Exemption From Tax on Corporations, Certain Trusts, etc. (Exempt v. Not Exempt)

1"""1 Department of the Treasury
"81/J Internal Revenue Service
IRS
Independent Office of Appeals
100 First Street
Suite2000
San Francisco, CA94105
Release Number: 202331003
Release Date: 8/4/2023
Certified Mail
Dear:
Dau,:
MAY O 9 ZltJ
Penson to contact
Name:
Employee ID Number:
Phone:
Fax:
Employer lO numbllr:
Uniform issue list fUIL):
501.00-00
This is a fmal adverse determination that you do not qualify for exemption from federal income tax under Internal Revenue Code (IRC) Section 50l(a) as an organimtion described in IRC Section S0l(c) (3) .
We have hereby revoked the favorable determination letter to you dated and you are no longer exempt under IRC Section 501 (a) effective We made the adverse determination for the following reasons:
Your organization is not operated exclusively for exempt purposes as described in lRC Section S01(c)(3) and your operations provided for more than insubstantial private benefit to an individual or shareholder.
Contributions to your organization are not deductible under IRC Section 170.
You're required to file federal income tax returns on Fonns 1120> U.S. Corporation Income Tax Return. Mail your fonn to the appropriate Internal Revenue Service Center per the form's instructions. You can get fonns and instructions by visiting our website at IRS.gov/forms or by calling 800-TAX-FORM (800-829-3676).
We'll make this letter and the proposed adverse determination letter available for public inspection under !RC Section 6110 after deleting certain identifying information. We provided to you, in a separate mailing, Notice 437, Notice oflntention to Disclose. Please review the Notice 437 and the documents attached that show our proposed deletions. If you disagree with our proposed deletions, follow the instructions in Notice 437.
If you decide to contest this determination, you. can file an action for declaratory judgment under the provisions ofIRC Section 7428 in either:
• The United States Tax Cou~
• The United States Court of Federal Claims, or
- The United States District Court for the Distrjct of Columbia
Letter 1371 (Rev. 9-2022) catalog Number 40883R
You must file a petition or complaint in one of these three courts within 90 days from the date we mailed this determination letter to you. You can download a fillable petition or complaint form and get information about filing at each respective court's website listed below or by contacting the Office' of the Clerk of the Court at one of the addresses below. Be sure to include a copy of this letter and any attachments and the applicable filing fee with the petition or complaint.
You can eFile your completed U.S. Tax Court petition by following the instructions and user guides available on the Tax Court website at ustaxcourt.gov/dawson.html. You will need to register for a DAWSON account to do so. You may also file your petition at the address below:
United States Tax Court
400 Second Street, NW
Washington, DC 20217 ustaxcourt.gov . -· - - -~---··--·--·---··-··-·-· ~---···-- - -- - --··- - --
The websites of the U.S. Court of FederaiClaimsandthe tf s. ·oi;trfut Co'i.ut for the District of Columbia contain instructions about how to file your completed complaint electronically. You may also file your complaint at one of the addresses below:
U.S. Court of Federal Claims
717 Madison Place, NW
Washington, DC 20439 uscfc.uscourts.gov
U.S. District Court for the District of Columbia
333 Constitution Avenue, NW
Washington, DC 20001 dcd. uscourts.gov'
Note: We will not delay processing income tax returns and assessing any taxes due even if you file a petition for declaratory judgment under IRC Section 7428.
Taxpayer rights and sources for assistance .
The lnteI'I_lal Revenue Code (IRC) gives taxpayers specific rights. The Taxpayer Bill of Rights groups these into 10 fundamental rights. See IRC Section 7803(a)(3). IRS employees are responsible for being familiar with and following these rights. For additional infonnation about your taxpayer rights, please see the enclosed Publication 1, Your Rights as a Taxpayer, or visit IRS.gov/taxpayer-bill-of-rights.
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers and · protects taxpayers' rights. TAS can offer you help if your tax problem is causing a financial difficulty, you've tried but been unable to resolve your issue with the IRS, or you believe an IRS system, process, or procedure isn't working as it should. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you. To learn more, visit taxpayeradvocate.ms.gov or call 877-777-4778.
Tax professionals who are independent from the IRS may be able to help you.
Low Income Taxpayer Clinics (LITCs) can represent low-income persons before the IRS or in court. LITCs can also help persons who speak English as a second language. Any services provided by an LITC must be for free or a small fee. To find an LITC near you: ·
• Go to taxpayeradvocate.ms.gov/litcmap;
• Download IRS Publication 4134, Low Income Taxparer Clinic List, available at IRS.gov/forms; or
• Call the IRS toll-free at 800-829-3676 and ask for a copy of Publication 4134.
Letter 1371 (Rev. 9-2022)
Catalog Number 40883R
State bar associations, state or local societies of accountants or enro1Ied agents, or other nonprofit tax professional organizations may also be able to provide referrals.
TAS assistance is not a substitute for established IRS procedures, such as the formal appeals process. TAS 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.
If you have questions, contact the person at the top of this letter.
Enclosures:
Publication 1
IRS Appeals Survey cc:
Sincerely,
Doug O'Donnell
Acting Commissioner .By
Valeria K rt{J';-
Valeria B. Farr
Appeals Team Manager
Letter 1371 (Rev. 9-2022)
Catalog Number 40683R fJl
IRS
Department of the Treasury
Internal Revenue Service
Tax Exempt and Government Entities
CERTIFIED MAIL - Return Receipt Requested
Dear
Why you're receiving this letter
Date:
January 21, 2021
Taxpayer ID number:
Tax periods ended:
Person to contact:
Name:
ID number:
Telephone:
Fax:
Address:
Manager's contact Information:
Name:
ID number:
Telephone:
Response due date:
February 21, 2021
We enclosed a copy of our audit report, Form 886-A, Explanation of Items, explaining that we propose to revoke your tax-exempt status as an organization described in Internal Revenue Code

(IRC) Section 50l(c)(3).
If you agree
If you haven't already, please sign the enclosed Fonn 6018, Consent to Proposed Action, and return it to the contact person shown at the top of this letter. We'll issue a final adverse letter determining that you aren't an organization described in IR.C Section 501(c)(3) for the periods above. · After we issue the final adverse determination letter, we'll announ~e that your organization is no longer eligible to receive tax deductible contributions under IRC Section 170.
If you disagree
1. Request a meeting or telephone conference with the manager shown at the top of this letter.
2. Send any information you want us to consider.
3. File a protest with the IRS Appeals Office. If you request a meeting with the manager or send additional information as stated in l and 2, above, you'll still be able to file a protest with IRS Appeals Office after the meeting or after we consider the information.
Letter 3618 (Rev. 8-2019)
Catalog Number 34809F
The IRS Appeals Office is independent of the Exempt Organizations division and resolves most disputes informally. If you file a protest, the auditing agent may ask you to sign a consent to extend the period oflimitations for assessing tax. This is to allow the IRS Appeals Office enough time to consider your case. For your protest to be valid, it must contain certain specific information, including a statement of the facts, applicable law, and arguments in support of your position. For specific information needed for a valid protest, refer to Publication 892, How to Appeal an IRS Determination on Tax-Exempt Status.
Fast Track Mediation (FTM) referred to in Publication 3498, The Examination Process, generally doesn't apply now that we've issued this letter.
4. Request technical advice from the Office of Associate Chief Counsel (Tax Exempt
Government Entities) if you feel the issue hasn't been addressed in published precedent or has been treated inconsistently by the IRS.
If you' re considering requesting technical advice, contact the person shown at the top of this letter. If you disagree with the technical advice decision, you will be able to appeal to the IRS Appeals Office, as explained above. A decision made in a technical advice memorandum, however, generally is final and binding on Appeals.
Ifwe don't hear from you
If you don't respond to this proposal within 30 c~lendar days from the date of this letter, we'll issue a final adverse determination letter.
Contacting the Taxpayer Advocate Office is a taxpayer right
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that can help protect your taxpayer rights. TAS can offer you help if your tax problem is causing a hardship, or you've tried but haven't been able to resolve your problem with the IRS. If you qualify for TAS assistance, which is always free, TAS will do everything possible to help you.
Visit www.taxpayeradvocate.irs.gov or call 877-777--4778.
For additional information
You can get any of the forms and publications mentioned in this letter by visiting our website at www.irs.gov/fonns-pubs or by calling 800-TAX-FORM (800-829-3676).
