internal_revenue_service appeals_office number release date date date org cio address city state vil dear department of the treasury person to contact empovee id number fax contact hours to refer reply to ap fe in re ‘ eo revocation ein form required to be filed tax periods ended 20xx 20xx 20xx this is a final adverse determination as to your exempt status under sec_501 of the internal_revenue_code irc from federal_income_tax under sec_501 effective date our adverse determination was made for the following reasons it is determined that you do not qualify as exempt you are not operated exclusively for charitable educational or other exempt purposes more than an insubstantial part of your activities were in furtherance of a non-exempt purpose and you were operated for the purpose of serving a part of your earnings inured to or ‘private benefit rather than public interests were for the private benefit of individuals or other non-exempt organizations further no exempt_purpose activities are described on the form_990 filed for contributions to your organization are not deductible under code sec_170 you are required to file federal_income_tax returns on the form indicated above you should file these returns within days from the date of this letter unless a request for an extension of time is granted file the returns in accordance with their instructions and do not send them to this office processing of income_tax returns and assessment of any taxes due will not be delayed because you have filed a petition for declaratory_judgment under code sec_7428 if you decide to contest this determination under the declaratory_judgment provisions of code sec_7428 a petition to the united_states tax_court the united_states court of claims or the district_court of the united_states for the district of columbia must be filed within days from the date this determination was mailed to you contact the clerk of cs 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 if you have any questions please contact the person whose name and telephone number are shown in the heading of this letter 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 matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at taxpayer_advocate_service city state phone see the enclosed notice helpful contacts for your notice_of_deficiency for additional taxpayer_advocate telephone numbers and addresses cc sincerely karen a skinder appeals team manager enclosures notice helpful contacts for your ‘deficiency notice’ department of the treasury internal_revenue_service s gessner m s 4900hal houston tx tax_exempt_and_government_entities_division july 20xx org address taxpayer_identification_number form tax_year s ended 2erson to contact id number contact numbers telephone fax certified mail - return receipt requested dear we have enclosed a copy of our report of examination explaining why we believe revocation of your exempt status under sec_501 of the internal_revenue_code code is necessary if you accept our findings take no further action we will issue a final revocation letter if you do not agree with our proposed revocation you must submit to us a written request for appeals_office consideration within days from the date of this letter to protest our decision your protest should include a statement of the facts the applicable law and arguments in support of your position an appeals officer will review your case the appeals_office is independent of the director eo examinations the appeals_office resolves most disputes informally and promptly the enclosed publication the examination process and publication exempt_organizations appeal procedures for unagreed issues explain how to appeal an internal_revenue_service irs decision publication also includes information on your rights as a taxpayer and the irs collection process you may also request that we refer this matter for technical_advice as explained in publication if we issue a determination_letter to you based on technical_advice no further administrative appeal is available to you within the irs regarding the issue that was the subject of the technical_advice ottar war naina if we do not hear from you within days from the date of this letter we will process your case based on the recommendations shown in the report of examination if you do not protest this proposed determination within days from the date of this letter the irs will consider it to be a failure to exhaust your available administrative remedies sec_7428 of the code provides in part a declaratory_judgment or decree under this section shall not be issued in any proceeding unless the tax_court the claims_court or the district_court of the united_states for the district of columbia determines that the organization involved has exhausted its administrative remedies within the internal_revenue_service we will then issue a final revocation letter we will also notify the appropriate state officials of the revocation in accordance with sec_6104 of the code you have the right to contact the office_of_the_taxpayer_advocate taxpayer_advocate assistance is not a substitute for established irs procedures such as the formal appeals process the taxpayer_advocate cannot reverse a legally correct_tax determination or extend the time fixed by law that you have to file a petition in a united_states court the taxpayer_advocate can however see that a tax matter that may not have been resolved through normal channels gets prompt and proper handling you may call toll-free and ask for taxpayer_advocate assistance if you prefer you may contact your local taxpayer_advocate at 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 thank you for your cooperation sincerely marsha a ramirez director eo examinations enclosures publication publication report of examination letter catalog number f form 886-a rev january 19xx age of name of taxpayer yeariperiod ended org 20xx - 20xx explanation of items tax identification_number 20xx state state a-dean a-dean legend org organization name city ira ira rsv aa attorney sec_5 directors co-1 thru co-64 fsa xx date country - country address address wife wife website website product product city m-ira m- ira number number poa poa ge-1 ge bm-1 bm-2 bm pean attn-1 attn-2 attn-3 attn-4 attn-5 dean-1 dean -2 raa-1 rsa-2 fac-1 fac-2 fac-3 aas ed-1 ed-1 dir-1 dir-2 dir-3 dir-4 dir-5 dir-6 thru related associate ra-1 thru ra-41 thru companies issues org failed to operate as an organization exempt under sec_501 of the internal_revenue_code payments made to or for the benefit of president director dir-1 constitute direct or indirect private benefit inurement payment made to family members of president director dir-1 constitutes private benefit inurement org failed to file employment_tax returns org failed to accurately prepare form_990 return of organization exempt from income for the tax years ending december 20xx through tax_year ending december 20xx facts org herein referred to as org was incorporated on february 20xx and received a certificate of incorporation from the state secretary of state as a domestic non-profit corporation the initial articles of incorporation filed with state secretary of state was a fill-in form and org checked the box which stated the corporation was formed for the purpose of engaging in any lawful activity for which corporations may be formed under chapter title of the state revised statutes non-profit corporation law on february 20xx org filed amendments to the articles of incorporation and this document provided that the corporation shall be operated exclusively for charitable religious educational and or scientific purposes under c of the internal_revenue_code org filed form_1023 application_for recognition of exemption under sec_501 of the internal_revenue_code on april 20xx part ii of form_1023 part ii activities and operation information states the org foundation ' will operate exclusively for educational and charitable purposes in particular the foundation will provide co-1 co-1' ll m programs in tax and human rights with contributions in order that the programs will be able to provide support to their students the foundation is viewed as an integral fundraising activity required by the ll m programs in order to continue their success the co-1 accredited by the american bar association american association of law schools and southern association of colleges and schools the co-1 was founded under the archdiocese of city in 19xx the ll m program in tax was founded residentially in 19xx and founded online in 19xx the human rights ll m program was founded in 20xx the foundation will hold conferences meetings and assemblies to provide a forum for the discussion and dissemination of relevant information and data to promote a better understanding of international economic tax and fiscal topics the f oundation will sponsor at least three conferences each year at co-1 featuring such economic and fiscal topics the foundation will edit and publish papers magazines pamphlets periodicals and books org's bylaws state the purposes of org are promoted through an educational program directed towards tax professionals international law students and educational programs are developed through conferences committees projects and programs the bylaws state that org is established as exclusively charitable and listed the following to promote education within the field of tax finance and economics to promote the standards of professional tax practices to promote the study of international law to promote education at any level to provide charitable assistance to the ll m in international_taxation and a c da e offshore financial centers or ll m in intercultural human rights at co-1 city in the state of state or any other educational_institution fi it is expressly authorized and contemplated that the corporation may and will engage in an active profit making business consistent with the charitable mission and may and will engage in any other active profit making business that is not inconsistent with the charitable mission but only to an insubstantial extent and shall have all the necessary powers to fulfill these objectives g this corporation may solicit and accept gifis grants and contributions jrom the general_public private and public charitable organizations and various public and governmental agencies and to distribute the same to such public and governmental agencies as the directors deem appropriate it may acquire by purchase or gifi such property whether real or personal to facilitate its charitable mission and to have and exercise all powers rights and privileges granted by the government of state org was granted exemption from federal_income_tax under sec_501 of the internal_revenue_code on may 20xx as a organization exempt under sec_509 and sec_170 the application was timely filed within months from when the organization was created or formed org's maintained their records on a cash_basis org's accounting_period ends ‘december filing information for the form 990s is as follows 20xx - filed on november 20xx 20xx - filed on december 20xx - filed late due to 20xx - filed on october 20xx filed late due to 20xx - not filed as of july 20kx 20xx - not filed as of july 20xx org's address of record as reflected on form_990 for 20xx and 20xx was address city state during the audit org provided testimony that this address was the register agent's office in city per org the laws of the state of state require non-profit corporations have an office in the state of state the registered agent in the audit years ra-1 is not an officer director or employee of org and was not involved with org other than serving as the designated registered agent org's current address of record as reflected on form_990 for 20xx is address city state per the filed form 990s 20xx through 20xx the directors and officers of org are as follows e dir-1 herein referred to as dir-1 city state - president dir-2 herein referred to as dir-2 - city state - director president dir-1 directed the activities relating to org from his office at co-1 and used co-1's address address city state on various org documents dir-1' was the full-time director of the ll m in international tax program at co-1 city state the ll m program at co-1 is an on-line program whose curriculum includes courses in five concentration areas offshore financial centers us tax anti-money laundering compliance e-commerce and trust and corporate administration compliance the program focuses on the global tax aspects of compliance and planning for both individuals and corporations the courses have been designed to prepare the practitioner to identify issues perform research use problem-solving skills and provide planning advice dir-1 holds a degree in political economics of the law track of the co-2 and a juris doctorate form co-3 co-1 his ll m specialized in european business and taxation is from the co-4 der the state secretary of state records dir-1 was the registered agent from february 20xx until ra-2 was appointed on april 20xx ra-2 is discussed later in this report 2dir-1 uses the title president and co-director on various documents submitted for the examination dir-2's name was misspelled as dir-2 on the 20xx 20xx and 20xx form 990s dir-2 is co-director of the co-5 and university law librarian of the co-5 dir-2 holds masters degrees from the co-7 and co-8 a juris doctor from the co-9 and a ph d from the university of state dir-2 although designated as the director of org in an interview said he provided no day-to-day oversight he did attend board_of director meetings both face-to-face and telephonically dir-1 as president of org has submitted form_2848 power_of_attorney and declaration of representative to change the representation of org before the service on three occasions in addition dir-1 signed a one-day authorization for ra-3 to allow ra-3 to represent org in a deposition held on february 20xx an examination of org's forms for the tax periods ending december 20xx december 20xx and december 20xx were conducted the initial contact with org's representative ra-4 was on may 20xx the examination was begun based on a referral from the large and midsize business lmsb division the referral indicated that the organization could be an accommodating charity for tax_shelter purposes pursuant to notice 20xx-81 issued by the service on december 20xx exhibit a per the notice the internal_revenue_service and the treasury_department are aware of a type of transaction in which a taxpayer claims a loss upon the assignment of a sec_1256 contract to a charity but fails to report the recognition of gain when the taxpayer's obligation under an offsetting non- sec_1256 contract terminates this notice alerts taxpayers and their representatives that these transactions are tax_avoidance transactions and identifies these transactions and those that are substantially_similar to these transactions as listed transactions for purposes of sec_1_6011-4 of the income_tax regulations and sec_301 b and b of the procedure and administration regulations this notice also alerts parties involved with these transactions of certain responsibilities that may arise from their involvement with these transactions org received assignment agreements to which the notice applied during the tax years ending december 20xx and december 20xx information provided from lmsb indicated that the promoter of the notice 20xx-81 transactions was an organization called the co-10 including co-10 and other co-10 subsidiary affiliate based on the information reviewed co-10 made no serious attempt to eliminate any semblance of a u s presence until sometime between midyear 20xx and the beginning of 20xx this was the same time period in which they were representing themselves as the owner of the notice 20xx-81 promotion although co-10's website currently directs all u s clients to their city office available information indicates u s activities were conducted through dir-1 and his offices co-1 this included the following dir-1 work with co-10 per the co-10 in existence pincitexx co-10 was established to publish relevant technical works it stated that later in the year co-10 in association with co-11 was to have published the definitive encyclopedia of company and trust legislation the general editors were to be ge-1 chairman of the co-10 and dir-1 the work was to contain the complete company and trust legislation from all major offshore and onshore financial centers for use in tax planning together with commentary and relevant cases they also planned to publish through co-11 a comprehensive electronic and paper reference work on e-commerce law and taxation an abbreviated version for the businessman and consumer with a more extensive version aimed at the practitioner would be available co-10 reports web site u s contact info a summary of u s contact information posted since 19xx in the co-10 web site and editions of the co-10 report shows that dir-1 was the co-10 agent within the u s during this whole time and that at least until xx co-10 listed a u s contact dir-1 separate from co-10 issue of the co-10 report estimated to have been published in march 20xx contains comments regarding the march u s treasury disclosure initiative to combat abusive tax_avoidance transactions it states that tax planning for us residents and nationals is becoming increasingly difficult as more of the existing tax breaks and loopholes are closed however co-10 has great expertise in international tax planning for us nationals and residents we have a specialist tax planning department based in city under the direction of dir-i as weil as other experts within the co-10 who can advise on american tax issues near the back of each co-10 report there is an additional information listing it depicts each co-10 office location the office contact e-mail address and phone numbers either there has not been an issue of the report since xx or they are not available on the web site table deleted with the issue of the co-10 report co-10 was also listed and it reflected the phone and fax numbers previously shown for co-10 country the co-10 country phone and fax numbers were different but still with a city area code issue only shows co-10 with the contact person being ra-5 another co-10 manager issue returns to the previous format of separate listings for co-10 country and co-10 with dir-1 as the contact for both beginning with issue dated xx the us listing is combined showing united_states of america co-10 and then dir-1 a co-10 showing a 19xx - 20xx copyright and containing information on events occurring as late as mid 20xx shows co-10 ltd as having a u s presence providing the co-1 ll m co-12 building as its u s contact address it also lists dir-1 as principal staff and the offices’ specialist services as tax practitioners the e-mail address posted is website another version of the co-10 which was printed sometime after xx page cites an event having taken place on that date shows under the co-10 directory section both an office in the u s at address city state and a separate listing for co-10 at the co-1 co-12 building the directory in another co-10 report as well as on the web site when downloaded on xx also has two u s entries the first listing names co-10 the entity that promoted the notice 20xx-81 transactions and instructions to contact dir-1 no physical address is shown and the contact numbers are the same as in previous u s listings the second listing for co-10 provides the same co-1 address and phone numbers but does not include a contact name documentary_evidence of dir-1 marketing for co-10 during the examination of org form 990s some documents were provided by org and some documents were provided by third party contact documenting the activity of dir-1 as independent developer and market of tax products and a representative of co-10 through his office at co-1 specific items include a prototype generic e-mail attachment dated xx from dir-1 to us client the attachment showed its source as co-10 co-10 with the co-1 address and phone numbers and dir-1 e-mail address at co-10 the topic was tax efficient strategies and basically outlined three of our tax efficient products the same types of entities co-10 markets in all its literature insurance structures non-profit offshore structures and hybrid company structures it also lists the tax advantages and possible disadvantages of each it states they have a legal opinion from u s lawyers advising that correctly structured and managed hybrid companies are not required to report their membership interests in the us such an opinion specifically addressed to each client can be arranged for a one time fee of dollar_figure it also states that co-10 is a one-source solution for offshore planning offering offshore private banking and investment services the attachment ends with dir-1 requesting to talk again this week by telephone a detailed description of the co-10 hybrid company and how by using tailor designed arrangements guarantee members neither own shares nor have control so that anti- avoidance legislation is ineffective in taxing profits rolled up within a hybrid structure additionally it will normally be the case that such a structure does not bring about any reporting requirement for the guarantee members so on a practical level unwanted attention is avoided site that would give the appearance of legitimacy to the structure it then discusses the same services and fees co-10 details in its web a copy of a co-10 master card application cover letter from a ra-6 in city sent to co-10 country the letter copy was faxed to dir-1 at co-1 on xx the cover letter stated he was a personal and business friend of dir-1 who recommended that he do this he wanted wire instructions asap to send funds an e-mail from dir-1 to rsa-1 and rsa-2 dated xx regarding co-10 country sent with a copy to website dir-1 had spoken to rsa-2 about the principal company contemplating the services of rsa-1 as its rsa broker it appears that rsa-1 is preparing to act as a broker in setting up and maintaining trading accounts for foreign principal companies through co-13 co-13 or another bank there was a question on how to set this up dir-1 states that the principal could have the account set up through bm- bm-2 in less than an hour he said i think bm-2 is in the best position to know what co- needs though either rsa-2 or myself can do this or the local co-10 office he further stated my concern for the foreign principal having a local rsa account is the possibility of attracting rsa taxation to the income produced from trades i have not looked into this but will if i am so instructed either a partial or complete dir-1 resume consisting of his association and work for various co-10 divisions a listing of published works and presentations and education he indicated work done for co-10 co-10 co-10 and co-10 bates - it was apparently done as part of a co-10 publication on its personnel and their credentials the latest work cited was xx and the heading was as follows dir-1 attorney co-10 city office ‘ phone numbers e-mail of dir-1 a faxed co-10 letter from dir-3 managing director of co-10 corporate fiscal e services country to dir-1 dated xx dir-3 stated a client wanted them to set up an off the shelf country agency structure to act and nominee trade for a country gbc2 entity since country agencies were not a part of their product line dir-3 