federal_income_tax liability exceeding dollar_figure yet these officers tacitly accepted that ra-5 was and would remain the manager of co-19 no contemporaneous documents have been provided to demonstrate that any org officer or director - investigated the operations of the nutritional or marketing business determined whether co-19 had employees who had the expertise to conduct the nutritional research questioned how the research results would be disseminated to benefit the public or attempted to retain the rights to patents and or copyrights developed through funding from org which were awarded to co-13 and or other for-profit companies controlled by ra-5 there is no contemporaneous record of any occasion when an officer or director questioned the value of the co-19 membership or the possible lack of donative_intent behind the transfer to co-5 org officers did not assess the value of the down-line for tax purposes nor was there any evidence that financial statements tax returns revenue and or expense reports were examined to evaluate the earning potential of the co-12 account or the value of interest in co-19 that the sub-account have a reasonable budget org has provided no evidence that a budget was solicited or submitted prior to acceptance of the application instead the officers stated that because org was an organization in its infancy which needed ‘seed' funding it accepted the co-19 application account in spite of the uncertainties and with knowledge of ra-5's tax_liabilities sub- that the sub-account be adequately funded org may have believed that the foundation would be adequately funded by the co-12 payments but there is no record that the earnings history of the down-line was solicited or examined no annual budget was prepared and there is no record that the officers reviewed or discussed the operations of co-19 before or after accepting the application f4 that the sub-account be staffed by competent and well trained personnel when org was asked to provide the names and the qualifications of the employees and contractors who were compensated by co-19 ra-7 and ra-21 were the only employees form 886-a cev department of the treasury - internal_revenue_service page -23- department of the treasury - internal_revenue_service explanation of items form_8 a name of taxpayer org ra-1 address city state schedule no or exhibit year period ended 20xx 20xx 20xx 20xx identified in correspondence ra-17 as the current vice-president of org responded that that since org did not hire those persons it was not aware of the qualifications that led to the selection of these individuals when asked to provide employment_tax form dir-4 responded that the individuals were not employees of org therefore org does not have copies of those forms that it be capable of effective monitoring and supervision despite the fact that it held a ownership_interest in co-19 which conveyed nearly all the member voting control to org org has not documented any occasion when an officer or representative attended any board meetings or even requested minutes of those meetings no org officer or other authorized person has provided any records of informal conversations calls or correspondence to confirm that disbursement requests were valid business_expenses with the exception of travel_expenses for one ra-5 speaking engagement in 20xx and invoices provided for expenses in the last months of 20xx the only invoices provided consisted of a list of undocumented operating_expenses attached to the org transaction form from 20xx through 20xx the invoices were provided on co-13 letterhead from 20xx to 20xx the source of the listing in some months was not identified in other months the list referenced ra-21 one of the managers of co-13 other disbursements from org to the co-19 were routinely made without any documentation when asked to provide records of contacts with the company org reported that the discussions were primarily oral and org had no other documents related to those payments the antithesis of the co-18 case can be found in new dynamics foundation inc like new dynamics foundation there is no indication that org has a set of standards designed to prevent abuse of its funds or insure that donors relinquished all ownership and custody of the donated funds or property instead org's pattern of returning the co-12 income to pay the alleged operating_expenses of co-19 while it continued to be managed and controlled by ra-5 and ra- suggests that the donor did not truly relinquish ownership and control_over the donated funds and property org 's lack of involvement and ra-5's control of the co-12 account were clearly evidenced by the fact that co-12 notified ra-5 not org that an irs levy had been received against her account nearly years after she had transferred ownership of the co-12 account the addis v commissioner and weiner v commissioner cases provide instances where donors received substantial benefits while the documents structuring the transaction avoided stating that any obligations were imposed on the donee nhf in both cases the court found that the taxpayers contributed money in the amount of the premium that the donee was required to pay to be eligible for a portion of the death_benefit on the donors' lives nhf would then pay the premium on a split dollar life_insurance_policy with the donated funds and issue a confirmation