2 Letter 3618 (Rev. 8-2019)
Catalog Number 34809F
If you have questions, you can contact the person shown at the top of this letter.
Enclosures:
Fonn886-A
Fonn6018
Publication 892
Publication 3498
Copy of Determinations File
Sincerely,
~AffeA~
~Im A Matias
Supervisory, Jntemal Revenue Agent for
Sean E. O'Reilly
Director> Exempt Organizations
Examinations
Letter 3618 {Rev. 8°2019)
3
Catalog Number 34809F
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Form886-A
Name of taxpayer

# Issues

Oepar1ment of the Treasury- Internal Revenue SeNlce
Explanations of Items
Tax Identification Number (last 4 digits)
Schedule number or exhibit
Year/Period ended
1. Whether the exempt status for (henceforth referred to as
"organization"." u, or "the organization") should be revoked for failure to operate exclusively in furtherance of exempt purposes.
2. Whether Organization's exempt status should be revoked retroactively to the first date that the organization failed to qualify for exemption.

# Facts

Articles of lncoroorauon:
The registered agent of the organization (as listed on the Articles of Incorporation filed with the application for exemption) is . The purpose of the organization listed in the articles is to: provide assistance to other charitable organizations and support activities described in IRC Section 501 (c)(3). The articles were approved and filed with the State of on Form 1023:
The F1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal
Revenue Code, was filed by the organization on . The primary contact listed on the F1023 is . The purpose of the organiZation as stated on the F1023 references the Articles of Incorporation.
Exemption:
The organization received L947 from the Internal Revenue Service (IRS) dated . The letter provides that the organization was granted exemption under Internal Revenue Code 501 (c)(3). The effective date of the exemption is listed as Board:
The board of directors of the organization consists of the following offices and individuals for the year of examination:
•
•
•
- President
- Vice President
-Treasurer and preceding years. were also listed as the President and Vice President respectively for the Forms _ filed Forms for the tax years ,and
Catalog Number 20810W
Page ...1 … wwwJrs.gov
Form 886-A (Rev. 5-2017)
Form886-A
Name of taxpayer
S:YnAft988
Grants other FVNl!Ne$
Tot.al
Total
Department of the Treuury- Internal Revenue Service
Explanations of Items
Tax Identification Number (last 4 digits)
Schedule number or exhibit
Year/Period ended
Based on the expenses reported for grants for each year, charitable grants for the , , and years were %, %, and % respectively when compared to the revenues reported by the organization.
A … ta
Cash
Savlncs
Investments -Other Securities
Total
Liabfllffoc.
Based on the assets reported on the return, Investments - other securities (donated LLC interests) accounted for %, %, and % of all assets of the organization for the , and years respectively.
Cash Inflows and Outflows:·
The organization provided statements (Acct # ) In response to the
Govemment's request for the banking statements of the organization. The statements provided the following cash inflows and outflows for the year ended IW'll'ltft ~ CttbQut
Januaru
Fetlru81V
March
ADl'II
Uav
June .JUIV
Auomt --er
October
November
DeCffllber
Tntalc
The organization reported in expenses on the Form , a figure which does not accurately reflect the amounts expended by the organization from its accounts per the account statements.
Catalog Number 20810W Page-2_ www.lr$.gov Form 886-A (Rev. 5-2017)
Schedule number or
Department of the Treasury- Internal Revenue Service
Form886-A exhibit
Explanations of Items
Name of taxpayer Year/Period ended
Tax ldentlfieatlon Number (last 4 digits)
LLC Cash Distributions to Organization and Subsequent Charitable Donations:
The organization provided a list of total distributions of cash made by each LLC to charities for the year and a!so provided distribution requests made by each LLC to . The documentation provided also included one instance where payments were made directly from an LLC ( ) to various charitable organizations. The documentation provided the following: percent,geJ:t.1.LQ Diffqnce Amount B,toorted LLC
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Page_3_ Form 886-A (Rav. 5-2017) www.lrs.gov
Fonn886-A Department of the Treasury- Internal Revenue Service
Explanations of Items
Schedule number or exhibit
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
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The documentation provides that the LLCs paid out$ to charities in the year of examination. The organization has provided documentation showing that $ of the $ was disbursed by at the request of the LLCs and $ was distributed directly by an LLC. The total expenditures as reported on the banking statements of the organization were $ and as such, the total charitable distributions reported of $ could not have been paid directly by The reports and documents also show that distribution to charity. Furthermore, of the request to to disburse charitable funds. of the LLCs (or %) did not make any LLCs (or %) of the LLCs did not provide a Lastly, of the LLCs had an asset value above for the year ended per documentation provided. Of these LLCs, LLCs did not make any distribution, LLCs made distributions above the % required in the operating agreements, and LLCs made distributions which were less than the % required by the operating agreements. The average distribution percentage made by all LL Cs was · %.
Disbursement Requests:
The organization provided copies of disbursement requests provided by the LLCs to for charitable giving. The language of the disbursement requests vaired, but all followed the same pattern of transferring money to and asking to distribute that money to a charity. Below are some examples of such language:
• It is our wish to have a distribution made from our donor advised fund to the following charities in the following amounts. We understand there is a$ processing fee per check".
• "Enclosed is our check in the amount of$ ____ _. payable to
Upon receipt of the funds, it is our wish to have a distribution made to the following charities in the following amounts".
• 'We have transferred $ ____ from the XXX account at to the account at
Upon receipt of these funds, it is our wish to have them distributed as follows".
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Catalog Nl.mber 20810W Page_4_ www.n.gov
Form 886-A (Rev. 5-2017}
Form886-A
Name i>f taxpayer
Department of the Treastl)' - Internal Revenue Service
Explanations of Items
Ta,c ldent!flcatlon Number (last 4 digits)
Schedule number or exhibit
Year/Period ended
• "We will be transferring funds to from the above named in the amount of$. ___ . Upon receipt of the funds, it is our wish to have checks sent to the following charities".
• "I will be transferring funds to from the above named in the amount of$. ___ . Upon receipt of the funds. it is my wish to have a distribution made from my donor advised fund to the following charities".
• "We have authorized a check payable to in the amount of
$ ___ . Upon receipt, it is our request that you send a check in the amount of$ __ _ directly to''. ·
• "It is our wish to have a donation in the amount of$. ___ made from XXX to the following charities".
Donated LLC Interest:
The organization's primary source of revenues and assets as reported by the organization on its returns are derived from LLC interests donated to the organization. For the period ended , the organization has reported donated LLC interests from separate and distinct entities. Of these entities, of the LLC interests (or approximately %) were previously donated to (an unrelated 501(c)(3) organization) and were subsequently assigned to the organization by the LLC managers. See the discussion on amended operating agreements below for additional detail.
How LLC Interest is Donated to Organization:
In some instances where LLC interests were donated to the organization, an assignment of the interest from the owning LLC member, to the organization was completed using an assignment agreement. In other instances, the assignment was memorialized in the operating agreement for the LLC. The following table shows the types of units issued to an LLC, the number of units "assigned" by the manager(s) of the LLC to the organization, and other information provided in the assignment agreements where applicable:
Nam1 §?! flW!!rshll!lLLC
M!nulag Memm ~
UnltsAss!Q~ Qllu! §lanad~
Units •
MembtWlil! Ynlm A:umament
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Catalog Ni..mber 20810W Page-2_ www.1ts.g011 FoOll 886,A (Rev. 5-2017)
Sciledule number or
Department of the Treasury - Internal Re,.,enue s.rvice
Form886-A exhibit
Explanations of Items
Name of taxpayer
Year/Period ended
Tex Identification Number (last 4 c1;g1ts)
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- www.lrs.gov Fonn 886-A (Rev. 5-2017)
Form886-A
Name of taxpayer
--
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Department of the Treesu,y - Internal Reveooe Service
Explanations of Items
Tax ldent1flcatlon Number (last 4 digits)
LLC Valuation Amounts:
Schedule number or exhibit
Year/Period ended
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The donated interests were reported on the organization's Form as an asset, specifically as
" ". The total amount reported in the General Ledger of the organization for the donated interests was,$ . The organization provided a breakdown of the total donated LLC interest. The organization also provided appraisals for the donated interest The documentation provided amounts for each LLC as follows:
U .. C Natn9 I lBookVatus .