wanted him to see if we could incorporate and service such an entity he then asked dir-1 if he saw any problems and if not dir-1 should find someone in country acquainted with the agency concept that could provide the essential incorporation and ongoing services an e-mail to attn-1 an international tax trust estate_planning attorney with the co-14 in calgary country dir-1 attaches copies of general information about himself co-10 and some co-10 marketing materials on a hybrid company and offshore non-profits he also attached a marketing type example letter to about of our offshore_trust clients after change in '86 and '93 he described himself as an independent professor and creator licensor of various tax programs i spend my time product designing and client closing for a few trust companies but primarily for co-10 _ dir-1 communicates that he is looking to create a hybrid company product for the up to dollar_figure market and was inquiring as to using co-14 to write and price out a general opinion for country clients he said he had a u s opinion and would confidentially supply the gist of that opinion so he would get exactly what i mean he said co-10 had experience running hybrids for us qj cfc pfic reasons international life_insurance utilized to arrange a person's financial affairs so that person will he also states in this e-mail that his colleague ra-7 is well known for inventing offshore insurance tax driven products for the us market ra-7 of products i determined there is a co-15 in state ra-7 wrote an article for the british magazine co-16 in october 19xx with an update in october 19xx the article describes the product as the creative use of never have to pay income taxes again the article uncovers the unique advantages afforded by employing life_insurance in an international estate_planning context dir-1 also states that if attn-1 had turn key style products for which he could give him his intended client market and produce info sheets with not much work on dir-1' part he had access to pitch and close the clients dir-1 also stated that he and ra-7 receive a country and three us clients a week presently but turn away or refer two for due diligence reasons had worked with he further disclosed the net_worth range of some of the clients he and over the last three years including billionaires but he said he wanted to hit the retail market because of the large number of snowbirds in the city area information from co-1 representatives dean-1 dean of the co-1 co-1 provided us with an e-mail written by dir-1 to dean- co-1 dean on xx the date of this e-mail in which dir-1 answered questions about co-10's activities on the co-1 campus the second question addressed was if co-10's presence at co-1 was only to engage in the activity of finding foreign students for the ll m dir-1 answer was yes and no because co- 10's presence was him he was not paid or receiving any benefit in any way by co-10 but he was allowed to spend upto of his time on outside work per the requirements of aba sanctioned law school programs he said he had not had time to do so and is cash strung he said he does not practice law but does develop tax products through intensive research of tax systems and writes law review articles which goes hand in hand with his teaching he licenses these products to co-10 pwc or other firms he stated he could show dean-2 examples as long as they were not made public he does not write legal opinions he does not publish the materials because they are unique forward thinking ideas he would prefer to sell not give away he would publish after the idea had been sold he has written three recent articles one on guarantees one on introduced next year he had one in the works on charitable foundations he stated further on that he does not write legal memorandum because he does not practice law or tax rather outside law firms do that if someone calls him and asks about co-10 he sends them a form e-mail letter stating due diligence in that he has seen offices and so forth if co-10 refers someone to him for a u s persons due diligence on it he provides that on his own accord using co-10 stationary and his own trusts and one on laws to be account he further stated that if co-10 sent him a wealthy client he would provide due diligence on co-10 he would also provide information on co-1 co-10 has sent him four prospects to date three were country persons and he passed them on to dir-4 the co-10 city office contact at the time he said he never used co-1's letterhead for any of these matters either plain paper or co-10's letterhead the third question addressed using co-1 facilities for business not related to finding students dir-1 replied that he was the only person but if dir-4 dir-4 co-10 country’ office came by he would not refuse him use of the telephone or a computer within reason and space availability he said dir-4's job was to train the ll m employees to be efficient and make sure they follow up on co-10's marketing efforts he had been on campus three times since program inception and djr-1 has requested that he increase his visits to maintain relationships with the dean's office and suggest things the program needs to do he has a very nice floor of an office facility to use on address with co-17 so it is a trek out of his way to stop by us attn-2 is shown as a conference speaker in at least the first two tax planning conferences sponsored by the co-1 and co-10 in 20xx dir-1 further stated that its co-10's marketing is actually done at its offices like in country country and the country the ll m program receives calls that co-10 refers forwards and if the call forward is missed he calls back he acknowledged getting calls from a variety of persons responding to co-10's ecomm advertisements the fourth question related to including co-10's name on the door of the new offices co-10 funded if dean-2 approved the format dir-1 responded that dean-2 and dir-4 should speak directly dir-1 preferred not to be involved to avoid conflict of interest he reiterated that co-10 does not want to conduct business at co-1 offices other than recruiting students he said they do not want a u s presence that an office would make it taxable in the u s co-10 supports achieving the ll m goals because its benefit is in corporate goodwill it works in co-1's favor financially and may for co-10 depending on student marketing performance the rest of the e-mail can be summed up as dir-1 again complaining about being out of pocket the problems in trying to be reimbursed and the potential these conferences could realize in adding students and program success information from others a third party contact interview was conducted with ed-1 executive director of co-1's human rights program ed-1 was paid_by org to develop the on-line ll m program in human rights during this interview ed-1 recalled dir-1 had the red and black co-10 logo on his office door a third party contact interview was conducted with aa former administrative assistant to dir-1 for the ll m program in international tax aa received payments from org as well as from co-1 aa kept the books for org and she wrote out checks for org's expenses aa recalled that when she worked for co-1 and for dir-1 she was responsible for answering two phones at her co-1's office she was instructed by dir-1 to answer one phone line as and the other phone line she was directed to answer as co-10 aa did not know exactly what co-10 was or what they did but she did have some brochures on co-10 for distribution and she knew this was a company in the country aa recalled that close to the time that she left city and the employment of co-1 approximately may or june 20xx dir-1 had told her the phone number answered as co- was the only u s contact number country and co-10 had offices in ll m program - recruiting tool for co-10 in 19xx with the support of the ibfd and the law faculty at the co-4 dir-1 outlined the curriculum for this tax program produced a draft and the collection process for its materials he first taught the tax program in 19xx in country he then created the present online version of the master of laws ll m international_taxation offshore financial centers program in 19xx with the support of ra-35s co-11 academic publishers and ra-35 and ra-36 the american bar association acquiesced to this program for online delivery in 19xx the first time offered by an aba law school and it was initially integrated into the law school program of co-18 it is not clear when dir-1 became associated with the co-10 or what that relationship was in terms of who approached who with the proposal of co-10 sponsorship for the program evidence shows that co-10 sponsored the program at least from the time it was brought to co-18 in the united_states dir-1 resume shows his first presentation on behalf of the co-10 took place in october 19xx according to its web site co-18 was founded in 19xx and was soon recognized as the nation's premier christian graduate university today co-18 has grown to encompass campuses in city and city state as well as having a strong presence online around the world students earn bachelor's master's and doctoral degrees in the fields of business communication divinity education government law leadership studies and psychology and counseling the first three co-10 reports covering the period of xx - xx advertise the co-18 internet ll m offshore tax planning program and states that more details are available on co-10's web site website the online program admits lawyers accountants estate planners trust officers and economists from country country country country country country country country country the country country country country and other countries in 19xx with dir-2 of the co-19 for international financial crimes the program obtained the anti- money laundering and compliance curriculum law students and the ll m program typically has between students in 20xx dir-1 hired fac-1 and fac-2 retired irs attorney as ll m in 20xx dir-1 moved the program to co-1 co-1 co-1 in city the reason for this is not known co-1 has around and faculty expanding the u s taxation curriculum started by fac-3 in 19xx into a concentrated curriculum in 20xx a new diploma program began whereby students could be granted a diploma in just one year instead of taking the two year credit curriculum in 20xx dir-1 was chosen by central law training step and itca to be the sole provider of tax education to the big_number plus member practitioner's certifying body new ll m concentrations are being developed in anti-money laundering and compliance as well as a curriculum in trust and company compliance co-10 is first listed as a contact office in the u s in the first quarter of 20xx issue of the co-10 report dean-2 as law school dean of co-1 entered into a marketing contract with co-10 having a country and country address effective from xx - xx the agreement was signed and returned to co-1 by co-10 trust through co-10's country ll m dir-1 supporting entities individuals co-10 co-10 office the agreement provided that co-10 or any subsidiary or entity within the co-10 organization would be the sole and exclusive marketing agent for the offshore and international tax courses to students worldwide co-10 was paid the commission on all students because supposedly they were all recruited by co-10 dean-1 current dean of the co-1 stated that most of the students were from the u s with some from country marketing was to be accomplished by promotional materials co-10 developed and sent by mail or other means promotion of the courses at seminars at which co-10 spoke or was otherwise represented advertising in local and international publications including those of co-10 but only with dir-1 permission on behalf of co-1 and through the design and printing of a suitable course brochure co-10 agreed to spend at least dollar_figure per year on marketing this includes costs of designing and printing brochures and mailing to members of such organizations as co-20 co-21 the co-16 etc the agreement describes assistance co-10 will provide in direct contact with potential students up to the point of securing an application but receive no funds directly from a student it also states that co-10 will not use co-1 as its u s office including listing co-1's address or phone number as a means of contacting co-10 unless approved by the president of co-1 or the law school dean co-1 is to provide co-10 with its promotional literature and other logistical support necessary for co-10 to perform its obligations it further states that co-10 shall not act as an agent for co-1 but dir-1 will act as liaison between the two receiving no remuneration from co-10 and acting in the best interests of co-1 these liaison duties shall at no time conflict with dir-1' duties as a law school professor co-10 was acting as an independent agent of co-1 co-10 or an associated company was to receive a commission determined as a percentage of gross course tuition actually collected from students as following table deleted commissions were payable within days after receipt of course fees from students which were due in four equal payments over a two year period the agreement is silent with respect to where the money was to be paid co-1 goes into the student's background to insure they were qualified to be in the program most of the students were not degree seeking and were only interested in areas of concentration dean-i said that although the wording in co-10 sites leaves the impression they constructed a building for the law school program co-10 section of the website states co-10 sponsors the ll m through charitable donations which have included funding of the construction of the offices that house the program all they did was spend about dollar_figure to remodel existing offices to accommodate the needs of the ll m program in dean-1 stated that'on november 20xx co-1 sent a letter to co-10 country country that they would not be renewing their contract with co-10 when it expires on xx he has never had communications with co-10 all negotiations were held with the previous dean dean-2 ge-1 co-10 ceo has been on campus several times visiting with dir-1 dean-1 stated he suspected dir-1 and ge-1 were friends socially in the xx e-mail from dir-1 to dean-2 referenced earlier in this report and pertaining to co-10 activity on the co-1 campus the first question regarded the extent of co-10's marketing territory dir-1 answered that co-10 was engaged to find all ll m students he explained how co-10 was assuming all of the costs and risks of marketing the program and co-1 neither had a marketing budget for the ll m or assumed risk he stated that co-10 lost money because the commissions do not meet costs but they could make money in future years if the program did well co-10 loaned money to the program the first year because it was in the hole and he expected they would do so again if need be dir-1 emphasized that money went to the school because he does not need it it comes from co-10 because he knows co-10 he stated that co-10 gets no advertising from the program and its name is not on co-1's web site dir-1' comments on co-10 on february 20xx an investigative interview was held at the city internal_revenue_service office located at address city state present for the interview was dir-1 ra-3 ra-8 ra-9 ra-10 and ira the purpose of the interview was to secure dir-1' testimony and to discuss available documentation part of the testimony secured related to dir-1' relationship with co-10 and his activities based on certain documents that indicated in dir- 1' own words that he was developing and licensing tax products attached as exhibit b are pages excerpted from the investigative interview the page numbers referenced in the following paragraphs are the pages from interview as noted in the upper right-hand corner testimony secured included - of the fee after expenses and the remaining split would dir-1 stated that he never worked for co-10 in any capacity agent representative employee etc but that occasionally co-10 would refer someone to him dir-4 has referred clients to him since the time he first started the tax program at co-18s university page dir-1 would advise the client if it was something he could do and the client would pay co- co-10 would retain come to him page in response to questions about the co-10 literature that depicts dir-1 as head of their city office dir-1 stated he can't speak for co-10 but co-10 did refer people to him he said they were potential students because co-10 marketed students for the ll m sometimes they were potential clierits of about engagement dir-1 said he would answer all calls by starting to talk about the tax program he said some would say well they were calling because they were referred by co-10 for tax_advice page he said him because he was not a u s tax practitioner only international page dir-1 later in his testimony acknowledged that he didn't think that co-10 had a separate phone line number coming into the ll m offices but maybe they did he said he didn't think there was a separate phone page for the clients that paid him dir-1 only gave them advice on what he thought was the best structure and way to go forward he never actually structured anything page he said co-10 referred the client to him expecting to get the structure business after his advice however he said that he was very independent many times he told the client they of those people did not materialize into consulting clients for in any given year page resulted in a paid regarding the co-10 address shown in certain materials as address city dir-1 dir-1 stated he doesn't know the internal workings of co-10 he knows it is a when dir-1 was asked about the e-mail he sent out to u s clients dated xx needed to give everyone a fair shot if he thought co-10 might not be the best to handle their situation he encouraged them to research online and look at all the companies out there and see what works best for them page exhibit c regarding co-10 structures with a co-10 e-mail address for him dir-1 stated that student referrals were coming in from that e-mail and co-10 set it up for student marketing also because the co-1 computers and e-mail wasn't functioning very well dir-1 said he sent out these information sheets to potential clients who had been referred to him it was not a mass mailing he may have sent out - of these a year to those who contacted him and maybe five of those contacts crystallized into advice for which the client paid him through co-10 page sec_131 - dir-1 was not paid_by co-10 for marketing their products unless a client received advice from him when asked if dir-1 was co-10's agent in the u s he stated he was a referral person not an agent he was a referral source page company but the term co-10 is just an acronym a trading name he said co-10 co-10 was also just a trading name and they were the referring arm of co-10 he said co-10 has never had a u s physical presence but that there were lots of other referral people he knows he wasn't the only one because he received so few calls and they stopped referring stuff to me page stated that it was the co-22 he said they had other people they refer to he said he didn't want to say who was on that lease but it was certainly a referral agent dir-1 stated he did not have an office or live there page dir-1 stated dir-4 at co-10 country referred ra-11 to him ra-11 needed u s advice and he didn't know how to do these tax eliminations dir-1 knew from conferences these things were possible and so he suggested maybe three firms ra-11 should consult one in state and co-23 co-23 for sure dir-1 had met ra-12 at conferences but they were a firm he had no previous or subsequent affiliations with dir-1 did not know what the transaction was that co-23 marketed to ra-11 he does not understand how these financial transactions work page sec_195 - dir-1 received no fee on this transaction because ra-11 was not his client however dir-1 did what he could do for ra-11 and set him up with a foreign bank account with co-24 this is a country asset and wealth management private bank dir-1 stated he told ra-11 that he must report the account as a u_s_person couldn't have a secret credit card account and would need a tax opinion if he was going to do this kind of thing page dir-1 stated he has not worked with ra-12 on a tax product because he doesn't do what ra-12 does he is a company guy he knows companies page e planning advice or something ra-11 mentioned that his attorneys were going to sue and referred to the transaction set up by co-23 as a son of boss transaction ra-11 told dir-1 it was water under the bridge and he had come clean page - dir-1 said he never received any fees for that transaction from anyone just for setting up the co-24 e names on the donor list he may have actually spoken to one or two on the phone for assurance that org was a tax exempt charity he said these donors were referred by co-25 co-26 co-27 co-28 and one or two others but not co-10 dir-1 said he would have met dir-1 stated that ra-11 contacted him like two years ago and was asking for estate with respect to the m m transaction donors to org dir-1 stated of the or so with respect to exhibit d the e-mail to attn-1 an attorney in country about ra-13 at a conference and asked for org to be put on their approved list of donation possibilities because org raised money for the ll m program page he said ra-13 told him that they managed assets for wealthy individuals and at the end of the year they advise their clients to donate to charities and dir-1 wanted org on those charity lists page dir-1 stated when asked if any co-10 affiliate have any transactions or dealings with co-23 that he was neither of those parties so it was better to ask them he couldn't be certain and he didn't want to speculate he said that he did not bring ra-12 to co-1 co-1 because he did not have the authority to hire people ra-12 was already relationshipping with co-1 and when ra-12 came to co-1 he was one of the people ra-12 relationshipped with he implied that ra-12 was brought on to teach u s tax courses in the regular law program and dir-1 suggested it would be a good thing if he could also teach in the ll m program page e dir-1 stated that co-10 would furnish the ll m program with co-10 reports and dir-1 would send them out with school brochures as a goodwill gesture for co-10's help in marketing for students he said co-10 paid dollar_figure - dollar_figure per year in marketing costs for the ll m program then when asked if he did any marketing for co-10 he said j would try to solicit clients for myself 'but wasn't very successful at it people would call up and he would send them materials about co-10 and explain that if they needed consultation on international issues he could help but they would have to go to co-10 for actual structuring page sec_129 - e dir-1' marketing activities with ra-7 he said it was all just marketing hype dir-1 said he talked to lots of country law firms about trying to create some kind of company that would work in country but it just never happened he couldn't do it there's nothing he knows that works in country he said the gist of the product ra-7 also taught at co-1 was a life_insurance_policy that's earnings were tax deferred and you could borrow against the policy tax free he says the references to his developing products and marketing