to form 886-a crev department of the treasury - internal_revenue_service page -24- form_8 a name of taxpayer department of the treasury - internal_revenue_service explanation of items org ra-1 address city state schedule no or exhibit year period ended 20xx 20xx 20xx 20xx the taxpayer acknowledging the charitable_contribution along with a statement that nhf did not provide any goods or services to the donor in return for the contribution as part of the addis v commissioner decision the court stated that petitioners and nhf designed a scheme purporting to provide no benefits to petitioners in exchange or consideration for petitioners' payments however petitioners received substantial benefits from nhf under the life_insurance_policy in the documents structuring this transaction petitioners and nhf avoided stating any obligation of nhf and made it appear that petitioners made an outright gift to nhf with no quid pro quo however petitioners expected and they told nhf that they expected nhf to use their contributions for both their and nhf's benefit like the donations by addis and weiner the transfer of the co-12 down-line interest appeared to be an outright donation of a valuable asset unlike addis and wiener the donation was not structured to provide a tax deductible contribution but co-2 org officers were aware that ra- already had a substantial outstanding tax_liability org has pointed out that it was under no legal_obligation to approve payments to the down-line but in fact all requests for payments were approved as long as the co-12 payments were providing an income stream to org and after those payments were made org stated that as the junior partner it was not in a legal position to access invoices influence day to day operations be part of the employee selection and compensation process or access the employment_tax records to verify the validity of the expenses the ultimate result was that org allowed ra-5 and ra-7 to continue to control the co-12 income circuitously by having org receive the income for the benefit of the co-19 financial sub-account and then requesting disbursements from the sub-account to co-19 those funds were used to pay the expenses of for-profit entities controlled b y ra-5 and ra-7 org partnership control as evidenced by the schedule_k-1 provided to org by the company co-19 elected to be treated as a partnership sec_1_704-1 provides that the reality of the transfer and of the donee's ownership of interest in a partnership attributed to him are to be ascertained from the conduct of the parties with respect to the alleged gift and not by any mechanical or formal test the execution of legally sufficient and irrevocable deeds or other instruments of gift under state law is a factor to be taken into account but is not determinative of ownership by the donee for the purposes of sec_704 a sec_501 organization may form and participate in a partnership including an llc treated as a partnership for federal_income_tax purposes and meet the operational_test if participation in the form 886-acev department of the treasury - internal_revenue_service page -25- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20xx 20xx 20xx org ra-1 address city state partnership furthers a charitable purpose and the partnership arrangement permits the exempt_organization to act exclusively in furtherance of its exempt_purpose and only incidentally for the benefit of the for-profit partners see plumstead and housing pioneers similarly a sec_501 organization may enter into a management_contract with a private party giving that party authority to conduct activities on behalf of the organization and direct the use of the organization's assets provided that the organization retains ultimate authority over the assets and activities being managed and the terms and conditions of the contract are reasonable including reasonable_compensation and a reasonable term see broadway t heatre league however if a private party is allowed to control or use the non-profit organization's activities or assets for the benefit of the private party and the benefit is not incidental to the accomplishment of exempt purposes the organization will fail to be organized and operated exclusively for exempt purposes revrul_98_15 in situation and plumstead theatre society inc describe partnership agreements which are structured in a manner that permits the charity to control the partnership in both cases the exempt_organization structured the partnership_agreement to permit the organization to act exclusively in furtherance of exempt purposes in contrast org has claimed that the limited_partnership agreement sic positioned it as nothing more than an investor who merely passively maintained the down-line asset by receiving a share of income from the co- and making distributions to maintain a capitol asset of the organization under those circumstances org argues that it could not exercise the control necessary to insure that its assets are dedicated to charitable purposes org defends its disbursements of the income from the down-line interest by quoting the uniform management of institutional funds act the response stated that the board_of directors of state charities are required to act with care skill prudence and diligence org has not provided evidence of any due diligence investigation into the character or history