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Catalog Number 20810W Page .J_ www.lrs.gov Form 886-A (Rev. 5-2017)
Schedule number or
Otpanment of the Treasury- lnlernat Reverrue Service
Form886-A exhibit
Explanatlons of Items
Name of taxpayer Tax kientification Number {ls.st 4 digits) Year/Period ended
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Review of Appraisals:
The appraisals provided by the organization for the donated LLC interests were prepared by primarily by ( or %) with the remaining appraisals prepared by . The method of determining the value of the donated LLC interests is the same in all of the appraisals, the appraisers reduce the "FMV" of the assets for lack of control (initial value is reduced by o/o ( ) or % ( )) and lack of marketability (remaining value is reduced by o/o ( ) or o/o ( )) in all instances. Overall, both appraisers use the same method of discounting the value of the donated interest for both marketability and control using different percentages for each method of reduction.
It is important to note that the amounts determined in both appraisals for the FMV were used in reporting the value of the assets as reported on the Form of the organization for the period . As such, it ended even though the appraisals were not completed until appears as though the appraisal amounts were determined by and prior to the preparation of the appraisal reports and provided to for preparation of the annual Form and reporting on the organizational books and records.
Catalog Number 20810W wwwJrs.gov Form 886-A {Rev. 5-2017)
Page~ .
Form886-A
Department of the Treasury- Internal Reverue Service
Explanations of Items
Name of taxpayer Tax Identification Nmlber (last 4 digits)
Review of Operating Agreement$_;
Schedule number or exhibit
Year/Period ended
The organization provided operating agreements for each of the LLCs for which it received donated interests. Of the operating agreements, the examiner identified two distinct types of agreements with identical language which the examiner named and . Of the agreements provided, agreements were and the remaining agreements were The agreements appear to have been prepared by and/or provided by and his related officials ( ) and the agreements appear to have been provided or drafted by the (owned in part by President of ).
Specific Language in the Operating Agreements
The following sections of the operating agreements provide insight into the operation of the LL Cs and their interaction with Section Company Purpose and Scope ( ) The Company is organized as part of a charitable planned giving strategy designed to fund tax qualified charities chosen by the Manager, the initial Member, and the initial Member's successors in interest. The investments held inside of this Company including any insurance policy death benefit and/or other assets held in this Company must be distributed to one or more charities during the life or upon the death of the initial Member or his/her successor in interest until tax q uallfied charities have received distributions equal to the full amount of assets that the Company's non-charitable Members have contnbuted to the Company plus a market rate of return. For example, if the Company has been funded with$ of marketable securities and this $ value was used when a portion of the Company member interests were donated to charity at a time when the current long- term interest rates were %, then the Company must insure that at least the $ plus % per year return will be distributed to third party charities before distributions are made from the Company to any non-charitable Members of the Company. While distributions must be restricted until third party charities receive assets in the Company plus a market rate of return, the Company manager may make secured loans of Company asse1s to qualified borrowers. Loan security must provide assurances that loans will be repaid so that the Company can distribute funds to charity equal to asset contributed by the members plus a market rate of return. The charity must maintain control over Company interests and receive income from the Interests to satisfy the substantial present economic benefit test.
Section Classification of Membership Interests ( )
The Company shall issue Voting Membership Interests to the Voting Members. The Voting
Members may vote upon all matters upon which Members have a right to vote under this
Agreement. in proportion to their Voting Membership Interests in the Company.
The Company may Issue Non-Voting Membership Interests. Members may own Voting
Membership Interests, Non-Voting Membership Interests, or both. Members who own only Non-
Catalog Number 20810W Page_9_ www.irs.gov
Form 886-A (Rev. 5-2017)
Form886-A Oepar!meot of the Treasury - Internal Reveooe Service
Explanations of Items
Name of taxpayer Tax ldentiftcatlon Number (last 4 digits)
Schedute number or exhibit
Year/Period ended
Voting Membership Interests are Non-Voting Members and may not vote on any Company matters.
Voting and Non~Voting Members have identical liquidation and distribution rights unless expressly provided to the contrary in this Agreement. Voting and Non-Voting Members have the same ownership rights except for voting rights.
Section Allocating Profits and Losses ( )
Subject to the provisions of Section and Section , all items of income, gain, loss, deduction, and credit, whether resulting from the Company's operations or in connection with its dissolution, must be allocated to the Members in proportion to their respective Membership Interests.
If the special allocations have substantial econo111ic effect as required by applicable federal tax law, the Voting Members, acting unanimously, may enter into agreements providing for the special allocation of items of income, gain, loss, deduction, or credit.
The Voting Members may agree to allocate net profits and net losses in a way that conforms to adjustments made to the Percentage Interests because of:
• any loans made to the Company that have been converted to Capital Contributions;
• any distributions of cash; or
• any liquidated distributions.
If the Percentage Interest of a Member is not the same throughout a given Taxable Year, the
Manager shall determine the allocation of net profits and net losses to the Members, taking into account the Members' varying Percentage Interests during the year. The Manager shall make the determination consistent with the requirements of Internal Revenue Code Section 706(d).
The Manager has the authority to change the allocation provisions of this Section if the Company's legal counsel advises the Company that this change is required under the lnternaJ Revenue Code based on the manner in which the Members have agreed to bear losses and to share profits and distributions under this Agreement.
The operating agreements contain the general LLC language, the name of the manager(s) of the
LLC, and information on ownership percentages as well as the type of ownership (Voting, nonvoting, general, etc.) for each LLC.
Section Distributions to Members ( )
The Company's primary intent is to retain Company funds in amounts determined in the
Manager's sole and absolute discretion to meet the reasonable needs of the business or investments of the Company and other needs as provided in this Agreement. No Member may demand distributions of any Company funds or assets.
Catalog Number 20810W
Page~ www.in;.gov
Fonn 886-A (Rev. 5-2017}
Form886-A
Department of the Treasury - Internal Revenue Service
Explanations of Items
Name of taxpayer Tax ldenttlica1ion Number (last 4 digits)
Schedute number or exhibit
Year/Period ended
Without the unanimous consent of all Members, the Manager may not distribute more than the
Company income for the previous tax year plus % of the value of the assets of the Company on the last day of the previous calendar year in any single year.
Section
Mandatory Yearly Distributions t )
The Manager shall be required to distribute, on a pro-rata basis, a substantial present economic benefit of at least percent ( %) of the total assets held by the Company on a yearly basis. If the optional distributions as set forth in Section above on a yearly basis are more than percent ( %) on a pro rata basis, then there shall be no mandatory distributions required under this paragraph. If the optional distributions set forth under Section above are less than percent ( %) on an annual basis, then the Manager shall be required to make distributions on a pro rata basis up to percent ( %) of the value of the assets on a year to year basis. For purposes of th is paragraph, the percent { % ) value is detennined as of the value of the assets of the Company as of January 1 of each calendar year. Furthermore, this mandatory distribution requirement shall not apply to the first partial year that this Company is in existence and shall only apply to each full calendar year that this Company is in existence.
Section
Distributions to members ( )
It is the primary intent of the Company to retain Company funds in amounts determined in the sole discretion of the Manager to meet the reasonable needs of the business or investments of the Company and other needs as provided in this Agreement. No Member shall have the right to demand distributions of any Company funds or assets.
Section Manager's General Authority ( )
Subject to the specific rights given the Voting Members in this Agreement, the Manager may make all decisions concerning any matter affecting or arising out of the Company's business conduct.
The Manager has the right and authority to manage, conduct, and operate the Company business; provided, however, that the manager shall make ·an financial decisions only with approval from the (" ") board for as long as LLC interests are owned entirely or In part by or its successor or assign, which must be tax exempt pursuant to Internal Revenue Code, 26 U.S. Code, Section 501, and a qualified charity as defined by Internal Revenue Code, 26 U.S.
Code, Sections 170(c), 2055 (a) and 2522(a).
Section Manager's Power to Amend ( )
The Manager may, without the consent of the Members. amend any provision of this Agreement or the Articles of Organization and prepare and deliver any documents necessary to reflect:
• A change In the name of the Company or the location of the principal office of the
-~~~ .