for co-10 is also hype dir-1 said he tried and tried to develop a product for u s and country clients but has never been successful at designing an international tax product that worked nor was he able to manage to ferment and crystallize a product that i could sell to the us market pages stated that dir-4 had a very nice floor at the co-17 in which to work was that he did not know the relationship between attn-2 and co-10 he assumes that co-10 is sending attn-2 referral clients beyond himself co-10 has lots of client referral people he was just one of them page regarding dir-1' resume exhibit f describing various worldwide works dir-1 had done for co-10 he again stated that he tried to do these things but failed it didn't work he was not an employee of co-10 in country he was on his own having been referred by co-10 for each of the specific projects he had listed he stated that for one reason or another they were unsuccessful and in most cases he never received any money dir-1 said i'm just trying to make myself look big so that people would hire me page he didn't have a big firm behind him so he didn't get the work dir-1 was asked how co-10 marketed its products obtained its clients dir-1 stated e through the internet he said dir-4 was a relationship_manager he marketed in country in response to the portion of dean-2's e-mail from dir-1 exhibit e where he but he'd fy over to shake hands with me page when asked about other referral people dir-1 stated attn-3 who has a law firm in state and someone in a law firm in city dir-1 stated that he was the only contact shown in co-10's materials in the u s because he would filter out potential students of which he probably obtained over the years this way page dir-1 stated he didn't know but it was possible that some of the ll m students became referral agents or marketers for co-10 he never actively marketed any company in the ll m program he was neutral and taught all companies all things co-10 had other students in the ll m program like ra-5 he said most of his students were - year old professionals who already had a tax degree and a practice so for the most part they were not looking for jobs he said if students came through co-10 because of co-10's advertising and then they set up a relationship with co-10 or something they may have told him in regarding the assignment of options to org dir-1 stated he did not prepare the passing but generally he would not know about it if co-10 had an opening he would post it like he would for any other co-10 competitor company he said it was possible that co-10 worked with some of the students who went through the program but a lot of them already worked for competitors of co-10 page - document he assumed that ra-14 or ra-15 did and does not know what this stuff means he didn't care what it was called people were giving to org only what the exact cash amount was org would get this was what he put on the donee acknowledgement letters he didn't want the risk of holding an asset represented as being worth so much but when converted to cash was much less he is not a finance guy who understands options he said the options were sold and the cash transferred by wire into org page sec_213 - dir-1 said his intention was to follow up on the donors and raise more money but he had a problem because ra-14 wouldn't send any more donors in 20xx when they discovered org didn't have an irs determination_letter yet he said it was because the service is so slow page to them when asked why they didn't take just cash he responded that they did he said options were the same as real cash but they took the options because these high net_worth individuals have pregnant stock or accelerated real_estate the asset gets donated it's just what normally happens page dir-1 stated he told ra-16 up front that he was not going to play the valuation game and he wanted him to understand that we want to receive cash in the bank he told ra-16 sell this as soon as possible i want cash in the bank and if i don 't have it no letter because i don 't know its value i can 't give you a value ra sold the options dir-1 stated did not even know what selling it meant he would wait for the counterparty to sell the options and wire the proceeds to org page towards the end in answer to ra-3 question of whether org or the donor sold the assigned options for cash he said ra-14 the donor i always thought it was the donor dir-1 also answered that the acknowledgement letter gave the amount of the cash received from the sales proceeds dir-1 said that the board_of org dir-2 himself voted to sell any asset donated operations of org as stated in the application_for exemption org was established to operate exclusively for educational and charitable purposes in particular the foundation will provide co-i co- i ' ll m programs in tax and human rights with contributions in order that the programs will be able to provide support to their students the foundation is viewed as an integral fundraising activity required by the ll m _programs in order to continue their success the foundation will hold conferences meetings and assemblies to provide a forum for the discussion and dissemination of relevant information and data to promote a better understanding of international economic tax and fiscal topics the foundation will sponsor at least three conferences each year at co-i featuring such economic and fiscal topics the foundation will edit and publish papers magazines pamphlets periodicals and books a third party contact letter was sent to co-1 on july 20xx for information with respect to org a response was received on july 20xx exhibit g questions asked and responses provided are shown below was co-1 aware that org was established to be an organization set up to support the co-1 if so were there any agreements between org and co-1 concerning the funding of these programs during 20xx through 20xx if so please provide a copy of the agreement co-1 was unaware that org was established to be an organization set up to support the co-1 if possible please explain how org's fundraising was an integral fundraising activity required for these programs to succeed org fundraising was not an integral fundraising activity required by the ll m programs or any other program at the co-1 the information in the application indicates that multiple conferences involving economic and fiscal topics were held at co-1 it is our understanding that these conferences were not actually held at co-1 but co-1 was a sponsor and or involved with these conferences sometime during the period 20xx through 20xx please provide a statement to explain the relationship between co-1 and org as it pertains to these conferences if a contract exists please provide a copy of the contract there was no relationship between co-1 and org with regards to the above conferences nor is there a contract if the ll m programs did not receive funding from outside source such as org would the programs have been terminated the operation of the ll m programs was in no way dependent upon funding from org or any other particular outside funding source conferences org provided material for four conferences for the audit as follows annual congress - may through may 20xx - country country annual conference - december through 20xx - city state annual congress - june through 20xx - country annual conference - march and 20xx - city state review of the org's records for tax_year 20xx indicated no financial support to the two conferences held in 20xx the following was noted in the review of the conference materials provided e e conferences mentioned above e org was not listed as a conference sponsor for any of the conferences there was no reference to org anywhere in the conference materials -dir-1 and dir-2 were listed as either participants and or presenters at the no information was provided on conferences subsequent to the last conference for all of the above conferences co-29 co-29 was shown to be sponsor information provided for the audit indicated a possible relationship between co-29 dir-1 and dir-2 so internet research was conducted to gather additional information these conferences were listed on co-29 website and the available information indicates co-29 is the premier professional cross-disciplinary society that educates trains and certifies professionals in international tax compliance anti-money laundering and corporate and computer security co-29's website stated the society hosts two three-day conferences annually that provide a forum for government officials expert practitioners and academics to present papers and talks on selected topics as well as spend quality social time together at the society dinner lunches and cocktails per the bylaws of co-29 dir-1 dir-2 and ra-17 are all founding members of co-29 see exhibit h for additional information on co-29 table deleted return_information - income reported on form_990 is as follows the 20xx form_990 does report an educational conference it does however report a net_loss from special events of dollar_figure the actual figures will be discussed later in this report in the income_category lss power_of_attorney poa poa stated in a response dated october 20xx org has submitted its amended form_990 for 20xx and the irs should have a copy this return was not filed with the revenue_agent even though there was an on-going examination this return has not posted to internal revenue service's irs's internal system the 20xx income will be addressed separately i in this report based on a review of the summonsed bank records the banking information from co-30 account number was summoned since org stated the bank records were destroyed review of the bank information revealed that the income reported on line a the 20xx form_990 dollar_figure agreed with the amount deposited into the 20xx income account see attached exhibit i for specific amounts and source of deposits from the beginning of the examination dir-1 stated the amount reported as income was from charitable donations and were the results of fundraising per response dated 20xx received from poa it was stated fac-2 will be discussed later in this report the original form_990 filed on october 20xx was filed with block k checked stating that org's bross receipts are normally not more than dollar_figure the 20xx form 990's balance_sheet was left blank document was not summonsed since the service policy precludes issuing a summons for a document that is in our possession dir-i did not directly contact any of the donors prior to their contributions to org however dir-1 did personally contact asset managers who represented wealthy individuals as a means of soliciting charitable_contributions for org typically many asset management firms would attend the international tax conferences that dir-1 would attend on behalf of org and or the ll m program of co-1 which org supported these assets management jirms would have booths at the conference where they would promote their services dir-1 would approach an asset management company tell them about org and its charitable mission and ask the asset management company to refer any of its wealthy clients who were interested in making a charitable_contribution to an educational or tax organizations to org it is a common fundraising technique for charities to approach private bankers or asset mangers when the charity is soliciting charitable_contributions moreover it is common for asset management firms to direct wealthy clients to charitable organizations with which managers have some knowledge or relationship had dir-1 not approached the asset management teams and or private bankers org most likely would not have received all of the contributions that it did in 20xx however dir-1 did not contact any donor directly other than ra-17 in 20xx more importantly dir-1 did not specifically solicit contributions of foreign_currency options from the asset managers rather he asked the asset managers to direct donors to send cash to org but was happy for whatever contributions org could receive dir-1 personally contacted the asset managers and private bankers but it was the asset managers and private bankers who would identify potential donors and refer them to org income was received in the form of assignment agreements the assignment agreement income was reported on line a - direct public support from contributions gifts grants and similar amounts received provided for the audit was a listing of assignment agreements that were for individuals and companies that donated put call options to org org issued an acknowledgement letter to each of the contributors stating the options were received as a charitable gift there were atotal of contracts listed on the assignment agreements involving individuals from various locations throughout the the acknowledgment letter issued to the contributors included the following statement the org recognizes your charitable gift dated date of amount due to present economic conditions and recession and economic fluctuations in the economy resulting there from as well as the potential for economic fluctuation because of military conflict and terrorist actions the foundation 's board_of directors voted to sell your gift in order to generate cash assets the proceeds from the sale of your charitable gift property that has been added to our endowment as well as some contracts with individuals in the of the total gross contributions received by org in 20xx however a the total donated per the assignment agreement listing provided by org was dollar_figure this is approximately reconciliation of the bank statements showed the full total of dollar_figure was from the assignment agreements although the assignment agreements indicated that org received puts calls the banking records summoned indicated that org received cash via wire transfers from various trading companies per review of the bank_deposits in 20xx there was also assignment agreement income of dollar_figure in 20xx exhibit i the service has determined that these amounts were from tax_shelter transactions reported on notice 20xx-81 the service has disallowed the contribution amounts on the form_1040 of all participants contributors in the sheltered transactions - 20xx income the bank accounts reflected more deposited into the co-30 account in 20xx than was reported on the form_990 the amount which should have been reflected on the form_990 was dollar_figure as shown in exhibit i reported on page line l gross_receipts was dollar_figure while reported on line a was contributions in the amount of dollar_figure the discrepancy was determined to be dollar_figure from the bank_deposits to the amount reported on page line l and a discrepancy of dollar_figure from the bank_deposits to the amount reported on line la - the income received reported in 20xx in the amount of dollar_figure was reported on line a - was from co- and two separate deposits as follows table deleted information presented for the audit indicated that ra-17 is the executive director of the tax clinic and visiting professor of law at co-1 ra-17's biography from co-1's website states atin-4 was an attorney with the internal_revenue_service for years before moving into private practice in 20xx while serving at the irs ra-17 worked in the following capacities estate_tax attorney 19xx-19xx estate_tax attorney manager 19xx-19xx - appeals officer 19xx-19xx appeals manager 19xx-19xx 19xx-20xx and tax_shelter program coordinator at the national_office 19xx-19xx at co-i ra-17 as the executive director of the tax clinic and an adjunct professor of law in the graduate tax program ll m and he teaches civil tax_procedure serves during the meeting held with dir-1 on may 20xx dir-1 acknowledged that ra-17 is a colleague and co-worker the form_990 for tax_year ending december 20xx reported an educational conference as a special event as follows less direct expenses gross receipt from conferences less contributions included on line 1a -dollar_figure dollar_figure net_loss from special event -dollar_figure line 9c return_information - expenses expenses reported on form 990s are as follows table deleted power_of_attorney poa poa stated in a response dated october 20xx org has submitted its amended form_990 for 20xx and the irs should have a copy org was requested on more than one occasion to provide a copy for the on-going examination but failed to comply the 20xx expenses will be addressed separately in this report based on a review of the summonsed bank records program service expenses are those incurred to carry out the organization's mission in an interview with dir-1 dir-1 stated the purpose of org is to provide charitable assistance to ll m in international_taxation and offshore financial centers and the ll m in international rights programs at co-1 dir-1 also stated that they support programs in the field including international policy fiscal policy and one of the goals of org was to bring knowledge back from other countries to the united_states dir-1 area of specialty is international tax policy fiscal policy in his position as professor at co-1 dir-1 has met people through co-50 co-50 which is per dir-1 the largest educator in the country org was formed in 20xx but dir-1 stated he was already an expert in his field and was already published dir-1 stated he spends about to hours a month handling org matters and has done so for years while at the same time being a full-time professor for co-1 20xx expenses - all the dollar_figure expense reported as program service on form_990 for 20xx was for the development of a computer_program for co-1's ll m in human rights a third party interview with the recipient of the payment ed-1 was held on may 20xx present were revenue_agent ira and manager m-ira ed-1 demonstrated the on-line program that she developed for co-1's ll m program in human rights she verified the receipt of dollar_figure from org via wire transfers was for the development of this program per ed-1 this was a one-time payment for her to research existing programs locate and or develop materials for the site and market the on-line program ed-1 stated while serving as the director of recruitment of the ll m program in human rights she ibid-5 a review of current internal irs documents reflects the amended_return was processed in late february 20xx as of the date of this report the revenue_agent has not received the copy from the processing center was approached by dir-1 in about april 20xx to put this program together no grant request was submitted to org ed-1 did not receive a form_1099 or w-2 from org management general_expenses in 20xx comprised of dollar_figure of legal fees and dollar_figure of bank fees the expenses in 20xx were limited and from review of the bank records it was determined the management expense was two wire transfer payments of dollar_figure each to the law firm co-32 the bank statement reflected one of the payments was reversed on 20xx withthe _ comment book credit for org rev of our dbt to yr acct xx org incorrectly claimed dollar_figure more in legal expense in 20xx than actually paid 20xx expenses -- program services program service reported on form_990 for 20xx included dollar_figure in grants allocations educational research of dollar_figure and other miscellaneous expenses of dollar_figure grants allocations were paid to co-33 dollar_figure and co-1 dollar_figure co-33 is a c exempt_organization that is run by dir-5 dir-5 is the mother of dir- org's form_990 reflected donee's relationship as none in an interview with dir-5 as the compliance officer of org dir-s stated that the payment was for educational_purposes dir-5 also stated that no one in my family received any of the dollar_figure subsequent to the meeting a written recap of the meeting was provided to dir-5s for review and comment poa provided a document entitled information for ra-18 the document was presented by poa as the response from dir-5 and this document indicated changes to statement as follows i did say the dollar_figure was used for educational_purposes i should not have said this i should have referred the answer to my cpa query what is the time limit for_the_use_of this money the funds were placed in the operating account of co-33 from the operating account money was spent on education specifically but not all inclusive ride sec_2 times a day days a week to step meetings purchases of educational material for tenants and employees costs of attending educational conferences for employees and tenants materials for college ged and literacy classes services of tutors physicians nurses a psychologist drug counselors social workers and others involved in the education of co-33 tenants since the dollar_figure was placed in the operating account one could argue that family received some of the money because family members were employees of co-33 most salaries were paid_by grants deposited into the employee account one grant paid approximately seventy percent of four salaries so approximately thirty percent of those salaries were paid_by the operating account although a signature was requested from dir-5 the document provided by poa was unsigned ra-18 was an attomey retained by matter dir-1 to assist in responding to the internal_revenue_service in this the dollar_figure donation to co-33 was further scrutinized when during the formal interview held with dir-1 on february 20xx information was obtained that dir-i's form_1040 for 20xx was amended to include dollar_figure from co-33 the payment to co-33 from org and the payment from co-33 to dir-1 were in the same year 20xx when directly questioned if the dollar_figure donation was the payment given to him dir-1 stated these were different transactions a review of the bank account information reflected checks totaling dollar_figure were paid to co-1 in 20xx this included some checks with the annotation of a loan for ra-19 and a check earmarked for a specific person ra-10 although it appears these checks were designated for a specific person these expenses will be allowed without further development since they were paid directly to co-1 the total was determined as follows table deleted a third party request to co-1 resulted in the presentation of check 20xx payable to co-1 from co-29 this check was signed by dir-1 exhibit j is the acknowledgement from co-1 as provided by org and a copy of the received by co-1 as provided by the university this payment was not made by org and therefore cannot be shown on the form_990 as program service expense of the organization for dollar_figure dated poa submitted a response on august 20xx in regards to org's relations with co-1 poa's response discusses the letter from a-dean assistant dean for development co-1 dated july 20xx which states as you requested here is a list of the gifts to co-1 that are credited to org one of the donations included the dollar_figure check to co-1 mentioned above poa explains this payment as follows org has indirectly supported co-1 by its payment to the co-29 of dollar_figure the purpose of this payment was to fund a conference that was held by co-29 in conjunction with co-1 dir-1 and dir-2 recall that it was the third annual congress held june 20xx country dir-2 recalls that the conference materials prominently displayed co-i's name and is in the process of locating these materials dir-1 recalls that co-1 and co-29 executed an agreement for