of managing members of co-19 ra-5 and ra-7 in addition the officers did not assess the value of the down-line interest or report that interest as an asset on its balance_sheet question co-19 ra-5 or ra-7' donative_intent question why the donor in co-19 did not request a valuation for tax purposes consider the implication of ra-5's failure to report the donation on her taxes consider the advantages of selling the down-line interest - exercise its voting_right to withdraw from or alter the limited_liability_company agreement or consider employing a different company to maintain the down-line interest department of the treasury - internal_revenue_service form 886-a ev page -26- form_886 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20xx 20xx 20xx org ra-1 address city state after accepting the down-line interest org promptly accepted what its officers have described as a junior partnership_interest in co-19 the donor of the interest and allowed the managing members of the llc to continue to manage the interest without question like the organizations described in harding hospital inc and redlands surgical servs org exercised no control_over the operations of the company instead the officers of org have continually maintained that as a junior partner they have no authority to control the daily operations of the limited_partnership there are no records of member or board_of director meetings requests for additional information or discussions concerning the low return on the investment like the relationship between the partners in housing pioneers inc supra org had no management responsibilities and could only describe vaguely the operations of the company in fact org ceded control of the company to the donor despite its voting rights and like the for-profit partners of est of hawaii ra-5 and ra-7 through their alleged managing interest in co-19 and ra-5 were able to use the non-profit co-5 at org to further their for-profit purposes org burden_of_proof _ the courts have consistently affirmed the importance of compliance with the recordkeeping requirements imposed by sec_6033 the court in church of scientology v commissioner found the taxpayer's argument to be unpersuasive in large part because the taxpayer presented little documentation likewise in bubbling well church of universal love v commissioner the failed to establish that it was not operated for private benefit because the taxpayer did not make an open and candid disclosure of facts the court found that there was no evidence provided to show that payments were reasonable and in church in boston v commissioner the court concluded that the operational_test was not satisfied where the taxpayer could not adequately document grants that it made in deciding new concordia bible church v commissioner the court noted that complete information about disbursements was required to ensure there is no inurement org has provided no documentation validating the exempt_purpose of the payments to co-19 instead org has used its claim that it was not the management member of the alleged limited_partnership to explain its failure to adequately document the charitable purpose for the disbursement of virtually all the income of the down-line interest to the control of the donor taxpayer position in correspondence dated december 20xx dir-1 stated that org was inactive for several years following its incorporation with the exception of its receipt of the co-12 down-line department of the treasury - internal_revenue_service form 886-a rev page -27- form_8 a department of the treasury - internal_revenue_service explanation of items name of taxpayer org ra-1 address city state schedule no or exhibit year period ended 20xx 20xx 20xx 20xx interest according to dir-2 org sought to maintain the value of the interest via the only means possible payment of the costs necessary to sustain its ongoing value dir-2 continued by quoting the uniform management of institutional funds act and enumerated a list of circumstances a board should consider in administering a fund during that same meeting org attorneys expressed the belief that the exempt status should not be revoked because org did not receive a portfolio of blue-chip stocks which produced capital_gains and dividend to sustain its initial existence org has denied knowledge of the existence of the ra-s lien prior to acceptance of the down- line interest and maintain that as a junior partner in the company it had no rights to enforce its request for documents related to actual expenses which it paid as requested by ra-5 org has asserted that co-12 account held by the ra-5 foundation at co-2 benefited from the operations of the company as well government position based on the facts in this case the irs has determined that ra-5 built a successful business through her association with co-12 in the mid 19xx's ra-5 stopped filing federal_income_tax returns to report her income as a result ra-5 amassed an unpaid tax_liability exceeding dollar_figure in 20xx ra-5 removed a portion of her income from irs collection efforts by transferring co-12 account to the ra-5 foundation at co-2 subsequently in 20xx her efforts to protect the co-12 account from taxation and collection led her to discussions with org a relatively new donor_advised_fund organization controlled by the same individuals who ran co-2 org officers were aware