• The admission, substitution, or termination of Members according to this Agreement;
• A change that the Manager in its sole discretion determines to be necessary or advantageous to qualify or to enable the Company to continue to qualify as a limited liability
Catalog Number20810W
Page … 11.. www.irs.gov
Form 886-A {Rev. 5-2017)
Form886-A
Oeparlment of the Treasury- Internal Revenue semce
Explanations of Items
Schedule number or exhibit
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended company, or a company in which the Members have limited liability under the laws of any jurisdiction, or to ensure that the tax treatment of the Company does not change, other than as provided in Article Two;
• A change that does not adversely affect the Members in any material respect or that is required or contemplated by this Agreement; or
• Any other amendments similar to the foregoing.
Any other amendments will require the written consent of % of the Voting Membership
Interests unless other provisions of this Agreement require a higher percentage of the Voting
Members (such as the liquidation of the Company before the expiration of its term).
Amendments:
The operating agreements were reviewed to determine the stated members and ownership percentages. In addition to the original operating agreements, amendments to the agreements were provided for the following LLCs:
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• a. First Amendment - The amendment changed the owner of the % interest in the from the ( ) to a. First Amendment - The amendment changed the owner of the % interest in the from the to a. First Amendment - The amendment changed the owner of the % non-voting interest in the from to . b. Second Amendment - The amendment changed the owner of the % interest in the from the to a. First Amendment - The amendment assigned % of the member interest in the from the to b. Second Amendment - The amendment changed the owner of the % interest in the from the to a. First Amendment - The amendment changed the owner of the % interest in the from the to a. First Amendment- Only the last page of the amendment was provided. There was no detail on what was changed included in the amendment. a. First Amendment - In the first amendment assigned his member interest in the to Catalog Number 20810W Page _ll_ WWW.ifs.gov Form 886-A (Rev. 5-2017}
Form886-A
Department of the Treasl.llY - Internal Revenue Servroe
Explanations of Items
Schedule number or exhibit
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended
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• b. Second Amendment- In the second amendment of the and named as the new manager. c. Third Amendment - In the third amendment resigned as manager was removed as the investment advisor for the and ( )was delegated to be the investment advisor. d. Fourth Amendment - In the fourth amendment transferred % of its member interest in the to a. First Amendment -In the first amendment assigned his member interest to the b. Second Amendment- In the second amendment resigned as manager of the and assigned to act as manager of the c. Third Amendment - In the third amendment transferred % of its interest in the to a. First Amendment- In the first amendment resigned as the manager of the and transferred % of its ownership interest in the to also was named as the new manager . a. First Amendment- In the first amendment resigned as the manager of the LLC and transferred % of its ownership interest in the to also was named as the new manager . a. First Amendment - In the first amendment and resigned as the managers of the and appointed as the manager.
Additionally, they transferred their member interest in the to b. Second Amendment - ln the second amendment resigned as the manager of the and transferred % of its ownership interest in the to also was named as the new manager . a. First Amendment - In the first amendment the resigned as the manager of the and appointed as the manager. Additionally, the trust transferred its member interest in the to . b. Second Amendment - In the second amendment resigned as the manager of the and transferred % of its ownership interest in the to also was named as the new manager.
1 a. First Amendment - In the first amendment resigned as the manager of the and transferred % of its ownership interest In the to also was named as the new manager .
Catalog NU'llber 20810W Page … ll,_ www.1ta.g011 Form 886-A {Rev. 5-2017)
Form886-A Department of 1he Treasury - lnlemal Revenue Service
Explanations of Items
Schedufe number or exhibit
Name of taxpayer Tax ldentification Number (las/ 4 digits) Year/Period ended
•
• a. First Amendment - In the first amendment resigned as the manager of the and appointed also assigned his % member interest to b. Second Amendment - In the second amendment resigned as the manager of the LLC and transferred % of its ownership interest in the to also was named as the new manager . a. First Amendment - In the first amendment resigned as the manager of the and transferred % of its ownership Interest in the to also was named as the new manager . a. First Amendment - In the first amendment interest to assigned a % non-Voting Ownership and Changes:
The examiner reviewed the operating agreements and amendments to the agreements to determine the stated ownership of each LLC. The following information was obtained from the review:
LLCName ~!!!.llmcmt !Jl1isl Owne@bip current Amend!d nm
2!!11mbt2
~
Mamber§liaDAd Dll
EIE'Sif!JlliUIII m
~m:nment Amondos! P!l'.£!1i!DIU!
Members prioT to l4!!!!e!r:
A
-
--
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- ...
_,_ - ..
-
I-
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- ...
---
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_,_
- -
- ..
-1-
- 1--
-
Catalog Number 2081 f1,N Page-1i_
-·"'90V Form 886-A (Rev. 5-201n
Form886-A
Name of taxpayer ...
…
Catalog Number 20810W
Department of the Treuwy- lntemal Revenue Service
Explanations of Items
Tax ldenliftcatlon Number (last 4 digits)
Page~ WWW.in.gov
Schedule number or exhibit
Year/Period ended
-
-
-
Form 886-A {Rev. 5-2017)
Schedule number or
Department of the Treasury - Internal Revenue Service
Form886-A exhibit
Explanations of Items
Name of taxpayer ...
_,_
--
-
_ ... __ ._. ..
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_,_ --- ...
Catalog Number 20610W
Year/Period ended
Tax Identification Number (last 4 digits)
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-
Form 886-A (Rev. 5-2017)
Page_1§_ WWW.ts.gov
Form886-A
Department of the Tre8$Ury- Internal Rellel'IUe Service
Explanations of Items
Name of taxpayer Tax ldentiflcat1on Number (last 4 digits)
-
--
Schedule number or exhibit
Year/Period ended
--
--
According to the operating agreements and related amendments, approximately % ( ) of the LLC interests are owned % by . Of the % owned interests or % were originally donated to prior to being transferred to . The interests transferred from to were all dated to have occurred in the month of Ownership Reported by other Entities: ) (A Charity which was prevlously run by ) filed a Form return for the period ended . The organization reported owning member interests in the following entities (not an all,.inclusive list) for the period:
• •
• • • •
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• • •
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• •
Catalog Number 2081 OW Page _1L www.irtl.gov Form 886-A (Rev. 5-2017)
Form886-A
Name of taxpayer
•
•
•
•
Department of the Treaaury- lmernal Revenue Servlce
Explanations of Items
Tax Identification Number (last 4 digits)
Schedule number or exhibit
Year/Period ended
As such, and are both claiming ownership of the listed above for the period ended . Additionally, provided documentation showing that the member interest it received for these organizations was received from and not About · During the examination the organization provided documentation which it provides to parties interested in donating LLC interest to . The documents included:
• Law Firm brochure
• Trifold
• Planned Giving Trifold
• Book on the • ..
All of these documents are created and provided to potential clients by through
Law (DBA ) and . Each of to solicit potential clients. these documents outlines methodologies used by utilizes many forms of "tax planning" one of which Is the same or substantially similar to the method used by as outlined below. received compensation from the clients for the initial setup of the structure used (formation of , preparation of appraisals, etc.) and continued support to each (annual filings, gift receipts for •donations" etc.) It is also apparent that has direct ties to as evidenced by his acceptance of interests from which was run by and the use of as an appraiser for the donated interests·.
About
On the United States of America, Plaintiff, filed a Complaint for Permanent Injunction and Other Relief against , Defendant. Per the complaint:
1. From to the present, · (
11 11 ) has organized, promoted, and operated an elaborate-and bogus-charitable giving tax scheme throughout the United States. Through this scheme, creates an entity for each scheme participant and advises them to transfer assets to the new entity. then causes the participants to purportedly "donate" or 11assign 11 an interest in these entities to charities that controls.
Catalog Number 20810W
Page --11. wwwjra,gov
Form 886~A (Rav. 5-2017)
Form886-A Department or the Treaaury- lntarnal Revenue Service
Explanations of Items
Name of taxpayer Ta)( Identification Number (last 4 digits}
Schedule number or exhibit
Year/Pertod ended then "appraises" the purportedly donated interests in a manner that fails to comply with the law and generally accepted appraisal standards. Finally, prepares the federal income tax return documents to claim the bogus charitable contribution deductions.
2. This entire tax scheme occurs only on paper. Participants never actually transfer or donate anything to purported charities. In some egregious instances, participants claim bogus charitable deductions for nonexistent, fictional assets that fabricates.
3. Regardless of the purported form, advises scheme participants to take unwarranted tax deductions for charitable donations thf!t knows were never made, and, in some instances, for assets that did not exist. sells this scheme to the clients of financial planners and Certified Public Accountants by misrepresenting his experience, his credentials, and the merits of his charitable giving tax scheme. f n return, scheme participants pay substantial fees to based on the purported value of the assets lni1ially transferred to the entities.