co-29 to administer the conference on behalf of co-1 poa's response later states jf org had made this dollar_figure payment direct to co-i it is unlikely that the irs would question org 's support although hindsight suggests that org should have made the dollar_figure payment directly the result at the end of the day is the same org provided financial support to a conference sponsored and affiliated with co-1 reported as educational research was dollar_figure based on review of the checks and third party contacts the expenses were reallocated into the following categories based on the country of funds table deleted see exhibit k for individuals paid and relevant amounts _ dated xx and the payment categorized as exempt_purpose was check included the annotation research grant this was paid to ra-20 for researching and writing an article published in cch and tax note international a letter from ra-20 and a copy of the article he prepared that was presented for the audit the article was copyrighted payments categorized as loans were checks that included the annotation of a loan in the memo line of the check there were no loans reflected on org's balance_sheet for the individuals identified in this category there were no loan documents presented in response to the information_document_request idr there were no loan repayments in tax_year ending december 20xx from these individuals to ra-20 org does not have a specific grant criteria application or approval process as confirmed by interviews and discussions with dir-2 and dir-1 payments categorized as payment for services - co-1 employees included payments to co-1 employees who were working in the ll m program in international tax dir-1 was the director of this program in some cases these expenses were expenses that were not allowed or would not be paid_by co-1 for example student workers were not allowed to work beyond a specific number of hours however dir-1 paid these individuals to work beyond the allowable number of hours and therefore he paid these individuals and classified it on the checks as research grant bonus severance_pay etc payments categorized as payment for services - dir-1 include payments to individuals who provided services that benefit directly or indirectly dir-1 as the director of the ll m program in international_taxation at co-1 these expenses may have been indirect expenses of co-1 however these were payments that were not allowed per the university's own policy internet research was conducted to locate third party contacts and some of these individuals were contacted to determine the purpose of their payments as follows ra-21 posted on org's most recent website under some of the foundation’s charitable accomplishment was information that ra-21 is a financial journalist who is working on an encyclopedia in the field of international tax and company compliance for co-34 provided for the audit was a couple of e-mail messages from attn-5 of co-34 to dir-1 from december 20xx which states the following ra-21 has so far spent two weeks on the project and expects to be able to work full tim sic on it from now that essentially means your arrangement with him would start december i subject_to any separate agreements with regards to the two weeks worked over the last couple of months i understand your concern regarding the returns on the projects covering the editorial investment you have committed the following points may be helpful in further considering this issue this is a long term project which will be built up over a number of years and the e returns will therefore build over time as well it would be difficult for us to guarantee that royalties will cover the entire editorial fees which is in any event unlikely for the first year or first couple of years depending on how quickly we can build content and market share the intention is clearly that over a period of years things would even out in cumulative terms subscriptions have been sold this should speed up the process outlined above i would be perfectly happy to increase the royalty rate once a certain number of a special offer to the society of fellows could help build market share more quickly than would otherwise be the case we are determined to aggressively market and sell this new service worldwide based on the usps you have identified in the proposal document the e-mail messages do not mention org internet research was conducted in an attempt to make contact with either ra-21 and or co-34 for possible contact as a third party was unsuccessful co-34 as well as ra-21 are located in the country and it was not possible to locate a personal address for ra-21 the available address for co-34 was not a valid address and further research reflected co-35 acquired co-34 in august 20xx per a press release the press release included the comment co-34 is a specialist legal publisher with particular strengths in titles on european law and financial services law and regulations for lawyers and professional advisors contact was not made to co-35 for information relating to co- various documents posted on the internet reviewed during the audit process include background on dir-1 part of the posted background includes the notation that dir-1 was listed as a consultant editor for co-34 the information provided on ra-21 and co-34 do not support that the work done by ra-21 is related to org attn-3 - attn-3 submitted a statement to poa ra-4 addressing the dollar_figure payment received by him from org per the statement on or about july 20xx i received a check in the amount of dollar_figurefrom the org to write articles to be published and used by the ra-35 h ra-35 ra-36 graduate international tax program co-1 attached are my two papers regarding money laundering and the country patriot act which were submitted to co-50 to be published third party contact to co-50 requesting verification of the articles resulted in the response of we have no knowledge of this person exhibit l ra-22 - ra-22 stated that she was paid for editing and typesetting a potential law review article dir-1 requested that i be his editor for this work these services were performed for dir-1 ra-22 was paid dollar_figure an hour for editorial work org did not receive editorial credit for this article society of fellows was the former name of co-29 ra-23 ra-23 was a student at co-1 review of the checks indicated he was paid for services rendered for the ll m program in international_taxation dir-1 directed the activities for the work that was performed ra-23 submitted a statement to poa which stated t served as a student employee to dir-1 as well as to other professors in the tax department and was paid_by co-1 as a research assistant while employed by co-1 co-1 as a student employee i undertook research for the article direction of dir-1 reporting back to him regularly with my research dir-1 credited me in his article as his co-1 research assistant as shown in exhibit m the article mentioned above was published in the reflected the author was dir-1 and included comments from dir-1 as follows j express business and tax law journal in 20xx the article _1 did this research under the specific much appreciation to my wife wife for her utmost patience to my research assistant ra-23 and to the co-1 law staff who assisted with long nights of microfilm and microfiche research and to ra-24 for the constant brainstorm sessions there was no mention of the funding support received from org nor was org given credit or acknowledged by dir-1 ra-25 ra-25 received dollar_figure as an advance for future work this indicates that this payment for future services to be rendered ra-26 - ra-26 stated during the time i worked for dir-1 i considered myself employed by him all my work was given directly by dir-1 sent to him and reviewed by him i never spoke to anyone at the org nor received any work from anyone at that foundation ra- 26's statement also stated in both 20xx and 20xx i would review the tompson chapter in saunders and dean 's publication international tax systems and planning techniques as part of the reviews i would update or write sections into the chapters to reflect changes in us tax law which had occurred over the past year i would incorporate in any new sections which were to be included by other tax professionals and proofread and bluebooked all citations a recent posting to the co-1 city state website included information on dir-1' ‘which included information that dir-1 is the author for the us chapters for international tax systems and planning techniques a series by roy saunders and miles dean published in loose-leaf and on checkpoint there was no mention of org or ra-26's involvement see exhibit n for information posted on co-1's website poa provided information concerning ra-26's payment as follows we understand that the grant to ra-26 in 20xx was for research work she performed for org throughout the _ year the research that ra-26 provided while serving as research assistant for org was related to org 's exempt_purpose of supporting and promoting the international ll m program at co-1 for example ra-26 provided significant research on international tax systems and planning techniques ra-24 - an appointment was scheduled with ra-27 to discuss the purpose of the payments he received when scheduling the aforementioned appointment a brief discussion was held with ra-27 regarding the payments he received from org ra-27 stated he had researched and written some lengthy documents and he was just told that he should have reported something like dollar_figure for the payments he received some of the payments were for rental vehicles and ra-27 stated he had car problems and needed a car since he was having car problems dir-1 paid for his rental car ra-27 indicated he knew dir-1 from co-18 co-1 in city ra-27 failed to appear for the scheduled appointment when he did not appear a follow-up phone call was made and ra-27 informed revenue_agent ira that he would not be meeting and any further questions should be directed to his attorney u per the program handbook 20xx-20xx posted on co-1 website dir-1 is listed as the assistant dean and is responsible for academic issues a review of the submitted documents included statements invoices submitted from ra-27 that showed research was conducted for dir-1 poa provided a statement concerning ra-27's involvement with org ra-27 was a research assistant for org from march 20xx until december 20xx poa's stated initially dir-1 recalls ra-27 conducted org's research while working as a legal researcher at co- co-1 in city ra-27's research for org related to money laundering economic terrorism and prosecuting - all topics relating to org 's charitable mission ra-27 would travel to state to conduct further research at co-i' law library and present his findings to dir-1 and dir-2 so org could incorporate his work into either the conferences that it was sponsoring or the publications it was drafting the response went on to state that org compensated ra-27 by paying for his research time and reimbursed his rental car expenses org does not recall reimbursing ra-27 for his lodging during this time period poa statement included the comment although some of ra-27's invoices may state that research was done for dir-i' the actual research was for publications and or conferences sponsored by org a review of org's financial records reflected org paid check -_ for dollar_figure on 20xx to co-1 third party contact to co-1 resulted in confirmation that this payment was for fall 20xx room and board for ra-27 which was paid_by org ra-28 - ra-28 received payments for vacation and severance_pay this indicates these payments were for services rendered in summary the payments to the above individuals appear to be payment for services rendered rather than actual educational research as noted on the form_990 or as research grants as noted on the checks by categorizing these expenses incorrectly org has failed to properly report compensation_for services rendered as either w-2_wages or form_1099 non-employee compensation in addition indirect benefits were provided to dir-1 by making the ll m program appear to be more success by having lower costs reported to the university than the true cost of the program in some cases editorial credit was claimed by or given to dir-1 rather than org the research and information provided during the examination was unable to verify that org had editorial credit for any published materials received as the result of a third party contact with co-1 was a document entitled memorandum of understanding which stated the following to the extent that dir-1 personally assimilates costs associated with the international tax ll m program in the 20xx-01 academic year he will inform the law school of such costs on a regular basis in the 20xx-02 academic year he will be paid these costs if the program generates net_revenues in excess of that year if net revenue from the program in the 20xx- academic year are insufficient to allow recovery_of dir-i costs from the 20xx-01 academic year than a payment will be provided in the 20xx-03 academic year if the program generates net revenue in excess of dollar_figure that year if net revenue from the program in the 20xx-03 academic year are insufficient to allow recovery_of dir-1' cost from the 20xx- academic year then payment will be provided in the 20xx-04 academic year if the program is expected to generate net revenue in excess of dollar_figure that year this document was executed by dir-1 as director international tax ll m program and by dean-2 dean co-1 during the formal interview held with dir-1 on february 20xx one of the documents discussed during this interview was a letter address from dir-1 to ra-29 dated october 20xx excerpted from this letter exhibit page was the following as long as my program is profitable i will continue to be employed by the university as the administrative and academic director of my program either as a tenure track professor of law or failing a tenure vote as a member of the law facility through five-year rolling contracts alternatively jailing a tenure vote we may agree to move my program and myself as director to sit under the graduate school reporting directly to the president alternately the university may request that i laterally move my program to another university for which i have two contemplated offers as i do now i will control my future budgeting based upon my present fiscal budget and my present expenditures will be based on my future budgets subject_to a minimum dollar_figure projects being built into the budget 20xx expenses - management general management general_expenses reported on form_990 for 20xx worthy of discussion includes dollar_figure in legal fees of this amount dollar_figure was paid to ra-2 ra-2 is the brother-in-law to president co-director dir-1 ra-2's wife ra-30 is dir-1' sister ra-2 was elected as secretary of org and served from the approximately the end of december 20xx through the end of 20xx per ra-2's oral testimony information secured from the state's secretary of state reflected ra-2 was appointed org's registered agent on april 20xx during the examination we initially identified two payments to ra-2 from org's account with co-30 account number the payments were made to ra-31 llc this included dated 20xx fordollar_figure check was issued on march 20xx requesting information on payments to ra-2 check idr this request included a statement to address any other_payments made to family members of any of org's officers or board_of director members for services rendered for the period 20xx through the present dated 20xx for dollar_figure to verify the purpose of these payments org provided correspondence and invoices received from ra-2 for his legal services which included a letter and an invoice dated september 20xx was provided for the payment of dollar_figure for legal services relating to the foundation for fiscal studies that was completed on behalf of org a retainer agreement dated november 20xx for the dollar_figure payment per thi sec_2 agreement in return for professional services rendered and to be rendered the org agrees to pay a retainer of dollar_figurefor professional services to be rendered by ra-31 and ra-31 llc for a term of months commencing on january i 20xx the retainer agreement goes on to state that ra-2 would deduct dollar_figure per month for administrative services and would deduct at a rate of dollar_figure per hour for legal and consulting services rendered during the agreement period and if the retainer is exhausted prior to the expiration of the agreement org agrees to pay additional funds to ra-2 in increments of monthly statements billing org for services january 20xx - dollar_figure - researching public v private_foundation hours although the dollar_figure expense was paid in 20xx per the contract no services were required until 20xx the statements for april 20xx and june 20xx through march 20xx date of submission only reflected dollar_figure per month for administrative services the other statements reflected deductions for legal services as follows e contributions rules hours about filings hour public support issue hours unable to make out third comment hours requirements hour february 20xx - dollar_figure - unable to read handwritten note which includes something may 20xx - dollar_figure - telephone call with wb requirements for bofd meeting march 20xxk - dollar_figure- telephone call with wb requirements for exemptions hour on may 20xx a face-to-face interview was held with ra-2 to determine his role in org and to acquire additional information concerning payments made to ra-2 present for this meeting was poa form_990 preparer former poa dir-5 former compliance officer of org ra-2 former secretary of org m-ira manager and ira revenue_agent during this meeting ra-2 stated his involvement in org included handling the paperwork and other information for org that were sent to the address city state address specifically ra-2 stated that letters and bank statements were sent to address and he would put the information statements in a folder and this was mailed to dir-1 in city state to review ra-2's understood that dir-1 would get the necessary paperwork to the accountant poa in city state a suburb of city state note - statements indicated org was charged during this period for the monthly administrative services april 20xx ra-2's monthly billing in the meeting described above ra-2 stated the income had not been reported on his individual tax returns a summary of the meeting was provided to ra-2 asking him to review the summary and to provide corrections additions as warranted ra-2 responded by submitting a signed written_statement with the following comment i did not report the income in 20xx i intended to report the income in 2oxx 20xx 20xx in equal installments i have been informed that i should have reported all of the income in 20xx iam amending my 20xx return to reflect this income subsequent to the meeting held with ra-2 financial records for org's bank accounts for 20xx were summonsed received and reviewed from the summonsed records it was determined that ra-2 received another substantial payment this was check 20xx for dollar_figure dated idr was issued on december 20xx to org requesting information on the second payment to ra-2 since the january 20xx monthly billing statements from ra-2 reflected a beginning balance of dollar_figure rather than the dollar_figure which was paid as evidenced by the cancelled checks at the time this payment was made to ra-2 he was officially the secretary of org a response was submitted on behalf of org from power_of_attorney poa poa on february 20xx per this response the payment was a retainer for ra-2 's professional services to establish the foundation for fiscal studies ffs' as a supporting_organization to org ffs was established in 20xx but never obtained exempt status thus org stopped researching whether ffs could obtain public charity status as a supporting_organization the dollar_figurefee was determined based on ra-2 's hourly rate and the amount of work needed to identify the pros and cons of ffs changing from a private_foundation to a public charity and fo pursue a private_letter_ruling from the irs indicating ffs was a supporting_organization the response went on to state that ra-2 would promptly return any portion for the dollar_figure payment that exceeds his services to org a subsequent response from poa received 20xx included a copy of a check from ra- and ra-30 paid to org in the amount of dollar_figure for repayment of the unused retainer also included in this response was a copy of the form 1040x signed on july 20xx which has been verified as filed with the service the service has no record of foundation for fiscal studies submitting a form_1023 application_for recognition of exemption under sec_501 of the internal_revenue_code a review of the foundation center's website revealed a form_990 for the tax_year ending december 20xx that was filed for foundation for fiscal studies on november 20xx exhibit p org is not identified anywhere on the return no subsequent returns were ever filed for ffs the foundation center is one the most authoritative source of information on private philanthropy in the united_states part of thelr service includes making available the form 990s and form 990-pfs filed by tax-exempt_organization on their website 20xx expenses - fundraising during the examination fundraising reported on the form_990 was identified as one payment check account number dated 20xx for dollar_figure to ra-30 from org's account with co-30 provided for the audit was a copy of a contract for services agreement dated november 20xx which stated it is agreed that org will employ ra-30 for fund-raising administrative and consulting services compensation will be paid-up-front in the amount of dollar_figure the term of employment will be for months commencing on january 20xx a third party contact was made with ra-30 a response included a signed statement dated august 20xx with the following comments i organized files prepared a database for conferences prepared materials and brochures for conferences and supervised the website the payment was for a year contract for 20xx through 20xx no w-2 was issued i intended to report the income in increments in 20xx through 20xx however i have been advised that this is not correct am amending my 20xx return no fundraising materials were submitted to reflect the fundraising activities that were undertaken 20xx through 20xx the summonsed bank records reflected only one contributor fac-2 in 20xx and no deposits from contributions gifts or grants in 20xx or 20xx in reviewing org's application_for exemption org was questioned concerning the use of professional fundraisers per the response submitted to the service from poa bruce hopkins on february 20xx you inquired as to the use of professional fundraisers that is not contemplated the present plan is to have one or more employees of the foundation solicit contributions and grants this response included a declaration signed under penalties of perjury by dir-1 president of org although professional fundraisers were not used in lieu of using employees of the foundation dir-1 used his sister ra-30 who received a three year contract with full up-front payment that included fundraising as one of the activities