of ra-5's outstanding tax_liability and the attention that the irs was focusing on ra-5 and her assets prior to accepting the co-12 down-line interest ‘ the preliminary discussions between org and ra-5 focused on how to best structure the org subaccount to deflect irs attention from the income received from co-12 co- account then org proceeded to accept ownership of the down-line interest but did not report the value of the donation as a contribution or an asset org has failed to demonstrate due diligence in accepting ownership of the company co-19 and in documenting the exempt_purpose of subsequent payments to the company form 886-a crev department of the treasury - internal_revenue_service page -28- form_8 a name of taxpayer explanation of items department of the treasury - internal_revenue_service schedule no or exhibit year period ended 20xx 20xx 20xx 20xx org ra-1 address city state org demonstrated little knowledge concerning the operations of the llc which allegedly supported the organization's valuable asset over the years after the company donated the down-line interest virtually all the income received was retumed to the donor the company llc and because the company was controlled by ra-5 and ra-7 much of the income was used to support the operations of businesses owned by ra-5 and ra-7 org alleged that additional charitable benefits were served through its support of the ra-5 foundation at co-2 however org has failed to meet its burden_of_proof by providing any detailed explanations or financial records of the relationship between the ra-5 subaccount at co-2 and the company org did not provide evidence of-the structural controls necessary for donor advised funds- as set forth by co-8 instead after accepting the down-line interest org promptly accepted an ownership_interest in co-19 the purported donor of the co-12 co-22 interest and allowed the company to continue to manage that interest then org disclaimed any control_over the operations of the company org that allowed ra-5 and ra-7 to freely and effectively employ the transferred assets and income derived there from in furtherance of their own private interest and benefit org's pattern of returning the income generated by the co-12 account as operating_expenses to co-19 which continued to be managed and controlled by ra-5 and ra-7 suggests that the donor did not truly relinquish ownership and control_over the donated funds and property rather the co-19 managers were allowed to treat org as a conduit to shield co-12 income from irs tax collection efforts against ra-5 salary payments to ra-7 and org income that was diverted to co-13 and ra-7 ra-5 have resulted in substantial private benefits to both ra-5 and ra-7 conclusion the internal_revenue_service has concluded that org does not operate exclusively for charitable educational or other exempt purposes therefore the internal_revenue_service should revoke its exempt status effective january 20xx department of the treasury - internal_revenue_service form 886-a rev page -29-


internal_revenue_service number release date index no cc dom fi p 2-plr-117153-99 date legend fund adviser date date date date date date dear this replies to the letter dated date submitted on behalf of the fund requesting an extension of time to elect under sec_855 of the code to treat dividends distributed after the close of the taxable_year as having been paid during that year the fund requests that its election be considered timely filed pursuant to sec_301_9100-1 of the procedure and administration regulations facts fund is registered under the investment_company act of as an open-end management investment_company that has elected to be taxed as a regulated_investment_company ric pursuant to sec_852 et seq of the code fund plr-117153-99 is an accrual basis taxpayer with a date fiscal_year end that has previously elected qualified and intends to continue qualifying to be taxed as a ric under subchapter_m of the code the adviser serves as the investment adviser and administrator to the fund and provides certain administrative services necessary for the fund’s operations these services include but are not limited to filing all necessary tax returns for the fund including form_7004 application_for automatic_extension of time to file corporation income_tax return the fund’s corporate_income_tax returns have been filed in timely fashion in all previous years and each return has included an election pursuant to sec_855 of the code and sec_1_855-1 of the regulations due to unforseen circumstances occurring at the adviser form_7004 inadvertently was not filed for the taxable_year ended date the combination of events leading to this oversight included the reassignment within the adviser of the responsibility for preparing and filing the form_7004 and the sudden departure from the adviser of the individual to whom this responsibility was reassigned due to the combination of these two events the fund’s request for extension of time to file its corporate_income_tax return that was due on date was not filed immediately upon discovery of this oversight the advisor prepared and submitted the fund’s federal corporate_income_tax return on date it has been the consistent practice of the fund to declare and pay dividends from short-term_capital_gains and net_long-term_capital_gains annually these annual dividends are