4. charitable giving tax scheme has harmed the United States by depriving the government of tax revenue. The IRS has identified specific transactions that, through cost the United States Treasury more than $ in lost tax revenue. And while the IRS has assessed and will continue to assess scheme participants with significant tax liabilities, it will likely never fully recover the monies bilked from the Treasury.
5. The United States brings this Complaint pursuant to 26 U.S.C. §§ 7402, 7407, and 7408 to enjoin and all persons and entities in active concert or participation with from, among other things, directly or indirectly: a. Making or furnishing or causing another person to make or furnish a statement with respect to the allowability of any deduction or credit, the excludability of any income, or the securing of any other tax benefit, or otherwise providing tax advice, in exchange for compensation; b. Preparing (or assisting others in preparing) appraisals in connection with any federal tax matter; c. Acting as federal tax return preparers, or filing, assisting in, or directing the preparation or filing of federal tax returns, amended returns, or other related documents or forms for any person· or entity other than his own tax returns; and d. Organizing or assisting in the organization of a partnership or other entity, any investment plan or arrangement, or any other plan m arrangement concerning charitable contribution deductions.
The United States also seeks to disgorge the llJ-gotten gains that bogus charitable giving tax scheme.
J.
Catalog Number 20810W Page_,jj_ www.trs.gov derived from this
Fonn 886-A (Rev. 5-2017)
Form886-A Department of the Treasury- rntemal Revenue S.rvlce
Explanations of Items
Schedule number or exhibit
Name of taxpayer Tax Identification Number (last 4 d;gits) Year/Period ended
Since and (3) controlled all has established at least three purported charities in : (I)
C' "); (2)
( 11
");
( ") (collectively, the " "). purported charities and operated them in the same manner.
According to their respective Articles of Incorporation, the were purportedly organized for charitable purposes. submitted a Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code ("Tax Exempt Status Application'1, on behalf of each of the . The IRS granted the tax exempt status based on the Tax-Exempt Status Applications that submitted.
Over the years, is listed on documents filed with the Secretary of State's
Office as an officer, treasurer, director, incorporator, or registered agent for the has also attempted to avoid IRS scrutiny by affiliating his parents or other individuals with the on filings with the Secretary of State's Office.
Ai all times, however, controlled the and was the only true officer and director. The had no employees.
On , executed an agreement with the IRS on behalf of retroactively revoking tax-exempt status as of . The IRS concluded, and did not dispute, that was no~ engaged primarily in activities for exempt purposes, and its net earnings inured to the benefit of private individuals i.e., him and his family.
On , , on behalf of , stipulated to an entry of judgment against it In
U.S. Tax Court for past due taxes for and owed taxes on its income because it was not a tax-exempt entity.
On , executed agreements with the IRS on behalf of and retroactively revoking and tax exempt status as of and , respectively, because used and as tools for promoting, organizing, and executing his charitable giving tax scheme.
Transactions:
Under the first step in scheme, creates a partnership or limited llability company (the "Entity" or "Entities") for scheme participants. Regardless of their form, the Entitles are holding comp11nies that exist solely to facilitate scheme. prepares and files all papeiwork necessary to create the Entities, including the partnership or LLC agreements.
Catalog Number 20810W Page_l!L
WWWJl'S.flOII
Form 886-A {Rev. 5-,2017)
Form886-A
Name of taxpayer
Department of the Treasury- lnlemal Revenue Service
Explanations of Items
Tax Identification Number (last 4 digits)
Schedule number or exhibit
Year/Period ended
Next. the scheme participants transfer "property" to the newly formed Entities using contractual documents prepared by . Some participants, at direction, claim to transfer cash or real property to the Entities while others purportedly transfer backdated promissory notes and fabricated intellectual property. Over time, varied how he executed this scheme step, but the variations were meaningless from both economic and federal Income tax perspectives. then drafts the paperwork necessary to cause the scheme participants to .. donate" or "assign" an interest in the newly created Entities to one of the Some participants purport to donate a % non-controlling interest in their Entity, while others a % interest In some cases, misrepresents the "transaction" to the . participants, telling such participants that they were "contributing" a % non-controlling interest, when, in fact, completed the transactional paperwork to show a % "contribution." then causes the to send contemporaneous written acknowledgments of the purported contributions 1o the scheme participants. appraises each "contribution" to facilitate the bogus charitable deductions. Not only are the appraisals baseless, but is prohibited by Jaw from providing them. completes, signs, and provides to each scheme participant IRS Forms 8283, Noncash Charitable Contributions ("Form 8283"), which are necessary to claim a non-cash charitable contribution of more than $ sends the scheme participants the following instructions: • ti In following instructions, the scheme participants then attach the prepared Form 8283 to their personal federal income tax returns to claim unwarranted charitable deductions. The Forms 8283 are based entirely on the bogus appraisals that prepares to facilitate this scheme.
On paper, it appears that the participants donate something of value to the repeatedly advises the scheme participants to take actions to give his scheme substance. This was mere window dressing, however, designed to disguise tax shelter. In reality. the scheme participants retain complete control over their Entities and their Entities' assets and continue to use the purportedly donated assets as if nothing ever happened.
Catalog Number 20810W Page..zt_
WWW.iR.gOY Form 886-A (Rev. 5·2017)
Form886-A
Name of taxpayer
Department of the Treasury- lnwmal Revenue Service
Explanations of Items
Tax ldentlficatlon Number (last 4 digits)
Schedule number or exhibit
Year/Period ended
After executing the ''transaction, 11 the do not take dominion or control over the Entities or their assets. The are simply vehicles through which executes his elaborate charitable giving tax scheme.
Misrepresentation of Structure by told potential participants that they could establish Donor Advised Funds C'DAFsj through the , but this was a false statement.
The Internal Revenue Code defines DAFs as a fund or account 11(i) which is separately identified by reference to contributions of a donor or donors, (ii} which is owned and controlled by a sponsoring organization, and (iii) with respect to which a donor ... has ... advisory privileges with respect to the distribution or investment of amounts held in such fund or account by reason of the donor's status as a donor."
DAFs are not standalone entities. Each DAF is established by a sponsoring organization, which must be an Internal Revenue Code§ 501(c)(3) tax exempt organization. The sponsoring organization creates a separate DAF for each donor. The donor then makes a tax-deductible charitable contribution to the donor's OAF. The donor cannot use or otherwise access the donated property because the sponsoring organization maintains complete control over the DAF and its property. The donor retains "advisory privileges" regarding future OAF distributions, but the sponsoring organization is not required to honor the donor's requests and may only distribute DAF property to other Code§ 50I(c)(3) tax exempt entities. After a donor makes a distribution request to a DAF, the DAF will make a distribution from the assets that the DAF controls after performing due diligence to ensure the intended recipient is a qualified charity.
By advising potential participants that they could establish DAFs through the , misrepresented the structure of his illegal tax shelter. The did not qualify or operate as sponsoring organizations, and the Entities established did not qualify or operate as DAFs.
To be a sponsoring organization, the were required to inform the IRS that they intended to be sponsoring organizations on their Tax-Exempt Status Applications.
They did not. To be a sponsoring organization, the were also required to describe its DAF program and the written materials provided to donors on the Tax-Exempt Status Applications. They did not.
To be a sponsoring organization, the were required to report certain information on the annual "tax return" for tax exempt entities-Form ("Form . "). They did not. Indeed, on the Forms I Part IV, Question 6, stated that the did not "maintain any donor advised Catalog Number 20810W Page~ www.irs.gov form 886-A (Rev. 5-2017) Fonn886-A Department of the Tru.sury - lntemal Revenue Senike
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 dig11s)
Schedule number or exhibit
Year/Period ended funds or any similar funds or accounts for which donors have the right to provide advice on the distribution or investment of amounts in such funds or accounts." completed the Tax-Exempt Status Applications and Forms and knew that the did not report the required information to be a lawful sponsoring organization. Therefore, knew that the were not sponsoring organizations.
To establish a OAF, the were required to take control of the purportedly contributed Entity interests. As explained throughout this Complaint. the scheme participants never gave up control of the purportedly contributed assets, which knew.
If scheme participants actually wanted to make a donation to a charity through a
(which many participants did not dp) required them to send to him a
" ., along with a check made out to one of the
These • 11 merely gave the appearance of a valid OAF, but a valid DAF would never have required an additional check from the participant. This process shows that the never had dominion or control over any of the purported contributions.