to be accomplished as part of the agreement 20xx expenses - investments the last expense to be addressed in 20xx is investments in the amount of dollar_figure during the examination org provided information on its various investments exhibit q is a recap of the investments for 20xx and 20xx as reflected in the exhibit investments included highly speculative_investments in stocks including stocks privately held and stocks that traded over-the-counter otc these investments ultimately resulted in overall loss to org poa provided the following statements with her february 20xx response org used reasonable business judgment and care when it selected the investments its board_of directors examined current market conditions to identify investments that would generate a positive return for the charity while also being an investment that had some relationship to org 's charitable mission of supporting co-i's international ll m program that is why several of the investments were for international companies for example org purchased shares in co-36 in country because the co-36 is located in city a country community that has skyrocketing real_estate values org's directors believed when they acquired the shares in co-36 and its underlying real_estate that its value would continue to grow as shown in exhibit q co-36 referenced by poa was purchased by six different some of the investments org were involved in and the end results include payments totaling dollar_figure this investment was sold in late 20xx per a letter from ra-32 ra- 32's letter stated that he is the majority owner of the co-36 a hotel and real_estate venture co-37 and co-25 ra-32's letter goes on to state that the co-36 investment was intended to be a five year investment for development and improvements of the property and renovations to the hotel org requested to sell out of its investment at an early stage in october i have purchased its interest in december 20xx poa provided with her response dated august 20xx verification that the co-36 was sold by org for dollar_figure and this amount was deposited into org's bank account based on the financial records reviewed and documents provided the overall loss to org for this one investment was dollar_figure purchase_price of dollar_figure less sales amount dollar_figure as shown in exhibit q org purchased dollar_figure of co-38 in two transactions paid on 20xx and 20xx this investment was sold in late 20xx for dollar_figure per information provided in poa's response dated august 20xx based on the financial records reviewed and documents provided the overall loss to org for this one investment was dollar_figure purchase_price of dollar_figure less sales amount dollar_figure was purchased in october 20xx for dollar_figure and sold for dollar_figure on april 20xx per poa's response to idr received february 20xx this security was purchased in the name of dir-1 and sold as an investment of dir-1 by co-39 rather than as an investment of org org claims the share certificates were erroneously issued in the name of dir-1 and some e-mail messages indicating the shares should be registered in the name of org when the stock was sold the shares were still in the name of dir-1 org purchased e co-40's website state co-40 is one of the largest privately owned and operated co-41 located in the state of state the headquarters for co-40 is located at address city state this is the same address co-1 had its off-campus location for the ll m program in international tax which was the program run by dir-1 co-40 is a privately traded company and we have no information on the current status of ownership of cp motion bank information from summonsed records 20xx_ income income from 20xx was determined based on deposits from summonsed bank records although poa has told us that the form_990 for the year ending december 20xx has been amended and filed the return has not posted to the irs internal system in poa's response dated october 20xx poa declined to provide a copy to the revenue_agent stating org has submitted its amended form_990 for 20xx and the irs should have a copy table deleted there were no contributions gifts grants or similar amounts deposited in 20xx income from special events is the result of org paying for materials to be reproduced for the ll m program in human rights the materials used in the ll m program in human rights were turned over to a copying service co-42 and the bills from co-42 were paid_by org upon completion of the service the reproduced material was subsequently sold to the students in the human rights program at or close to cost the payments from the students were paid_by personal checks and the amounts received from the students were deposited into org's account this was not intended to be a money making activity the internet business law service ibls revenue was four payments of dollar_figure each paid to org for preparing and publishing international tax books used by students in the ll m program ibls is the internet platform hosting the course materials and providing it support for the students and staff a third party contact was made to ibls to clarify and confirm the information provided testimony was received from ra-33 who stated that ibls received payment from co-1 for putting the materials on the internet platform ibls subsequently made payments to org since ibls was paying for the publishing rights for this material when verifying the purpose of the payments ra-33 of ibls stated dir-1 directed that payments be made to org as it was the producer of the tax books being used during the course of study third party contact was made to co-1 concerning the payments made to ibls in 20xx and 20xx per the response received from ra-34 associate dean of academic affairs which stated the total amount_paid to ibls in 20xx and 20xx was dollar_figure no payments to our knowledge were returned or refunded from ibls various internet sites were reviewed to learn more about the law ll m program’ dir-1 was listed as the founder of the co-43 a k a co-43 the ll m program in international tax was started at co-18 co-1 city state in 19xx the ll m program was operated in conjunction with co-1 city state from 20xx through 20xx the ll m program is currently offered by co-1 city state dir-1 has been involved in the program since its inception in 19xx and is still currently involved dir-1 was employed by all three universities during the time the programs were operated at those universities as stated previously the ll m program was established and operating in 19xx before org was incorporated on february 20xx or recognized as a tax-exempt_organization on may 20xx secured from co-1 was a list of the courses offered in the ll m program and the description of the courses this is attached as exhibit r in comparing the courses offered for the ll m program at co-1 to the individuals paid for specific work it was observed that none of the individuals paid worked on developing any of the ll m program courses from information publicly available via the internet reviewed as part of the audit process it was determined the original materials used in the ll m program were developed and published by ra-35 and ra-36 a third party contact letter was sent to ra-35 ra-36 to request information on the ll m program when asked what the co-43 is ra-35 stated that the program started at co-18 as an international tax program to educate foreign students who did not have the means in their countries to go to college the response went on to confirm that the program was moved from co-18 to co-1 and is now offered by co-44 using ra-35 ra-36 books published by five law publishers whose professors have approval to use as source materials when inquiring what the ra-35 ra-36s' relationship affiliation was with each of the universities mentioned above ra-35 stated the only relationship is free use of our name that is known for years in international trade and taxation through distribution of our books by the legal publishers when inquiring what the ra-35 ra-36s' knowledge relationship and affiliation with org and its directors ra-35 stated that he had no knowledge relationship of org and had never heard of it for dir-1 ra-35 provided information that dir-1 is the director of the ra- ra-36 international tax program at co-44 and our understanding is he is an assistant dean in charge of the ra-35 ra-36 internation sic tax proram ski for dir-2 ra-35 stated dir-2 is co-author with ra-35 ra-36 for the book updated three times a year titled ‘international trust laws and analysis ' published by co-11 legal international in the country questions were asked about the materials used in co-1's ll m program per ra-35 our books published by five legal firms were and are used as source materials in classes and approved by the published to be used the five publishers pay me royalties for books sold all publishers have coprighted sic ra-35 ra-36 books under their names the copyrights are owned by publishers co-45 co-45 co-11 co-35 co-46 co-47 formerly now by co-35 including co-1 co-1 co-48 co-43 and co-49 the complete response provided by ra-35 is at exhibit s 20xx expenses - totals a review of the summonsed bank records revealed disbursements totaling approximately dollar_figure in the absence of a form_990 the service attempted to allocate the expenses into appropriate categories based on review of the checks third party contacts and a summary spreadsheet provided by org exhibit t is the summary spreadsheet org provided for 20xx in comparing the bank account information with the amounts reflected on the summary sheet provided it was determined that the summary did not include all the expenses withdrawals from the account exhibit u shows the expenses allocated to most of the categories shown above and will be discussed further not reflected in this chart are dollar_figure expenses relating to org paying for materials to be reproduced for the ll m program in human rights this was discussed previously in the report under special events line 9a and resulted in a net_loss of dollar_figure 20xx expenses exempt_purpose table deleted payments categorized as exempt_purpose included a couple of minor payments and a dollar_figure country the information on org's summary spreadsheet payment to co-50 indicated the dollar_figure payment was for diploma agreement publishing book on tax compliance third party contact made to co-50 confirmed that there was a contract between org and co-50 to work together to provide course material for distribution under the advanced professional development apd series as part of the agreement org transferred dollar_figure us to co-50 as a contribution towards the initial set up of the program co-50's response also stated we confirm that dir-1 is acknowledged as the author of the advance professional development course entitled international_taxation - principles and structures 20xx expenses - loans payments categorized as loans were checks that included the annotation of a loan in the memo line of the check or reflected the expense as a loan on org's summary spreadsheet there were no loan repayments in tax_year ending december 20xx from these individuals per review of the bank records there were no loan documents provided for the examination 20xx expenses - payment for services - co-1 employees payments categorized as payment for services - co-1 employees included payments to co-1 employees who were working in the ll m program in international tax some of the payments included the annotation fall bonus on the check dir-1 was the director of this program in some cases these expenses were expenses that were not allowed or would not be paid_by co-1 for example student workers were not allowed to work beyond a specific number of hours however dir-1 paid these individuals to work beyond the allowable number of hours and therefore he paid these individuals and classified it on the checks as research grant bonus severance_pay etc other expenses in the category included dollar_figure payments to three individuals -- ra-37 dir-2 and ra-38 - for teaching per org's summary spreadsheet also included in this category of expenses were payments totaling dollar_figure to co-1 that were org claimed was donations to the co-1 this included the following table deleted 20xx expenses - payment for services - dir-1 payments categorized as payment for services - dir-1 include payments to individuals who provided services that benefit directly or indirectly dir-1 as the director of the ll m program in international_taxation at co-1 these expenses may have been indirect expenses of co-1 however these were payments that were not allowed per the university's own policy some of the individuals who received payment in tax_year ending december 20xx were the same individuals as mentioned previously in the tax_year ending december 20xx information this includes payments to ra-21 ra-25 and ra-26 these individuals and the services they performed was previously discussed under the 20xx development the other individuals paid were students at co-1 and per the summary spreadsheet they were paid a fall bonus since these individuals are not employees of co- the services performed for the bonus is attributed to dir-1 20xx expenses - reimbursements payments categorized as reimbursements were payments identified on the checks as reimbursements and were paid to two individuals check dollar_figure dated xx for dollar_figure to ra-39 for for co-51 and check dated xx for dollar_figure to dir-2 for reimb 20xx expenses - donations payments categorized as donations included payments totaling of dollar_figure to co-1 that the university identified and acknowledged as gifts to co-1 20xx expenses - general and management payments categorized as general and management were primarily for payments for accountant attorney fees dollar_figure directors’ liability insurance dollar_figure the second payment of dollar_figure to ra-2 paid on 20xx which was discussed under management general_expenses for 20xx and a payment to dir-5 for rent of address city state on january 20xx a check was written to dir-5 in the amount of dollar_figure this represents a three year up-front contract for rent the rent is for the office space for org located at address city state the space has been described as the room above the garage dir-5 resides at address idr was issued to obtain additional information on the rent payment per the written_statement provided by poa on 20xx org and dir-5' did enter into a commercial lease with org on november 20xx the term of the lease i sec_36 months org most likely lost its executed copy of the lease due to property leased by org stores its files conference materials research records and various publications although org conducts its charitable activities around the globe and conducts most of its research activities in state it is less expensive for org to store its records in state than in state dir-1 usually ships org's records to state via third class mail after org completes its research projects conferences or publications moreover org must have a registered office in state because it is a state nonprofit corporation the property serves as org 's registered office other activities conducted at this address include organizing org 's research materials and donor records the landlord also provided a computer printer and telephone access to org the monthly rent was dollar_figure the - the financial records reviewed did not reveal any payments for postage for the shipment of records to state via third class mail from state or from any other location org was requested to provide verification that an office was maintained in city and specifically requested to provide verification of the shipping of documents none has been provided the conferences that are referenced in poa's response have been determined to not be an activity of org there were no donors to org in 20xx it has not been established why org would need an office to organize the research materials and donor records when the individuals compensated for research were located in various locations and the financial records reflect only one donor fac-2 in the years under examination and ra-17 donated before the office was established according the state secretary of state corporation database on the report filed january 20xx domicile address address city state mailing address c o poa address city state dir-1 address address city state the report filed on april 20xx with the state secretary of state shows the following domicile address address city state mailing address c o poa address city state dir-1 address address city state 20xx expenses - benefit to dir-1 inurement payments categorized as benefit to dir-1 include dollar_figure of payments from org to dir-1 and dollar_figure of payments to an co-52 credit card account number which was dir-1' personal co-52 card most of the payments directly to dir-1' were transferred directly from org's co-30 account into dir-1' account with co-30 account number one payment made on july 20xx was a check dir-1i are shown below _ issued directly to dir-1 dates and amounts of payments transfers to table deleted idr was issued on december 20xx to request information on payments to dir-1 this idr requested information on the dollar_figure payment issued to dir-1 via check on 20xx as well as for information on the payments detailed above for the payment issued in 20xx the idr requested a statement to address specific services rendered for this payment and information on the filing or lack of filing form_w-2 form_1099 for this payment on february 20xx poa's submitted a response which included the comment org's dollar_figure payment to dir-1 was erroneously marked ‘services' by org's accountant dir-1 believes that dollar_figure actually was an advance for several conferences that dir-i attended in the fall of - 20xx dir-1 would promote the ll m program during these conferences this statement contradicts available information for the following reasons dir-1 reported the income on his personal form_1040 for tax_year ending december although poa's letter states the payment was erroneously classified as services by dated xx included the annotation services to org's accountant poa check co-1 ra-4 did not write out the checks and therefore did not make the annotation conceming the payment was for services 20xx per poa's statement dir-1 paid tax on that amount and has provided his form_1040 for 20xx to the irs in the audit of his personal taxes stated the dollar_figure was payment for dir-1' services to org on may 20xx dir-2 co-director of org was interviewed in person and he at the conclusion of the meeting held with dir-2 on may 20xx dir-2 provided a written letter addressed to poa dated 20xx that stated we voted to compensate dir-1 as a dollar_figure services contract for the year 20xx for his long hours of work with establishing the foundation documentation and administration interview held on february 20xx which was after idr statement to address specific services rendered and an explanation about the lack of a form_1099 or w-2 poa's response goes on to state that the funds transferred into dir-1' account were for advances for various conferences and in accordance with org ‘s reimbursement policy dir-1 would reimburse org for such advances within - months of his receipt dir-1 repaid org dollar_figure on august 20xx dir-1 was reimbursing org for its earlier advances to him poa's response went on to state dir-1 also repaid the following amounts dir-1 did not raise this as an issue in this examination until the investigative was issued requesting a table deleted in reviewing the information secured via the summonsed bank records check from dir-1' co-30 account number was deposit on 20xx there was no deposit into org's account for dollar_figure during november or december 20xx per review of the bank records records for tax_year ending december 20xx were not requested or reviewed since it is outside the 20xx through 20xx years under audit for dollar_figure for one reimbursement dollar_figure on 20xx poa provided a partial copy of dir-1' bank statement for february 20xx the statement was for co-30 account number-9 in the name of dir-1 and was for the period february 20xx - march 20xx most information on this statement including summary of activities balances other transactions were removed for dollar_figure this statement did sanitized and the one amount left disclosed was for check not provide verification of who the check was actually issued to and is not considered verification of repayment of funds to org for the other_payments listed above org did not provide verification of these amounts being repaid by dir-1 and is therefore not considered to be reimbursement of the funds paid to dir-1 poa did include information in her february 20xx response which stated org has requested its bank statements for 20xx from co-30 but no additional verification of the repayment has been provided for the audit poa's response goes on to state org made these expense advances to dir-i so he could travel to conferences on org's behalf the amounts in tab relating to the advances questioned in idr relate to the personal component of dir-1 travel and were ultimately repaid by dir-1 the amounts for which there are reimbursement sheets relate to the business_expenses that directly connected with org 's exempt_purpose as a practical matter org should have offset the expense reimbursement with the expense advance that it had previously paid dir-1 however org did not do this instead org sought repayment from dir-1 for the expense advance amount plu sec_15 interest amounts paid to him also nothing has been provided to show the repayments if made no information other than poa's statement has been provided to confirm dir-1 repaid the included interest under sec_3121 officers of an organization are considered to be employees payments issued under a non-accountable plan should be included in an individuals income and later if the expenses is ordinary and necessary business_expense under sec_162 and if the elements of sec_274 are met the expense deduction can be claimed by the individual since the claimed repayments occurred outside the audit years no information has been requested or provided concerning how dir-1 handled this issue the payments to co-52 account number were as follows table deleted _ idr was issued on april 20xx to obtain information on the payments made by org to dir-1' personal co-52 credit card the last two payments above checks were not part of idr bank records were received via summons since complete financial information was not available until the and requested verification of the expenses including verification required under irc idr sec_274 requested verification of the business purposes of the expenses under sec_162 and requested how the expenses were determined to be an expense of org rather than a personal_expense of dir-1 this idr also requested that org provide a statement from co- if the reimbursed expenses relate to the university in response to idr statement was not signed but included the following comments poa provided a statement and some documents the submitted one of org 's purposes is to provide support for the ll m in international_taxation support may be expressed in a variety of ways the board_of org represented by dir-2 and dir-1 decided org would partly