generally declared and paid in an amount calculated to comply with the distribution_requirements of sec_852 and sec_4982 of the code additionally to the extent necessary the fund has consistently elected pursuant to sec_855 of the code to treat dividends_paid after the close of its taxable_year as having been paid during the taxable_year it was the intention of the fund to make a sec_855 election for the taxable_year in question on date the funds declared dividends that were paid on date in its submission the fund represents that the request for relief was filed by the taxpayer before the failure to make the regulatory election was discovered by the service granting the relief will not result in the taxpayer having a lower tax_liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money the taxpayer did not seek to alter a return position for which an accuracy- related penalty has been or could have been imposed under sec_6662 of the plr-117153-99 code at the time the taxpayer requested relief and the new position requires or permits a regulatory election for which relief is requested being fully informed of the required regulatory election and related tax consequences the taxpayer did not choose to not file the election applicable law sec_301_9100-1 of the regulations provides in part that the commissioner has discretion to grant a reasonable extension of time to make a regulatory election defined in sec_301_9100-1 as an election whose due_date is prescribed by regulations or by a revenue_ruling a revenue_procedure a notice or an announcement published in the internal_revenue_bulletin or a statutory election but no more than months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-3 through c i of the regulations set forth rules that the internal_revenue_service generally will use to determine whether under the facts and circumstances of each situation the commissioner will grant an extension of time for regulatory elections that do not meet the requirements of sec_301_9100-2 sec_301_9100-3 provides that subject_to paragraphs b i through iii of sec_301_9100-3 when a taxpayer applies for relief under this section before the failure to make the regulatory election is discovered by the service the taxpayer will be deemed to have acted reasonably and in good_faith and sec_301_9100-3 provides that the interests of the government are prejudiced if granting relief would result in the taxpayer having a lower tax_liability in the aggregate for all years to which the regulatory election applies than the taxpayer would have had if the election had been timely made taking into account the time_value_of_money analysis in this case the fund satisfies the requirements of sec_301_9100-3 through c i of the regulations the fund has applied for relief before the failure to make the election was discovered by the service and therefore is deemed to have acted reasonably and in good_faith fund is not seeking to alter any return position for which an accuracy-related_penalty could be imposed fund is not using hindsight to make an election that has become advantageous since the original due_date of the return containing the election the fund represents that the grant of relief will not prejudice the interest of the government because the fund will not have a lower tax_liability in the aggregate for the year to which the election applies than it would have had if the election had been timely made taking into account the time_value_of_money conclusion based upon the facts and representations submitted it is held that the fund has demonstrated good cause for the granting of relief under sec_301_9100-1 of the plr-117153-99 regulations and therefore will be treated as having made a timely election under sec_855 of the code and sec_1_855-1 of the regulations for the taxable_year ended on date no opinion is expressed as to whether the taxpayer’s tax_liabilities are not lower in the aggregate for all years to which the regulatory elections apply than the taxpayer’s tax_liabilities would have been if the elections had been timely made taking into account the time_value_of_money upon audit of the federal_income_tax return involved the district director's office will determine the taxpayer’s tax_liabilities for the year involved if the district director's office determines the taxpayer’s liabilities are lower that office will determine the federal_income_tax effect this ruling is limited to the timeliness of the fund’s election this ruling does not relieve the fund from any penalty that may be owed as a result of failing to file its federal_income_tax return on time this ruling's application is limited to the facts code sections and regulations cited herein no opinion is expressed as to whether the fund qualifies as a ric that is taxable under subchapter_m part of the code a copy of this letter is being forwarded to the service_center where the fund files its returns with instructions that although form 1120-ric was not timely filed for the taxable_year ended on date fund is to be treated as having made a timely election under sec_855 of the code for that taxable_year this ruling is directed only to the taxpayer who requested it sec_6110 of the code provides that it may not be used or cited as precedent sincerely yours ____________________ assistant chief_counsel financial institutions products enclosure sec_6110 copy