Scheme Flagrantly Violates Internal Revenue Laws:
Some participants in tax scheme, upon advice and with his assistance, have taken out substantial loans from their respective Entities even after transferring their ownership interest to one of the . These loans are made on beneficial terms and sometimes go unpaid. testified in a deposition that most participants borrowed their Entities' assets or used the assets as collateral for some other purpose.
Consequently, participants in scheme receive a large income tax deduction and still get the use and enjoyment of the assets that generated the deduction.
Because each of scheme participants claimed non-cash charitable contributions of over $ on their tax returns based on the purported donation of their Entity interests to the , they were required to obtain qualified appraisals of the purportedly donated Entity interests from "qualified appraisers."
In reality, performs the appraisals for the scheme participants. does not tell scheme participants that he is the appraiser prior to performing the appraisals. completed and signed the Form 8283 for each of the participants, which based entirely on the bogus appraisals he prepared. often listed the following credentials on the Form 8283 after his signature:
Catalog Ntmber 20810W Page~ www.ir&.gov
Form 886-A (Rev. 5-2017)
Form886-A
Oepaitmenl of the Treasury- Internal Revenue Service
Schedule number or exhibit
ExplanaUons of Items
Name of taxpayer Tax Identification Number (last 4 ciig;ts) Year/Period ended claims that he "implemented and consulted on over charitable plans in States encompassing $ since [and] performed over qualified appraisals of closelyheld businesses since "
The appraisals uses in his tax scheme are bogus because is excluded by law from preparing appraisals in connection with this scheme, the appraisals are not qualified appraisals within the definition of the Internal Revenue Code. and the appraisals are based on unreliable methods. profits from his scheme by charging a percentage fee based on the value of the purportedly donated assets. His standard fee is" % of net assets transferred (to the ) up to but not in excess of $ , plus % of net assets transferred which exceed$ ,.
Example of Charitable Giving Scheme: sold his charitable giving tax scheme to
1's financial planner. Participant-1 claimed a$
-based Participant 1 through Participant charitable contribution deduction on for Participant 1 to participate in his federal income tax return. charged $ this scheme.
Participant 1 decided to participate in charitable giving tax scheme in used an existing LLC and illegally backdated every document he prepared for Participant 1 so that Participant 1 could claim a charitable deduction on his federal income tax return.
On , and Participant 1 completed an LLC Agreement to transfer an
LLC that had previous established in to Participant 1. backdated the
LLC Agreement to . Then, drafted a promissory note through which Participant 1 promised to pay his LLC $ backdated the promissory note to . The promissory note was not secured by any collateral and charged a % interest rate on outstanding balances in and % on any outstanding balances thereafter. also drafted an assignment agreement through which Participant 1 purported to assign % of his LLC to backdated the assignment agreement as well to
• Despite executing the assignment agreement, Participant 1 believed, based on misrepresentations, that Participant 1 only assigned a non~controlling LLC interest to On , Participant 1 opened a bank account in the LLC's name. Participant 1 was the only person with signature authority over this account. Participant 1 never gave or anyone at control over the account.
Catalog Number 2oa1ow
Page~ www.irs.gw
Form 886-A (Rev. s-20m
Form886-A
Department of the Treasu,y- ln1emal Revenue Service
Explanations of Items
Name of taxpayer Ta,c Identification Number (last 4 digits)
Schedule number or exhibit
Year/Period ended
Later in , Participant 1 transferred to the LLC's bank account to "repay" the bogus note's principal. Participant 1 did not pay any interest. then prepared an appraisal report backdated to -more than months prior to the transfer of the LLC to Participant 1-in which "appraised" Participant 1 's purported gift of LLC units to at $ backdated appraisal does not describe or analyze the LLC's only asset-the promissory note. Rather, applied his standard % discount for lack of control, despite stating that owned % of Participant 1 's LLC, and a % discount for lack of marketability. provided no meaningful explanation for these discounts. then prepared an lRS Form 8283 so that Participant 1 could claim a $ charitable contribution for the purported donation to on his federal income tax return.
The IRS audited Participant 1 's contribution. tax return and disallowed the $ charitable
In , after the IRS initiated the audit of Participant 1 's tax return,
Participant 1 made charitable distributions totaling $ to . In order to do so,
Participant 1 completed " ,· but also sent a check to in that amount.
Additional information can be found at United States of America, Plaintiff, v. , Defendant. Case No.:
Permanent Injunction:
On , the United States District Court Judge ( ) issued a permanent injunction against permanently barring him from directly or indirectly: a. Organizing (or assisting in the organization of), promoting, marketing, or selling the or any plan or arrangement that is substantially similar, or participating (directly or indirectly) in the sale of any interest in the or any plan or arrangement that is substantially similar; b. Making or furnishing, or causing another to make or furnish, any statements about the tax benefits of the or any plan or arrangement that is substantially similar; c. Organizing (or assisting in the organization of), promoting, marketing, or selling any entity, plan, or arrangement involving charitable giving, or participating (directly or indirectly) in the sale of any interest in an entity, plan, or arrangement involving charitable contributions;
Catalog Number20810W Page-2.§_ www.irs.gov Form 886-A (Rev. S.2017)
Form886-A
Name of taxpayer
Department of lhe Treasury- Internal Revenue Service
Explanations of Items
Tax ldentiftcatlon Number (last 4 digits)
Schedute number or exhibit
Year/Period ended d. Furnishing, or causing another to furnish, tax advice regarding charitable contributions; e. Organizing (or assisting in the organization of), promoting, marketing, or selling any entity, plan, or arrangement involving federal taxes that relies upon, requires customers to execute, or uses a standard set (or substantially similar version or set) of transaction documents; f. Making or furnishing, or causing another to make or furnish, any statements about the tax benefits of entities, plans, or arrangements that rely upon, require customers to execute, or use a standard set (or substantially similar version or set) of transaction documents; g. Making or furnishing, or causing another to make or furnish, any statements in connection with the organization or marketing of a transaction having a significant purpose of avoidance or evasion of federal taxes; h. Preparing (or assisting others in preparing) appraisals in connection with any federal tax matter; i. Representing anyone other than himself before the IRS; j. Acting as a federal tax return preparer, or filing, assisting in, or directing the preparation or filing of federal tax returns, amended tax returns, or other related documents or forms for any person or entity other than his own individual tax returns (or his joint tax return); k. Assisting or advising individuals or entities in seeking tax-exempt status from the
IRS;
I. Advising, performing work for, or receiving compensation from , or .
I m. Advising, performing work for, or receiving compensation for work performed for individuals in connection with making assignments, donations, contributions, or transfers to , or ; or n. Referring individuals to make assignments, donations, contributions, or transfers to , or IRC Section 501(c)(3) provides for an exemption from tax for corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious. charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or internaUonal amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net Catalog Number 2081 OW PageJ.§..
WWW.Ira.gov
Form 886-A (Rev, 5-2017)
Form886-A
Department of the Trem.uy- Internal ReYeooe Selvlee
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits)
Schedule number or exhibit
Year/Period ended earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office.
Treasury Regulation (Treas. Regs.) Section 1.501 (c)(3)-1 (a)(1) provides that. in order to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organization1;1I test or the operational test, it is not exempt.
Treas. Regs. Section 1.501 (c)(3)-1 (a)(2) provides that, the term exempt purpose or purposes, as used In this section, means any purpose or purposes specified in section 501(c)(3), as defined and elaborated in paragraph (d) of this section.
Treas. Regs. Section 1.501 (c)(3)-1 (c)(1) provide$ that an organization will be regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified in section 501 (c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.
Treas. Regs. Section 1.501 (c)(3)-1 (d)(1) provid~ that in general:
I. An organization may be exempt as an organization described in section 501(c)(3) if it is organized and operated exclusively for one or more of the following purposes: a. Religious, b. Charitable, c. Scientific, d. Testing for public safety, e. Literary, f. Educational, or g. Prevention of cruelty to children or animals ii. An organization is not organized or operated exclusively for one or more of the purposes specified in subdivision (i) of this subparagraph unless it serves a public rather than a private interest. Thus, to meet the requirement of this subdivision, it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly. by such private interests.