expend its funds in the manner of these reimbursements the ll m is unique in that it is an online distance learning program most students do not live within a mile radius thus an opportunity for students for face-to-face meet network and undertake discussions with the program director is through meals a customary approach in all cultures other ll m international_taxation programs undertake social events as well as this being a customary practice of law schools and universities in general further the program director does not have significant involvement with the jd students because of the ll m program duties thus orientation and graduation represents an opportune time to network with the jd students and to create goodwill for the ll m program amongst that student body the information presented included information on various social activities including a flyer for a cocktail reception for the ifa congress september 20xx packet of information for an event called global tax symposium 20xx which appeared to be an event sponsored by co-1 e-mails from a ra-40 with a co-1 e-mail address inviting co-1 administrators faculty staff to an event called law alumni network happy hour in city in april 20xx and city in may 20xx the response continued with the comment separately org has other charitable purposes than the ll m program in international_taxation by example promoting education in the field of international_taxation through conferences and publishing which the board has sought to promote such activities require networking and development over an extended time frame networking and development requires meeting different individuals sometimes many times over time to develop a relationship to achieve some purpose provided for the audit was the excerpts from the co-52 statements and the reimbursement forms submitted to org from traveler dir-1 in reviewing the documentation the following was noted from the reviews reimbursement form filed by dir-1 for the period 20xx through 20xx totaled dollar_figure the form indicated this was for the asof conference speaker meeting copy costs and human rights program attached to this form was a copy of the org's check - paid to co-52 co-29' sec_4 annual conference cover page reflecting conference dates of march 20xx information on the annual offshore financial services summit held the and of may 20xx in country and some excerpted pages from dir-1's co- statements most of the expenses listed on the reimbursement form were for meals for the meal expense a persons name and or company name was listed on either the co-52 statement but no actual receipts were provided nor was the specific business_purpose noted for these meals one expense on 20xx for dollar_figure was for conference photocopies materials the conference was an activity of co-29 and not of org on 20xx the reimbursement form filed by dir-1 for the period 20xx through 20xx totaled dollar_figure this was reimbursed by org's check form indicated witwatersrand university masters program also left over co-29 conference receipts city country verification provided included co-52 statements with some annotations indicating expense was for org airline receipt from city to country country and taxi receipts one expense on the co-52 statement was for co-53 city country for dollar_figure on 20xx no actual lodging receipt was provided sufficient information was not provided to verify expenses listed were for org's exempt_purpose nor was information provided to establish the expenses as an ordinary and necessary business_expense of org's org's business_purpose for these expense and sec_274 pertaining to recordkeeping not totaled dollar_figure this was reimbursed by org's check the expenses were for ll m graduation dinner and for what appeared to be some individual names attached to this reimbursement form were excerpts from the co-52 statements with org noted on it for dining and bar expenses no actual receipts provided no verification of purchased by co-52 and reimbursed by org by check __ in the amount of dollar_figure paid to co-52 the invoice for this purchase indicates it was shipped to dir-1 at co-1's co-1's address this amount is de minimus and could be an ordinary_and_necessary_expense of org it is therefore allowed without further verification of the expenses reimbursement form filed by dir-1 for the period 20xx for adobe acrobat reimbursement form filed by dir-1 for the period 20xx through 20xx on 20xx the form indicated met reimbursement form filed by dir-1 for the period 20xx through 20xx on 20xx the form indicated the totaled dollar_figure this was reimbursed by org's check expenses were for ibfd international bureau of fiscal documentation provided for verification was excerpts of co-52 statements the expenses listed included restaurants discussed below dollar_figuredollar_figure for co-54 city country on 0xx gift item at city intl airport for dollar_figuredollar_figure and dollar_figuredollar_figure for co-55 internet research was conducted for ibfd and it was determined this company is based in the country and per their website site since 19xx tax practitioners from all over the world rely on international bureau of fiscal documentation ibfd for authoritative expertise on cross-border taxation ibfd is the portal to high qualify independent tax research international tax information and education with the aim to enable customers to do their work more quickly and efficiently co-55 was researched and it was determined about the time of the dollar_figuredollar_figure charge this non-profit organization held the city celebrity domino night no specific information on what was received for the dollar_figuredollar_figure payment for the meal expenses it was determined from the information submitted by org and by the reimbursement vouchers provided by co-1 that the charges reflected on the co-52 statement was equally split between co-1 and org no information was provided as to why it was split and the specific business_purpose of the expenses the expenses included the following table deleted reimbursement form filed by org for the period 20xx through 20xx totaled'dollar_figure this was reimbursed by org's check the expense was for a dinner with co-56 and for an unidentified expense at a city restaurant no actual receipts provided no business_purpose established and recordkeeping requirements of sec_274 not met for these expenses -_ on 20xx the form indicated reimbursement form filed by dir-1 for the period 20xx through 20xx totaled dollar_figure the form indicated the expenses were for ibls student orientation ll m and ra-21 these expenses include lodging_expenses of dollar_figure on 20xx at the cco- city state and dollar_figuredollar_figure on xx at co-58 city country the other expenses were for items such as dollar_figuredollar_figure for hosting the incoming orientation for jd students meal with ra-21 in country on 20xx for dollar_figuredollar_figure ll m orientation meal in city for dollar_figuredollar_figure and parking at city international airport from - 20xx for dollar_figure as a recap ibls is the internet platform hosting the course materials and providing it support for the students and staff ibls received dollar_figure from co-1 for this service and ibls subsequently paid org dollar_figure which was paid at the direction of dir-1 ra-21 was previously discussed and available information did not support a business relationship between ra-21 and org on 20xx and these expenses may be part of that reimbursement but the in reviewing the payments to co-52 see previous table there was no payment corresponding to this reimbursement form there was a payment of dollar_figure made to co-52 by check - reimbursement form filed by dir-1 for the period 20xx through 20xx dates do not agree and the amount_paid to co-52 is substantially more than the listed expenses totaled dollar_figure and was for student orientation for verification org provided excerpts from the co-52 statements and some receipts some of the receipts were just the charge slips but three were legible and included details some of the details noted included the following - dollar_figuredollar_figure for cheese fruit and shrimp cocktail on 20xx dollar_figuredollar_figure for a bottle of champagne perrier jouet rose fleur de champagne on 20xx at co-60 in city state and dollar_figuredollar_figure for a bottle of grey goose j b lr brut and five single red bulls on 20xx at the co-59 in city state for a party of guests none of these receipts specified who was entertained or the specific business_purpose of the expense these expenses are not ordinary and necessary under sec_162 and even if they were determined to be ordinary and necessary these expenses relate to student orientation of the ll m program and would be expenses of co-1 in reviewing the payments to co-52 see previous table there was no payment corresponding to this reimbursement form there was a payment of dollar_figure made to co-52 by _ check dates do not agree and the amount_paid to co-52 is substantially more than the listed expenses on 20xx and these expenses may be part of that reimbursement but the reimbursement form filed by dir-1 for the period 20xx through 20xx totaled dollar_figure this was reimbursed by org's check - on 20xx one of the expenses on this reimbursement form included an expense of dollar_figuredollar_figure on 20xx which was designated on the reimbursement form as lodging_expenses the actual receipt provided with that dollar amount included the preprinted name of co-61 in country and there was a line for gratuity this is not verification of a lodging expense the other expenses were for meals and did not meet the recordkeeping requirements of sec_274 reimbursement form filed by dir-1 for the period 20xx through 20xx totaled dollar_figuredollar_figure but was reimbursed as dollar_figure per annotation on the voucher the comments on the reimbursement form stating the nature of the request was not clear attached to this voucher was information on the international_fiscal_association ifa congress 20xx in vienna third party contact to co-1 on travel vouchers filed by dir-1 during this period of time resulted in information provided that the ifa conference was related to dir-1' position as an employee of co-1 and the conference expenses were therefore paid for by co-1 the conference was from 20xx through 20xx these expenses on this reimbursement form do not appear directly related to the conference since co-1 paid for the expenses relating to the conference the reimbursement form included dollar_figuredollar_figure for a rental vehicle and dollar_figuredollar_figure for lodging at co-58 city country business purposes of these expenses were not clear reimbursement in reviewing the payments to co-52 see previous table there was no payment corresponding to this reimbursement form this reimbursement form was approved by dir-2 on 20xx and it is possible the dollar_figure payment transferred from org's account with co-30 to dir-1's account with co-30 number on 20xx may be for thi sec_11 no verification or documentation was provided for the final three payments to co-52 reflected in the chart above it was noted that these payments were made on the same date 20xx and were paid_by three consecutive checks the total for these checks were dollar_figuredollar_figure and __ summary of coq-52 payments in reviewing the documents submitted by org the only expenses which appear to be allowable as related to org's exempt purposes include the purchase of adobe acrobat on 20xx for dollar_figure and ibfd purchase on xx for dollar_figuredollar_figure this was a total of dollar_figure dollar_figure for business the other_payments made by org to co-52 were determined to be either personal expenses of dir-1 payments of another organization's such as co-29 or co-1 or unsubstantiated as an ordinary necessary business_expense of org in comparing the total payments made by org in 20xx to co-52 dollar_figure to the amount determined to be for org's exempt_purpose dollar_figuredollar_figure less than of the payments were verified to be for org's business_purpose co-1 was contacted as a third party contact to obtain information concerning the university's policy concerning the expectation that dir-1 entertain and pay for meals without reimbursement for other professors or students during orientation during the school year or at graduation per the written_statement from co-1 dated november 20xx - based on university policy it would not be expected for a faculty_member to entertain and pay for meals without reimbursement for other professors or students during orientation during the school year or at graduation exhibit v co-1's response referenced above and subsequent response provided on july 20xx exhibit g were shared with org and poa submitted a response on 20xx to address co-1's letters to us for the first letter dated november 20xx poa's response stated dir-1 would take students other professors and visiting faculty out to dinner this promotes org 's charitable purpose because it rewards students for work that they did for org and promotes org's charitable activities by providing details about org in general and co-1 's ll m program in particular and by encouraging students visiting faculty and other professors to inform others about the ll m program dir-1 was either reimbursed by org or co-i for these expenses dir-1 recalls that he never was reimbursed twice for the same expense if co-1 did not reimburse dir-1 the org would which is consistent with its exempt purposes including supporting and promoting co-1 's ll m program org respectfully disagrees with co-1's characterization of its relationship with org for the second letter dated july 20xx poa's response stated co-1 distances itself from org and states that it ‘was unaware that org was established to be an organization set up to support the co-1 ' further co-1 states that org was not an integral fundraising activity for co-1 nor were the operations of the ll m program dependent on funding from org or any other particular source of outside funding first co-1 was aware and even acknowledged the financial support that org provided it for example in a july 20xx letter co-1 thanked org for its ‘support over the last several years' and identified four direct gifts from fea co-1 also indicates that org has indirectly supported co-1 by encouraging ra-35 and ra-36 to donate to co-1 poa's letter then mentions the dollar_figure payment from co-29 that was credited to org this was previously discussed under 20xx expenses - program services poa's response referenced and included a fundraising letter from co-1 dean dean-1 dated november 20xx review of this letter showed this to be a general fundraising letter it did not acknowledge past donations and did not solicit any specific amount for the future the letter included information on the history of co-1's co-1 and provided statements as to why this was a worthy cause to support poa's letter talks about this letter and then states it is disingenuous for co-1 to argue that it was unaware of org 's support or that org 's support was not critical to its law school and programs when org prepared its form_1023 org had every expectation that its support of co-1 would be an integral part of co-1's fundraising in total org gave dollar_figuredollar_figure of direct and indirect cash contributions to co-1 in 20xx and 20xx and co-1 acknowledged these contributions although dollar_figuredollar_figure may not be an ‘integral part' of co-1's fundraising it still is a significant sum of money and is consistent with org's charitable purpose of supporting co-1 it should be noted that gross_income received by org from during the audit years of 20xx through 20xx was approximately dollar_figuredollar_figure without regards to income received in 20xx from reimbursement of copied material for the ll m program in human rights the gross_income received by org was calculated as follows table deleted the only support provided to co-1 since the inception of org was dollar_figureof indirect support in 20xx and dollar_figuredollar_figure direct support in 20xx the dollar_figure poa included in her calculation as paid to co-1 was from co-29 total amount donated dollar_figuredollar_figure is less than received by org of the total gross_receipts the original acknowledgement for the donations from org to co-1 was dated july 20xx and was from the co-1 co-1's assistant dean a-dean this acknowledgement was previously discussed and is included in the report as exhibit j a-dean is no longer employed by co-1 and was therefore unable to explain why a payment written from co-29's account is credited to org a third party contact was conducted to co-1 in october 20xx to confirm the donations and to establish what support was provided by org to co-1 from 20xx through the present since org claims to be an entity providing support to co-1 in co-1's response they acknowledged the donations listed on exhibit j with the exception of the dollar_figure check from co-29 co-1 did not verify any other support from org 20xx letter when it states that it was unaware that org was established as an organization this was the series of donations discussed previously under 20xx expenses - program services see comments previously noted in the report and attached exhibit d poa included a footnote that stated the following perhaps co-1 is confused in its july set up to support the co-1 perhaps co-1 thinks that the irs is asking co-i to negate the idea that org is a sec_509 supporting_organization for co-1 given that co-1 has sec_509 supporting organizations such as the friend of co-1 it is possible that co-i1 thinks that org is characterizing itself as a supporting a supporting_organization as discussed in its form_1023 org was created as a publicly supported charity under sec_170 vi 20xx expenses - unknown not identified payment categorized as unknown - not identified is for dollar_figure wire transfer on xx to co-62 escrow - co-33 per the wire transfer information initially it was believed this might be another donation to co-33 which was discussed previously in tax_year ending december 20xx information however org's summary spreadsheet identified the payment as co-63 - ra-41 and the comment wire error - transfer out to further confuse the understanding of this payment poa provided some information on 20xx which included the following statement dir-1 recalls that this relates to donors requesting a refund of their donations to org because org did not yet have its determination_letter 20xx expenses - investments org purchased investments in the amount of dollar_figuredollar_figure during 20xx no investments were sold in - 20xx as discussed under the 20xx development org provided information on its various investments exhibit q is a recap of the investments for 20xx and 20xx as reflected in the exhibit investments included highly speculative_investments in stocks including stocks privately held and stocks that traded over-the-counter otc these investments ultimately resulted in overall loss to org review of org's financial records indicate no payments to co-1 in 20xx or 20xx law internal_revenue_code code sec_501 provides that organizations that are corporations and any community chest fund or foundation organized and operated exclusively for religious charitable scientific testing for public safety literary or educational_purposes no part of the net_earnings of which inures to the benefit of any private_shareholder_or_individual emphasis added are exempt from federal_income_tax under this section regulation sec_1 c -i c defines the operational_test regulation sec_1_501_c_3_-1 primary activities provides in part an organization will be regarded as federal_income_tax regulation regulation sec_1_501_c_3_-1 states 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 code section if an organization fails to meet either the organizational_test or the operational_test it is not exempt emphasis added ‘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 emphasis added regulation sec_1_501_c_3_-1 distribution of earnings expands on the definition of an activity that is not in furtherance of an exempt_purpose it states an organization is not operated exclusively for one or more exempt purposes if its net_earnings inure in whole or in part to the benefit of private shareholders or individuals for the definition of the words ‘private shareholder or individual’ see paragraph c of sec_1_501_a_-1 emphasis added regulation sec_1_501_a_-1 defines 'private shareholder or individual’ when it states the words 'private shareholder or individual' in sec_501 refer to persons having a personal and private interest in the activities of the organization regulation sec_1 c -1 d ii provides emphasis to the operational_test it states that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest thus it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals the creator or his family shareholders of the organization or persons controlled directly or indirectly by such private interests emphasis added revrul_77_366 1977_2_cb_192 states that operating exclusively for charitable religious or educational_purposes has been construed as requiring all the resources of the organization to be applied to the pursuit of' such purposes revrul_56_304 1956_2_cb_306 states that charitable organizations are not precluded from making distributions of their funds to individuals provided such distributions are made on a true charitable basis in furtherance of the purposes for which they are organized in addition it should maintain adequate_records and case histories to show the name and address of each recipient of aid the amount distributed the purpose for which the aid is given the manner in which the recipient was selected and the relationship that exists between the recipient and members officers and trustees of the organization or a corporation controlled by the such individuals in order to establish that distributions are made for charitable purposes in 92_tc_1053 the court addressed the operational_test and illuminates the difference between private benefit derived by private interests where such private benefit is adverse to exemption under sec_501 from inurement derived by insiders which also is adverse to exemption under sec_501 it states specified in sec_501 sec_1_501_c_3_-1 income_tax regs second the the treasury regulations specify three conditions which must be satisfied for an organization to meet the operational_test 765_f2d_1387 cir affg c memo first the organization must be primarily engaged in activities which accomplish one or more of the exempt purposes organization's net_earnings must not be distributed in whole or in part to the benefit of private shareholders or individuals sec_1_501_c_3_-1 income_tax regs third the organization must not be an action_organization ie one which devotes a substantial part of its activities attempting to influence legislation or participates or intervenes directly or indirectly in any political campaign see c -1 income_tax regs to establish that it operates primarily in activities which accomplish exempt purposes petitioner must establish that no more than an insubstantial part of its activities does not further an exempt_purpose sec c -1 c income_tax regs the presence of a single substantial nonexempt purpose destroys the exemption regardless of the number or importance of the exempt purposes 326_us_279 79_tc_793 prohibited private benefits may include an ‘advantage profit fruit privilege gain or interest ' 78_tc_280 occasional economic benefits flowing to persons as an incidental consequence of an organization pursuing exempt charitable purposes will not generally constitute prohibited private benefits kentucky bar foundation v commissioner t c pincite thus should petitioner be shown to benefit private interests it will be deemed to further a nonexempt purpose under sec_1_501_c_3_-1 ii income_tax regs this nonexempt purpose will prevent petitioner from operating primarily for exempt purposes absent a showing that no more than an insubstantial part of its activities further the private interests or any other nonexempt purposes sec_1_501_c_3_-1 income_tax regs we have consistently recognized that while the prohibitions against private_inurement and private benefits share common and often overlapping elements 83_tc_20 75_tc_337 n the two are distinct requirements which must independently be satisfied 82_tc_973 aid to artisans inc v commissioner t c pincite nonetheless we have often observed that the prohibition against private_inurement of net_earnings appears redundant since the inurement of earnings to an interested person or insider would constitute the conferral of a benefit inconsistent with operating exclusively for an exempt_purpose 73_tc_196 n affd in an unpublished opinion 631_f2d_736 7th cir see also sec_1_501_c_3_-1 income_tax regs in other words when an organization permits its net_earnings to inure to the benefit of a private_shareholder_or_individual it transgresses the private_inurement prohibition and operates for a nonexempt private purpose the absence of private_inurement of earnings to the benefit of a private_shareholder_or_individual does not however establish that the organization is operated exclusively for exempt purposes therefore while the private_inurement prohibition may arguably be subsumed within the private benefit analysis of the operational_test the reverse is not true accordingly when the court concludes that no prohibited inurement of earnings exists it cannot stop there but must inquire further and determine whether a prohibited private benefit is conferred see aid to artisans inc v commissioner t c pincite 78_tc_280 moreover an organization's conferral of benefits on disinterested persons may cause it to serve ‘a private interest’ within the meaning of sec_1_501_c_3_-1 income_tax regs 70_tc_1037 see kentucky bar foundation v commissioner supra aid to artisans inc v commissioner supra see also the martin s ackerman foundation v commissioner tcmemo_1986_365 in this connection we use disinterested to distinguish persons who are not private shareholders or individuals having a personal and private interest in the activities of the organization within the meaning of sec_1_501_a_-1 income_tax regs in defining who is an insider 165_f3d_1173 cir states the term any private_shareholder_or_individual in the inurement clause of sec_501 of the internal_revenue_code has been interpreted to mean an insider of the charity 893_f2d_529 2d cir church of scientology v commissioner supra f 2d pincite 765_f2d_1387 9th cir 92_tc_1053 a charity is not to siphon its earnings to its founder or the members of its board or their families or anyone else fairly to be described as an insider that is as the equivalent of an owner or manager the test is functional it looks to the reality of control rather than to the insider's place in a formal table of organization the insider could be a mere employee-- or even a nominal outsider such as a physician with hospital privileges in a charitable hospital 505_f2d_1068 e cir revrul_69_383 1969_2_cb_113 in examining the compensation arrangement between a radiologist and an exempt hospital wherein the radiologist was paid on the basis of a fixed percentage of the radiology department's income provides criteria useful in distinguishing between an insider and private interests it notes under certain circumstances the use of a method of compensation based upon a percentage of the income of an exempt_organization can constitute inurement of net_earnings to private individuals the presence of a percentage compensation agreement will destroy an organization's exemption under sec_501 of the code where such arrangement transforms the principal activity of the organization into a joint_venture 31_tc_141 or is merely a device for distributing profits to persons in control 276_f2d_476 the compensation agreement in this ruling did not constitute inurement because the amount received was not excessive but was reasonable in terms of the responsibilities and activities the radiologist assumed under the contract the radiologist did not control the hospital and the compensation agreement was as a result of arms-length bargaining the courts have determined that the inurement proscription does not prevent the payment of reasonable_compensation for goods and services and the payment of reasonable salaries and benefits do not give rise to inurement though the courts in 203_f2d_872 cir birmingham business college inc v commissioner f 2d cir determined that excessive_salaries do result in inurement they have in addressing the issue indicated that the payment of reasonable salaries by a tax-exempt_organization does not result in the inurement of net_earnings to the benefit of private individuals see in their decisions the courts indicate that this tl determination of whether the salaries paid are reasonable is a question of fact the court in 165_f3d_1173 cir stated that the inurement provision of the code is designed to prevent the siphoning of charitable receipts to insiders of the charity not to empower the irs to monitor the terms of arm's length contracts made by charitable organizations with the firms that supply them essential inputs whether premises paper computers legal advice or fundraising services in 75_tc_127 the court in examining the compensation arrangement of an insider noted that it is an established principle that the organization is entitled to pay reasonable_compensation to an insider but the burden of establishing the reasonableness of the compensation fell upon the organization it noted that where the insider's donhowe's compensation was based upon a percentage of petitioner's gross_receipts apparently subject_to no upper limit a portion of petitioner's earnings is being passed on to donhowe see 276_f2d_476 5th cir affg on this point c memo 71_tc_1067 appeal filed 9th cir date 412_f2d_1197 cert_denied 397_us_1009 the statute specifically denies tax exemption where a portion of net_earnings is paid to private shareholders or individuals we hold here that paying over a portion of gross earnings to those vested with the control of a charitable_organization constitutes private_inurement as well all in all taking a slice off the top should be no less prohibited than a slice out of net the inurement of earning to an insider is described in 412_f2d_1197 ct_cl cert den 397_us_1009 the court determined that the different arrangements between the organization and its founder such as payment of ten percent or gross revenues lending of money to him and his family payment of expenses on their behalf rental of property at inflated prices resulted in inurement the court rejected the reasonable_compensation defense it stated if in fact a loan or other payment in addition to salary is a disguised distribution or benefit from the net_earnings the character of the payment is not changed by the fact that the recipient's salary if increased by the amount of the distribution or benefit would still have been reasonable it is clear in other decisions that an organization's net_earnings may inure to the benefit of private individuals in ways other than by the actual distribution of dividends or payment of excessive_salaries 202_f2d_633 7th cir - reports and surveys furnished to members 182_f2d_551 6th cir - services to members 135_f2d_371 7th cir cert_denied 320_us_756 -reports and studies furnished 222_fsupp_151 e d wash - goods services and refreshments given that the benefit conveyed may be relatively small does not change the basic fact of inurement spokane motorcycle club v united_states supra though inurement involves the flow of funds or other financial resources from the exempt_organization to an individual that is an insider of the organization the determination of private benefit does not require that payments for goods and services be unreasonable or exceed fair_market_value in 71_tc_1067 the court upheld the revocation of the organization's exemption where it had operated for another organization that exerted considerable control_over it in upholding the revocation the court stated nor can we agree with petitioner that the critical inquiry is whether the payments made to international were reasonable or excessive regardless of whether the payments made by petitioner to international were excessive international and est inc benefited substantially from the operation of petitioner ‘in a similar case westward ho v commissioner tcmemo_1992_192 the court noted that the organization that had been created by three restaurant owners to provide funds to ‘indigent and antisocial persons’ thereby enabling them to leave the city did in fact have another motive it determined that the organization's true motive was to provide its creators with a more desirable business environment by removing disruptive homeless persons from the area the court ruled that the organization did not qualify for exemption even though it provided direct ‘assistance' to members of the charitable_class in 765_f2d_1387 cir affg tcmemo_1984_349 the court noted that church by mail inc ‘church’ paid twentieth century advertising agency ‘twentieth’ for services provided twentieth was owned and controlled by the two individuals who ran church the tax_court had found it unnecessary to consider the reasonableness of payments made by the applicant to a business owned by its officers in addressing whether church operated for a substantial non-exempt purpose the circuit_court of appeals in affirming the tax court's decision stated the critical inquiry is not whether particular contractual payments to a related for-profit organization are reasonable or excessive but instead whether the entire enterprise is carried on in such a manner that the for- profit organization benefits substantially from the operation of the church est of hawaii v commissioner t c pincite see also 743_f2d_148 3d cir courts must look to all objective indicia from which a corporate actor's intent may be discerned 666_f2d_1096 7th cir cert_denied 456_us_983 72_led_861 i 02_sct_2257 it is necessary and proper for the i r s to survey all of the activities of an organization to determine whether a non-exempt purpose is furthered code sec_6001 notice or regulations requiring records statements and special returns provides in part every person shall keep such records render such statements make such returns and comply with such rules and regulations as the secretary may from time to time prescribe code sec_6033 returns by exempt_organizations provides in part except as _ provided in paragraph every organization_exempt_from_taxation under a shall file an annual return stating specifically the items of gross_income receipts and disbursements and such other information for the purpose of carrying out the internal revenue laws as the secretary may by forms or regulations prescribe and shall keep such records render under oath such statements make such other returns and comply with such rules and regulations as the secretary may from time to time prescribe code sec_6033 provide mandatory exceptions to the filing_requirements under code sec_6033 including code sec_6033 which states any organization other than a private_foundation as defined in sec_509 described in subparagraph c the gross_receipts of which in each taxable_year are normally not more than dollar_figure as explained in revenue procedures 1996_1_cb_577 the internal_revenue_service has the authority to create discretionary exceptions to the requirement to file an annual information_return if the filings of certain returns is not necessary to efficiently administer the internal revenue laws as stated in announcement 1982_25_irb_23 the service exercised this discretionary authority by expanding the filing exception to include code sec_501 exempt_organizations other than private_foundations whose gross_receipts in each tax_year are not normally more than dollar_figure thus expanding the dollar_figure limit in the statutory exception regulations sec_1_6033-2 organizations not required to file includes an organization other than a private_foundation the gross_receipts of which in each taxable_year are normally not more than dollar_figure as described in subparagraph of this paragraph regulations sec_1_6033-2 as modified by announcement lr b provides for purposes of subparagraph iii of this paragraph the gross_receipts as defined in subparagraph of this paragraph of an organization are normally not more than dollar_figure if - i in the case of an organization which has been in existence for one year or less the organization has received or donors have pledged to give gross_receipts of dollar_figure or less during the first taxable_year of the organization ii in the case of an organization which has been in existence for more than one but less than years the average of the gross_receipts received by the organization in its first taxable years is dollar_figure or less and iii in the case of an organization which has been in existence for years or more the average of the gross_receipts received by the organization in the immediately preceding taxable years including the year for which the return would be required to be filed is dollar_figure or less regulation sec_1_6033-2 discusses returns filed by exempt_organizations regulation sec_1_6033-2 records statements and other returns of tax-exempt organizations provides in part every organization which is exempt from tax whether or not it is required to file an annual information_return shall 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 revrul_59_95 1959_1_cb_627 provides in part failure or inability to file the required information_return or otherwise to comply with the provision of sec_6033 of the code and the regulations which implement it may result in the termination of the exempt status of an organization previously held exempt on the grounds that the organization has not established that it is observing the conditions required for the continuation of an exempt status internal_revenue_code code sec_7602 provides the authority to examine any books papers records or other data which may be relevant or material for the purpose of ascertaining the correctness of any return sec_162 states that ordinary and necessary expenses paid_or_incurred in carrying_on_a_trade_or_business shall be allowed as a deduction sec_274 addresses the disallowance of certain expenses in sec_274 substantiation required provides that no deduction is allowed under sec_162 for any traveling expense including meals_and_lodging while away from home for any item with respect to an activity which is of a type generally entertainment amusement recreation or use of the facility used in connection with such an activity or for any gifts unless the taxpayer substantiates by adequate_records or by sufficient evidence corroborating the taxpayer's own statement- a the amount of the expense b the time place of travel entertainment amusement recreation or use of the facility or property or the date and description of the gift c the business_purpose of the expense or other item d the business relationship to the taxpayer of the persons entertained using the facility or property or receiving the gift regulation sec_1_274-5 addresses the substantiation requirements with respect to the business_purpose of an expense if the substantiation requirements are not met no deduction is allowed with respect to that expense regulation sec_1_274-5t identifies the elements that the taxpayer must substantiate - with respect to the expenditure i amount ii time and place of travel entertainment amusement recreation or use of the facility or property iii business_purpose and iv the business relationship to the taxpayer of each person entertained using the facility or property or receiving the gift sec_1_274-5t notes that a taxpayer must substantiate each element of an expenditure by adequate_records or by sufficient evidence corroborating taxpayer's own statement sec_274 contemplates that a taxpayer will maintain and produce such substantiation as will constitute clear proof of an expenditure referred to in sec_274 it states that a record of the elements of an expenditure made at or near the time of expenditure supported by sufficient documentary_evidence has a high degree of credibility not present with respect to a statement prepared subsequent thereto when generally there is a lack of accurate recall it states that the corroborative evidence required to support a statement not made at or near the time of the expenditure must have a high degree of probative value to elevate such statement and evidence to the level of credibility reflected by a record made at or near the time of the expenditure supported by sufficient documentary_evidence it states that to obtain a deduction for travel etc a taxpayer must substantiate each element of the expenditure sec_3121 provides that the term employee means any officer of a corporation regulations sec_1_274-5 defines an adequate account to an employer per this section an adequate_accounting means the submission to the employer of an account book diary log statement of expense trip sheet or similar record maintained by the employee in which the information as to each element of an expenditure or use is recorded at or near the time of the expenditure or use together with supporting documentary_evidence in a manner that conforms to all the adequate_records requirements of this section employment_tax regulation sec_31 d - provides regulations to define who is an employee sec_31_3121_d_-1 provides if the relationship of employer and employee exists the designation or description of the relationship by the parties as anything other than that of employer and employee is immaterial thus if such relationship exists it is of no consequence that the employee is designated as a partner co-adventurer agent independent_contractor or the like employment_tax regulation sec_31_3121_d_-1 provides that corporate officers generally are employees of the corporation however an officer of a corporation who as such does not perform any services or performs only minor services and who neither receives nor is entitled to receive directly or indirectly any remuneration is considered not to be an employee of the corporation government's position org failed to operate as an organization exempt under sec_501 of the internal_revenue_code the following is a timeline depicting events from the date of incorporation to the receipt of the determination_letter articles of inc filed xx although certain activities were historical as shown in the table above form_1023 contained various inaccuracies or misstatements when compared to the actual activities including form_1023 filed on xx case re- est on xx foundation will provide co-1 ll m programs in tax and human rights with y contributions in order that the program will be able to provide support to their students contributions to co-1 are minimal compared to income received by the organization considerable payments were payments either made directly to or paid for the benefit of dir- directly or indirectly foundation is viewed as an integral fundraising activity required by the ll m y programs in order to continue their success co-1 was unaware that that org was established to be an organization set up to support the co-1 also org fundraising was not an integral fundraising activity required by the ll m programs or any other program at co-1 as evidenced by the third party response from the university co-1 has stated that no contributions have been received from org since june 20xx the foundation will hold conferences meetings and assemblies to provide a forum for y the discussion and dissemination of relevant information and data to promote a better understand of international economic tax and fiscal topics the foundation will sponsor at least three conferences each year at co-1 featuring such economic and fiscal topics co-1 has stated in a third party response that there was no relationship between co-1 and org with regards to the conferences there are no contracts for such a purpose the form_1023 was signed under penalties of perjury the penalty statement is directly above the signature assignment agreement notice 20xx-81 income received xx - xx ltr issued granting exempt status on xx effective xx case closed fte on xx line and states j declare under the penalties of perjury that iam authorized to sign this application on behalf of the above organization and that i have examined this application including the accompanying schedules and attachments and to the best of my knowledge it is true correct and complete conference materials provided and reviewed indicates that two conferences were held in 20xx country and city one in 20xx cayman island and one in 20xx city org was not listed as a sponsor for any of these conferences dir-1 and dir-2 were listed as either participants and or presenters at the conferences a review of the website for co-29 shows that co-29 sponsors the conferences the form_1023 application_for recognition of exemption was filed on april 20xx at that time the conferences for country and city had already been held a review of the financial records reviewed indicated no conference expenses were paid in 20xx or 20xx in 20xx some payments were made to dba and co-29 which may be related to conferences sponsored by co-29 and not org y the foundation will edit and publish papers magazines periodicals and books the foundation holds no copyrights or editorial mention other than on its own website individuals are paid wages to edit and prepare articles that dir-1 directs individuals interviewed with respect to certain activities have said that editing and writing are for dir-1 and in some cases editorial credit went to dir-1 notice 20xx-81 as mentioned in the facts section the irs issued notice 20xx-81 describing a transaction in which a taxpayer claims a loss upon the assignment of a sec_1256 contract to a charity but fails to report the recognition of gain when the taxpayer's obligation under an offsetting non- sec_1256 contract terminates org was the recipient of assignment agreements to which the notice applied during the tax years ending december 20xx and 20xx the assignment agreements were reported as charitable donations by org theterm donation is defined by webster's ninth new collegiate dictionary as ‘the action of making a gift esp to a charity or public institution org did send acknowledgment letters to the donors one hundred percent of the gross_receipts reported by org in the year of incorporation was the result of the assignment agreement transaction as a result of listing this transaction the service subsequent disallowed the