In Better Business Bureau of Washington D.C. v. U. s .. 326 U.S. 279 (1945. the court found that the existence of a substantial nonexempt purpose, regardless of the number or importance of exempt purposes, will cause failure of the operational test
Notice 2004:3Q
Catalog Number 20810W
Page … J:L www.irs.gov
Form 886-A (Rev. 5-2017)
Form886-A
Department af the Treasury - Internal Revenue Service
Explanations of Items
Name of taxpayer Tax ldemlfication Number (last 4 digits)
Schedule number or exhibit
Year/Period ended
The Internal Revenue Service and the Treasury Department are aware of a type of transaction, described below, in which S corporation shareholders attempt to transfer the incidence of taxation on S corporation income by purportedly donating S corporation nonvoting stock to an exempt organization, while retaining the economic benefits associated with that stock. This notice alerts taxpayers and their representatives that these transactions are tax avoidance transactions and identifies these transactions, and substantially similar transactions. as listed transactions for purposes of§ 1.6011-4(b)(2) of the Income Tax Regulations and§§ 301.6111-2(b)(2) and 301.6112-1{b)(2) of the Procedure and Administration Regulations. This notice also alerts parties involved with these transactions to certain responsibilities that may arise from their involvement with these transactions.

# FACTS

In a typical transaction, an S corporation, its shareholders, and an organization exempt from tax under § 501 (a) and described in either § 501 (c)(3) or§ 401 (a) of the Internal Revenue Code (such as a tax-qualified retirement plan maintained by a state or local government) (the exempt party) undertake the following steps. An S corporation issues, pro rata to each of its shareholders (the original shareholders), nonvoting stock and warrants that are exercisable into nonvoting stock. For example, the S corporation issues nonvoting stock in a ratio of 9 shares for every share of voting stock and warrants in a ratio of 10 warrants for every share of nonvoting stock. Thus, if the S corporation has 1,000 shares of voting stock outstanding, the S corporation would issue 9,000 shares of nonvoting stock and warrants exercisable into 90,000 shares of nonvoting stock to the original shareholders. The warrants may be exercised at any time over a period of years. The strike price on the warrants is set at a price that is at least equal to 90 percent of the purported fair market value of the newly issued nonvoting stock on the date the warrants are granted. For this purpose, the fair market value of the nonvoting stock is claimed to be substantially reduced because of the existence of the warrants.
Shortly after the issuance of the nonvoting stock and the warrants, the original shareholders donate the nonvoting stock to the exempt party. The parties to the transaction claim that, after the donation of the nonvoting stock, the exempt party owns 90 percent of the stock of the S corporation. The parties further claim that any taxable income allocated on the nonvoting stock to the exempt party is not subject to tax on unrelated business income (UBIT) under§§ 511 through 514 (or the exempt party has offsetting UBIT net operating losses). The original shareholders might also claim a charitable contribution deduction under§ 170 for the donation of the nonvoting stock to the exempt party. In some variations of this transaction. the S corporation may issue nonvoting stock directly to the exempt party.
Pursuant to one or more agreements.(typically redemption agreements, rights of first refusal, put agreements, or pledge agreements) entered into as part of the transaction, the exempt party can require the S corporation or the original shareholders to purchase the exempt party's nonvoting stock for an amount equal to the falr market value of the stock as of the date the shares are Catalog Number 20810W Page~ wwwJrs.,gov Form 886-A (Rev. S.2017}
Form886-A
Name of taxpayer
Department or the Treasu,y - Internal Revenue Service
Explanations of Items
Schedule number or exhibit
____
___._IT .. _...,_an_Numbe
__ r_(la-st_4_cH_g_'its_~ __ … _v_e_a(-/P-en-·oo-ended
__ _ presented for repurchase. In some cases, the S corporation or the original shareholders guarantee that the exempt party will receive the fair market value of the nonvoting stock as of the date the stock was given to the exempt party if that amount is greater than the fair market value on the repurchase date.
Because they own 100 percent of the voting stock of the S corporation, the original shareholders have the power to determine the amount and timing of any distributions made with respect to the voting and nonvoting stock. The original shareholders exercise that power to cause the S corporation to limit or suspend distributions to its shareholders while the exempt party purportedly owns the nonvoting stock. For tax purposes, however, during that period, 90 percent of the S corporation's income is allocated to the exempt party and 10 percent of the S corporation's income is allocated to the original shareholders. The transaction is structured for the original shareholders to exercise the warrants and dilute the shares of nonvoting stock held by the exempt party, or for the S corporation or the original shareholders to purchase the nonvoting stock from the exempt party at a value that is substantially reduced by reason of the existence of the warrants. In either event, the exempt party will receive a share of the total economic benefit of stock ownership that is substantially lower than the share of the S corporation income allocated to the exempt party.

# DISCUSSION

The transaction described In this notice ls designed to artificially shift the incidence of taxation on S corporation income away from taxable shareholders to the exempt party. In this manner. the original shareholders attempt to avoid paying Income tax on most of the S corporation's Income over a period of time. The Service intends to challenge the purported tax benefits from this transaction based on the application of various theories, including judicial doctrines such as substance over form. Under appropriate facts and circumstances, the Servlce also may argue that the existence of the warrants results in a violation of the sing le class of stock requirement of § 1361{b}(1)(D}. thus terminating the corporation's status as an S corporation. See, e.g.,§§ 1.1361M 1(1)(4)(ii) and (iii).
Transactions that are the same as, or substantially similar to, the transaction described in this notice are identified as "listed transactions" for purposes of§§ 1.6011-4(b)(2), 301.6111-2(b)(2), and 301.6112-1(b)(2) effective the date this notice was released to the public.
Independent of their classification as listed transactions, transactions that are the same as, or substantially similar to, the transaction described in this notice may already be subject to the disclosure requirements of§ 6011 (§ 1.6011-4), the tax shelter registration requirements of§ 6111 (§ 301.6111w1T and§ 301.6111-2), or the list maintenance requirements of§ 6112 (§ 301.6112-1 ). Under the authority of §1.6011-4(c)(3)(i)(A), the exempt party in the listed transaction described in this notice will also be treated as a participant In the transaction (whether or not otherwise a participant). The exempt party will be treated as participating in the transaction for the taxable year of the purported donation, the taxable year of the reacquisition, and all intervening taxable years. Pending further review and possible additional guidance, this notice does not apply Catalog Number 20810W Page~ www.lrs.gov Form 886-A (Rev. 5-2017}
Form886-A
Department of the Treasury - Internal Rellenue Service
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 d'tgits) Schedule number or eXl'llbit Year/Period ended to any investment in employer securities, as defined in § 409(1), by an employee stock ownership plan subject to the requirements of§ 409(p).
Persons who are required to register these tax shelters under § 6111 but have failed to do so may be subject to the penalty under§ 6707(a). Persons who are required to maintain lists of investors under§ 6112 but have failed to do so (or who fail to provide those lists when requested by the Service) may be subject to the penalty under§ 6708(a). In addition, the Service may impose . penalties on parties involved in these transactions or substantially similar transactions, including the accuracy-related penalty under § 6662.
The Service and the Treasury Department recognize that some taxpayers may have filed tax returns taking the position that they were entitled to the purported tax benefits of the type of . transaction described In this notice. These taxpayers should take appropriate corrective action and ensure that their transactions are disclosed properly.
Taxpayer's Position:
1. The Taxpayer has not provided a position on the issue.
2. The Taxpayer has not provided a position on the issue.
Government's Position:
1. That the exempt status for should be revoked for failure to operate exclusively in furtherance of exempt purposes.
Under IRC Section 501 (c)(3) an exemption from tax is provided for organizations, organized and operated exclusively for religious, charitable, scientific. testing for public safety, literary, or educational purpose$, or to foster national or international amateur sports competition, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which Is carrying on propaganda, or otherwise attempting, to influence legislation, and which does not participate in, or intervene in, any political campaign on behalf of (or in opposition to) any candidate for public offtce.
Treas. Regs. Section 1.501 (c)(3)-1 (a)(1} provides that, in order to be exempt as an organization described in section 501(c)(3), an organization must be both organized and operated exclusively for one or more of the purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt.
Treas. Regs. Section 1.501 (c}(3)-1 (c)(1) provides that an organization will be regarded as operated excluslvaly for one or more exempt purposes only if it engages primarily in activities which accomplish one or more of such exempt purposes specified In section 501 (c)(3). An organization will not be so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.