contribution amounts on the form_1040 of all the contributors in this sheltered transaction it should be noted that in some instances the contributor did not taken the contribution deduction on the return and they self-reported their involvement it should be further noted that there have been no more referrals of wealthy client from the asset management firms that have contributed to org operations activities dir-1 has stated in interviews that he spends about to hours a month handling org matters and has done so for years while at the same time being a full-time professor for co- _ activities of co-1 and co-29 have been described as activities of org however a review of the financial information indicates differently v reflected as a program service activity by org v payment for services by employees of co-1 that exceeded what was allowed to be the check payable to co-1 from the co-29 was signed by dir-1 this was paid_by co-1' policy payment for services that were directed by dir-1 paid_by org when the payees did v not know who or what org was income in the amount of dollar_figure dollar_figure dollar_figure in 20xx and dollar_figure in 20xx has been established to come from tax sheltered activity even though org received this sum from shelter activities although reported differently nominal amounts were spent for org's exempt purposes and a substantial amount was paid to or paid for the benefit of org's president co-director dir- - grants allocations - dollar_figure to co-33 dollar_figure to co-1 research - dollar_figure research grant paid to ra-20 for tax_year ending december 20xx verification was provided that dollar_figure was expended for the development of co-1's ll m program in human rights for tax_year ending december 20xx audit of the records indicate the following amounts were for program services for tax_year ending december 20xx audit of the records indicate the following amounts were for program services diploma agreement publishing box on tax compliance dollar_figure co-64 dollar_figure city county recorder dollar_figuredollar_figure to co-1 dollar_figure paid to co-52 for business_expenses dollar_figure payment to co-50 for the contract between org and co-s0 regarding the under sec_162 in general there shall be allowed as a deduction all the ordinary and necessary expenses paid_or_incurred during the taxable_year in carrying out any trade_or_business what is not allowed are expenses paid on behalf of a third party co-1 or co-29 in addition as a professor at university it is reasonable that dir-1 in his position as a professor would have educational expenses but this does not allow him to use assets of a public charity for his own benefit in addition there has been a misclassification of payments for services rendered as research grants org does not have a formal grant policy org did not comply with even the most basic recordkeeping requirements with respect to grants or other distributions to individuals see revrul_56_304 org was unable to demonstrate that the payments to individuals were based on any charitable criteria or demonstrate that the recipients of the distributions were members of a charitable_class students by definition are not a charitable_class per revrul_56_304 1956_2_cb_306 provides that an organization is not precluded from sec_501 exemption when it makes grants to individuals provided the distributions are made on a true charitable basis and in furtherance of its exempt purposes such organizations should keep adequate_records and case histories to show the name and address - of the recipients of aid the amount distributed to each the purpose for which the aid was given the manner in which the recipient was selected and the relationship if any between the recipient and members officers or trustees of the organization a grantor or substantial_contributor to the organization or a member_of_the_family of either and a corporation controlled by a grantor or substantial_contributor as previously mentioned there was a problem with respect to org's records due to org' s address of record is in city and that is the area that was impacted by the hurricane dir-1 was physically located in state both his residence and office although he stated that he spent to hours per month on org's matters the records lost were retained in the city area the individuals who were compensated for services rendered performed these services in the state office this office was also the office of the ll m program of co-1 payment made to or for president director dir-1 constitutes private benefit inurement as mentioned above although org received dollar_figuredollar_figure dollar_figure in 20xx and dollar_figure in 20xx in what has been established to come from tax sheltered activity and org received dollar_figure from ibls in 20xx although reported differently nominal amounts were spent for org's exempt purposes and a substantial amount was paid to or paid for the benefit of org's president co- director dir-1 some payments were reported as research grants however a review of financial and third party information reveal that most payments were for services rendered these services were directed by dir-1 or were for the benefit of dir-1 in some cases the services were payments that the university would not pay as a professor at co-1 and as director of the ll m program in international_taxation dir-1 has a vested interest in making the ll m program appear to be highly successful this benefits him directly by assuring him of job security increases in pay and job promotions to limit costs co-1 was paying and to make the program look more successful dir-1 had some of the costs paid for by org which was a benefit to him although the costs may have some elements of being educational support in nature the true end result was to promote dir-1 in his position as director of the ll m program payment made to family members of president director dir-1 constitutes private benefit inurement in response to idrs asking for documentation to verify these expenses contracts were payments were made to president co-director's dir-1 sister and her husband ra-30 and ra-2 during november 20xx these payments were reported as expenses on the form provided for both ra-30 and ra-2 these contracts were mentioned in the previous section of this report it should be further noted that both the contracts - were dated november 20xx were three year contracts were not to commence until january 20xx and were paid upfront in 20xx ra-30's was a contract for services agreement which called for fundraising administrative and consulting services no fundraising materials were submitted to reflect the fundraising activities that were undertaken the bank summonsed bank records do not reflect any deposits for contributions gifts or grants per a statement submitted by the poa on dir- behalf he did not directly contact any of the donors prior to their contributions to org he did personally contact asset managers who represented wealthy individuals as a means of soliciting charitable_contributions for org no w-2 or was issued by org for the dollar_figure that was paid this amount was not reported as income by her own statement until an amended form_1040 was filed in july 20xx ra-2 is an attorney by profession the documentation for his payment was a retainer agreement the agreement states that ra-2 would deduct dollar_figure per month for administrative services and would deduct at a rate of dollar_figure per hour for legal and consulting services rendered during the agreement period if the retainer were exhausted prior to the expiration of the agreement org would pay additional funds in increments of dollar_figure during the may 20xx interview previously mentioned ra-2 stated that his administrative services included handling the paperwork and other information for org that was sent to the address of record address city state ra-2 stated that he expended hours per month for this activity specifically he stated that letters and bank statements were sent to that address and he would put the information statements in a folder and then mail to dir- in city dir-1 after reviewing in city would then re-mail the items to his accountant in city state this activity occurred and org was billed even after _ an interruption in mail service in the city area from august 20xx until regular mail service was resumed on april 20xx in addition although ra-2's three-year contract was dated november 20xx and was effective january 20xx state secretary of state records revealed attorney ra-1 was the registered agent of org from february 20xx until ra-2 was appointed on april 20xx the official address of record was dir-1 's place of business there were no payments to dir-1 per review of the financial records caused a review of the summonsed bank records for 20xx revealed a second dollar_figure payment to ra-2 was made via check - on january 20xx this amount was not reflected in his billing records when the payment was questioned the response was that it was another retainer for professional services to establish an unrelated ‘organization this statement does not excuse or explain the non-reporting of substantial income received by attorney ra-2 and the failure to timely file an amended_return form 1040x to include the income received by ra-2 and ra-30 it should also be noted that both the ra-2s were being paid per the contract or retainer agreement for administrative services fiduciary responsibility notwithstanding with respect to the contracts org failed to properly report the contracts in their books_and_records and on the 20xx form_990 org failed to provide w-2s and or 1099s for these individuals the individuals by their own admission failed to report the payments the same date payments were made to ra-2 and ra-30 november 20xx org made a dollar_figure contribution to co-33 the 501_c_3_organization that is run by president co-director dir-1 mother dir-s in dir-5 response she stated since the dollar_figure was placed in the operating account one could argue that family received some of the money because family members were employees of co-33 during the formal interview held with dir-1 on february 20xx information was obtained that dir-1's form_1040 for 20xx was amended to include dollar_figure from co-33 the form 990s for co-33 for 20xx 20xx and 20xx reflected compensation to ra-2 dollar_figure dollar_figure dollar_figure respectively and compensation to dir-5 of dollar_figure in 20xx and dollar_figure in 20xx for their positions as directors of co-33 since co-33 was not audited is unknown how much if any payments were made ra-30 in addition to the dollar_figure donation to co-33 the charity run by dir-5 on january 20xx a check was written to dir-5 in the amount of dollar_figure this represented a three year up-front contract for rent the rent is for the office space for org located at address city state the space has been described as the room above the garage dir-5 resides at address as stated previously org did not provide verification that a physical office specifically for org activities actually existed nor did they establish that it was ordinary and necessary under sec_162 when minimal activities may be conducted there the service does not challenge that the state secretary of state may require a domicile in state for a corporation however prior to april 20xx org used the registered agent's ra-1's business address of address city state as org's domicile address and used the former poa's poa's address of address city state for org's mailing address in summary the only individuals to receive full payment in advance for three-year contracts were family members mother sister and brother-in-law payments in amount of dollar_figuredollar_figure and the dollar_figure contribution were made on the same date the dollar_figure to dir-5 and the second dollar_figure to ra-2 and were made by consecutive checks 20xx to dir-5 on 20xx and to ra-2on org failed to file employment_tax returns audit findings indicate that either form_w-2 wage and tax statement or form misc miscellaneous income should have been issued to the employees and or independent contractors the applicable forms were not filed and the proper withholding amounts were not submitted to the service org failed to accurately prepare form_990 return of organization exempt from income for the tax_year ending december 20xx through tax_year ending december 20xx a bank account analysis reflected more deposited into the co-30 account in 20xx co-33 is a c exempt_organization that is run by dir-5 dir-5 is the mother of the financial records reflected there were two wire transfer payments of dollar_figure each to the the following are some of discrepancies noted during this examination org reported contributions of dollar_figure on the form_990 for the period ending december 20xx the service has determined that these amounts were from tax_shelter transactions reported on notice 20xx-81 and the service has disallowed the contribution amounts on the form_1040 of all participants contributors in the sheltered transactions the donors in this situation had no charitable intent e than was reported on the form_990 law firm co-32 the bank statement reflected one of the payments was reversed on 20xx with the comment book credit for org rev of our dbt to yr acct xx org incorrectly claimed dollar_figure more in legal expense in 20xx than actually paid org claims they were paying for and sponsoring conferences but there was no e verification provided that these conferences were sponsored by org the conference materials provided indicated the entity who was the sponsor co-29 co-29 was not a tax- exempt_organization but dir-1 and dir-2 were both members of the co-29 e dir-1 and she was also the compliance officer of org ra-2 is the brother-in-law to williams dir-1 and he was also the secretary of org the form_990 for org for all years under audit reflected donee's relationship as none org submitted minutes indicating dir-6 was a member of org's board_of directors in 20xx dir-6 is the director of the ll m program in human rights at co-1 during a third party contact with dir-6 he stated he was not a board_of director member and had never been a board member or an officer of org dir-6 was not listed on the 20xx form_990 as a director or officer e resulted in the presentation of check co-29 this payment was not made by org and therefore cannot be shown on the form_990 as program service expense of the organization e are the property of org however the ll m program was established back in 19xx at co-18 co-1 city and the materials used in the course are from materials published by dorothy and ra-35 e annotation of a loan in the memo line of the check there were no loans reflected on org's balance_sheet e educational research as noted on the form_990 or as research grants as noted on the checks payments directly to ra-27 as well as payments for a rental vehicle and the dormitory at co- ra-27's statement indicated services were for dir-1 poa's submitted a response indicating ra-27 was traveling from city to state to present his findings and no lodging was provided e paid per the contract or retainer agreement for administrative services fiduciary org claimed charitable donations to co-1 in 20xx of dollar_figure a third party request to co-1 for dollar_figure dated 20xx payable to co-1 from ra-30 and ra-2 sister and brother-in-law to president co-director dir-1 were both orgis claiming that the materials used in the ll m program in international_taxation payments were made to ot for the benefit of ra-24 totaling over dollar_figuredollar_figure this included payments categorized as loans during the audit were checks that included the the payments to various individuals were for services rendered rather than the form_990 for tax_year ending december 20xx was submitted to the service responsibility notwithstanding with respect to the contracts org failed to properly report the contracts in their books_and_records and on the 20xx form_990 org failed to provide w-2s and or 1099s for these individuals the individuals by their own admission failed to report the payments e with all blanks and the block k was checked indicating there was no filing_requirements due to the organization's gross_receipts are normally not more than dollar_figure this was determined to not be true since the summonsed bank records indicated dollar_figure deposited from one source and the average gross_receipts for 20xx 20xx and 20xx were substantially more than dollar_figure ending december 20xx or december 20xx poa previously informed the auditor that org was looking into whether or not they have a filing requirement since their gross_receipts maybe be less than dollar_figure discussion was held that pursuant to sec_6033 and the applicable regulations the gross receipt filing requirement is an average dollar_figure over a rolling three-year period and the bank information for tax years ending december 20xx through december 20xx clearly reflects an average above the dollar_figure in addition based on information provided by poa concerning the sales of investment org had gross_receipts from the sale of the investments in excess of dollar_figure inconducting the compliance check org has not filed its form_990 for tax years taxpayer's position after the facts were shared with org a written response was submitted outlining and discussing the items with the greatest impact on org's tax-exempt status and which it most strongly disagrees this included the following alleged private_inurement to dir-1 - org does not believe the amount_paid to or for the benefit of dir-1 constitutes private_inurement because dir-1 has repaid over dollar_figure to reimburse it for loans and advances that he received government's response in reviewing the timeline on the examination org was notified in early may 20xx of the commencement of the examination at that time only a small amount of the amounts paid to or for the benefit of dir-1 was repaid the repaying of such a substantial amount after the notification of examination supports the government's position that org was not operated for a substantial exempt_purpose but was set up to benefit dir-1 org's alleged participation in major-minor transactions described in notice 20xx-81 - org points out that dir-1's relationship with co-10 occurred in 20xx and 20xx before the formation of org in addition org fails to see the relevance of any correspondence between dir-1' and co-10 that occurred prior to the formation of org and was about matters completely unrelated to operating a charitable_organization government's response this is discussed above under the facts and under government position as a summary in order for the notice 20xx-81 transactions to occur the promoter co-10 needed to have an accommodating charity from the records reviewed org was the charity used to foster these transactions it is possible dir-1 specifically set-up org to be used for this promotion since all the income received and reported in tax_year 20xx was from the sheltered transactions and for tax_year 20xx substantial income was received and deposited into org's bank account from the sheltered transactions but not reported on the form_990 per review of the financial records for the audit years the only contribution received by org was dollar_figure from fac-2 who dir-1 acknowledged was a colleague and co-worker at co-1 the government does not believe that org was properly operated as a charitable_organization expense reimbursements to dir-1 - org is maintaining the expenses were not personal expenses of dir-1 and they served the legitimate business_purpose of org and are ordinary and necessary business_expenses of org government's response org has not been able to establish to the satisfaction of the government that it is operating for an exempt_purpose dir-1 was the full-time director _ of the international tax ll m program at co-1 city state which is the university that org was established to support as such even though paying some of the expense may have somewhat indirectly benefited the university the payments directly benefited dir- and the programs he was involved in by having an outside organization in this case org pay for some expenses directly related to the ll m program it gave co-1 the impression that the program was more success than it was the international tax ll m program was ended at co-1 around the end of 20xx and based on information received from co-1 in november 20xx the co-1' last support received from org was in june 20xx org's charitable activities - org is maintaining they are operating for a charitable purpose government's response the lack of a charitable purpose is discussed extensively throughout this report and is summarized in the government's position the government does acknowledge that org paid for course materials for co-1's human rights ll m program and the amount_paid out for the materials was reimbursed by the students who participated in the human rights program there was no giving of funds directly to the human rights program to allow that program to use the funds as deem necessary there was no provision to cover the costs for students unable to pay for the materials etc although dir-1 used org's funds to pay students researchers to assist in the international tax ll m program that he was the director or and responsible for and dir-1 paid for meetings and dinners relating to activities relating to his international_taxation ll m program this did not occur when assisting other areas of co-1 including the assistance provided to the human rights ll m program the difference being by supporting the international_taxation ll m program of which dir-1 was the director dir-1 was indirectly supporting and benefiting himself org's payments to individuals - org is maintaining these payments are in furtherance of its exempt_purpose org explains the payments to family members are reasonable and necessary org position on the payment to non-family members was for the purpose of loans which have now been substantially repaid and payment to individuals for falls within org's charitable purpose of editing and publishing papers magazines pamphlets periodicals and books government's response much of this section is devoted to discussing the payments to dir-1' family members this is extensively addressed in government's position above the payments to individuals were substantially for the benefit of dir-1 summary org is not in compliance with the filing_requirements under sec_6033 the form 990s for tax_year ending december 20xx and tax_year ending december 20xx have a filing requirement have not been filed and are considered delinquent based on the examination of records interviews and third party information revocation is proposed effective the date of incorporation february 20xx contributions to org are no longer deductible as charitable_contributions any contributions to this organization by those who were in part responsible for or were aware of the activities or deficiencies on the part of the organization that gave rise to loss of exempt status should not be allowed as a deduction org will be required to file form_1120 for all years since inception if this proposed revocation becomes final appropriate state officials will be advised of the action in accordance with internal_revenue_code sec_6104 and applicable regulations