Catalog Number 20810W Page~ www.!rs.gov Form 886-A (Rev. s-2017} Form886-A Department of the Treasury - Internal Reveooe Service
Explanations of Items
Schedule number or exhibit
Name of taxpayer Tax Identification Number (la$/ 4 digits) Year/Period ended Here the facts show that more than an insubstantial part of the organization's activities are not in furtherance of an exempt purpose. These activities include:
1. Participating in the S Corporation Tax Shelter Scheme
2. Operating as a vehicle to assist the promoter of the scheme ( out his abusive charitable scheme ) in carrying These activities disqualify the organization from exempt status under IRC Section 501 (c)(3).
Disgy§Sion on the disqualifying activities
1. The organization is a participant in the S Corporation Tax Shelter Scheme.
Transactions that are the same or substantially similar to those described in Notice 2004-30 are designed to artificially shift the incidence of taxation on S corporation income away from taxable shareholders to the exempt party. In this manner, the original shareholders attempt to avoid paying income tax on most of the S corporation's income over a period of time. The shifting of taxation away from the taxable shareholders is possible due to the exempt party generally does not pay tax on its income. Since inception, has not paid any tax on Its income. Notice 2004-30 designated these type of transactions as listed transactions.
In determining whether the donations of LLC membership units to the organization are the same or substantially similar to Notice 2004w30, the provisions in the Operating Agreements and other relevant facts are examined. These provisions include:
• The original shareholders donated membership units to the organization.
• The original shareholders retain control of the LLC via their holdings of exclusive management rights and/or ownership of voting units.
• The original shareholders have the power to determine the amount and timing of any distributions.
• The organization is allocated percent or more of the profit, while the original shareholders are allocated percent of the loss.
• The LLCs have the firs1 right to purchase the organizations membership units. Wrth the original shareholders having exclusive management right, they can issue additional shares to dilute the shares held by the organization.
Discussion of the above factors i. The original shareholders donated membership units to the organization.
Slmilar to Notice 2004-30, the original shareholders donated membership uni1s to the organization, while retaining complete and total control over the LLC units. As the holder of membership units, the organization has no voting rights and consent right.
Catalog Number 20810W Page_ai_ wwwJrs.gov Form 886-A {Rev. 5-2017} Form886-A Department of the Treasury- Internal Revenue Serl/Ice
Explanations of Items
Name of taxpayer Tax Identification Number (fast 4 digits) Schedule number or exhibit Year/Period ended ii. The original shareholders retain control of the LLC via their exclusive management rights.
Similar to Notice 2004-30, after the original shareholders donated membership units to the organization, they still maintain complete control over the assets of the LLC. In the majority of instances ( LLCs or %) where interest was donated to the organization, a % non-voting interest was donated while a % Voting interest was maintained by the original donors. As such, the original donor maintains all voting rights and management rights of the
LLC. This creates a situation where the donor can take a tax deduction for a "charitable contribution" while maintaining the economic benefit and control of the donated asset. iii. The original shareholders have the power to determine the amount and timing of any distributions.
In Notice 2004-30, because they are the sole managers of the S Corporations, the original shareholders have the power to determine the amount and timing of any distributions.
In this case, the original shareholders, also Manager of the LLCs, have the power to determine the amount and timing of distributions. Per the Type Operating Agreements, there are no required annual distributions for organizations operating under the Type 1 agreements.
For organization's operating under Type 2 agreements, the manager shall be required to distribute, on a pro-rata basis, a substantial present economic benefit of at least percent ( %) of the total assets held by the Company on a yearly basis. For purposes of this paragraph, the two percent ( %) value is determined as of the value of the assets of the Company as of January 1 of each calendar year. Furthermore, this mandatory distribution requirement shall not apply to the first partial year that this Company is in existence and shall only apply to each full calendar year that this Company is in existence.
In the year of examination, some LLCs did not make any distributions to the organization . Additionally, only of the LLCs (or %) made distributions at or above the required % with LLCs making no distribution or a distribution which was less than the % required by the operating agreements. Overall, the average distribution for all LLCs was % of the value of the LLC at Where distributions were made to charities; the timing, amount, and chosen charity were determined by the LLC manager (typically the original donor). Many of the LLCs made direct payments to their chosen charities without any notification to and simply reported the expense to at year end. , Other entities transferred funds to and also provided with payout instructions on recipients and amounts to be paid. In these instances, acted as a passthrough account with no oversight or involvement in the actual charitable giving process.
Catalog Number20810W Page~ www.irs.gov
Fonn 886-A (Rev. 5-2017)
Forrn886-A
Department of the Treaswy - lntamal Revenue Service
Explanations of Items
Name of taxpayer Tax Identification Number (last 4 digits) Schedule number or exhibit Year/Period ended was unable to provide any documentation or substantiation of its involvement in the charitable giving or disbursement process other than its activities as a pass-through entity for a portion of the charitable giving activities so that it can show some form of charitable activity for the year. iv. The organization is allocated percent or more of the profit, while the original shareholders are allocated percent of the loss. The Special Allocation Provisions further allocate all passive income to the organization and all active Income and deductions to the original shareholders.
In this case, %- % of profits and losses are allocated to the exempt party and % -% are allocated to the original shareholders. However, none of the profits or losses are realized by the exempt party as the only funds received are the pass~through funds received as outlined in item t#v above. v. With the original shareholders having exclusive management right, they can issue additional shares to dilute the shares held by the organization.
In these LLCs, the donors, their spouse and/or famlly members are the sole managers of the LLCs. They have the power to issue additional membership units within the LLC. Such issuance of additional shares may dilute the value of those share already held by the organization. Given the organization has no consent rights, there's nothing it can do to prevent the issuance of additional units.
In summary, the facts show the transactions in this case are the same or substantially similar to those described in Notice 2004-30. Therefore, it is concluded that was a participant in the S-Corporation Tax Shelter scheme as described in. Notice 2004-30.
2. acts as a vehicle to assist the promoter of the scheme ( ) in carrying out his abusive charitable scheme.
As stipulated in United States of America v. , charitable giving scheme is designed to assist his wealthy clients improperly reducing their tax liability by taking unwarranted charitable contribution deductions. Mr. scheme has harmed the United States by depriving the government of tax revenue. The IRS has identified specific transactions that, through • cost the United States Treasury more than $ in lost tax revenue.
To facilitate his scheme, needed a charity described under IRC § 501 (c)(3) to take the bogus contributions, as contributions to such ch~rity Is tax deductible. In the beginning, created his , and so he could facilitate his scheme. Once Catalog Number 20810W Page ~ wwwjrs.gov Form 886-A (Rev. 5-2017} Form886-A Department of lhe Treasury - Internal Revenue SO!Vk:e
Explanations of Items
Schedule number or exhibit
Name of taxpayer Tax Identification Number (last 4 digits) Year/Period ended scheme was exposed, the IRS revoked , and I tax exempt status, which agreed to.
Facts connecting limited to: to scheme included, but are not
• Approximately % of the LLC interest "assigned" to were originally "assigned" to
• a charity which was involved in the scheme until it was revoked by the IRS.
• appraised the value of ownershin interest for many of the donors who donated their interest to the organization. signed many of the Forms 8283 for the appraised assets.
• is the President of which is named in the injunction against . It is clear from the injunction that and worked together to perpetrate the tax scheme concocted by and that is a promoter of the scheme.
In conclusion, the facts show that the organization was operated as a vehicle of bogus charitable scheme which is being promoted and carried out by The activities discussed above were more than an insubstantial part of activities.
These activities did not further one or more exempt purposes described in IRC § 501 (c)(3).
Therefore, exempt status under IRC § 501(c}(3) should be revoked.
2. That the Organization's exempt status should be revoked retroactively to first date that the organization failed to qualify for exemption. , the activities remain the same in the year of examination as they were at the inception of the federal tax exemption on . The organization began accepting LLC interest donations in the tax year based on their Form reporting. This demonstrates that became a participant in the tax avoidance scheme in Therefore, it is warranted to revoke the exempt status of the organization retroactively to the first date it was determined that the organization was not operated exclusively for exempt purposes.
Conclusion: is not operated exclusively in furtherance of an exempt purpose as outlined in IRC Section 501(c)(3). As such, its tax-exempt status should be revoked retroactively to is required to file Form 1120, U.S. Corporation Income Tax Return. for the tax years
• and all future years.
Catalog Number 2081ffiV Page_li_ www.lrs.gov
Form 886-A (Rev. 5-2017)