Originally published on Passive Activities and Other Oxymorons on June 5th, 2011.
Private Letter Ruling 201116033
This ruling just proves that 80% of keeping your exempt status is showing up.
On 10/15/20XX, the agent called EO, President answered the call and stated that he is the contact person of the organization. President stated, “stop playing games and just tell me what you need and I will provide it to you if I can.”
On 11/2/20XX, agents Agent and Agent went to the organization's address. No one answered the door. An elderly man could be seen walking inside the house from outside the property. He could not be identified as President and he chose not to answer the door. The property appeared to be a private home located in a residential area and there were no signs or indications that it was where the organization operated.
Private Letter Ruling 201115026
In a previous post, I expressed my distaste for using not for profits to scam. Not that I approve of scamming in general. I just think it is worse to pull scams that appeal to people's higher natures rather than their greed. This one is a little wrinkle on that. It encourages greedy people to start exempt organizations to get their share of the millions that are being shovelled out to people just like you.
You can receive money from private foundations and government programs for virtually any type of business. Whether it is to start a business or expand your existing business, there is money waiting for you. Private foundations and the federal government provide this money to help existing small business owners and those who want to start their own business [to] change their lives and achieve financial independence... many private foundations and government programs are available to stimulate small business. As a business owner or future entrepreneur, you may qualify for a variety of programs from public sources designed to enhance, expand, or initiate your business.
One of the problems with private letter rulings is the anonymity. I poked around a bit and found somebody who is offering this type of stuff. It's called FinancialDirect.net. They explain that private foundations have to give away 5% of their assets each year and will explain to you how to get in on it.
You further explained that “[H] first said that they had $ [Redacted Text] to $ [Redacted Text] funding available. Then they told us that they could get us well over a Million if we had a non-profit company. That is why we signed the non-profit service contract. They instigated and completed the filing for tax exemption.” B and C signed a service contract (on behalf of their privately owned businesses, F and E ) and paid a fee of $[Redacted Text] to H to solicit for grant funding in the amount of $[Redacted Text]. The contract between B and C (on behalf of E and F) with H stated that the business intent of the contract was to “Expand, Staffing, Facility, Equipment, Advertising, Transportation, and Operating & Reserve.”
Org will not be getting its exempt status. I don't know if they are launching an investigation of H. We can only hope.
Private Letter Ruling 201115025
This Org is working on world peace through bringing in international students. That was the idea anyhow. There were some glitches.
ORG has not filed Form 990 for any year since inception in 20XX through present, though income per bank deposits and assets have far exceed the filing requirement. President has not filed his individual tax returns since 19XX. CO-1 did not file tax returns until after the Service issued notification of examination regarding ORG. Following notification for ORG examination, delinquent returns were filed for tax years 20XX through 20XX which claimed that a large ($$) capital loss occurred in 19XX, eliminating potential corporate taxes. The only documentation presented to verify the loss were copies of e-mail correspondence and 3 stock certificates. No cancelled checks were kept and there is no evidence that necessary investment principle existed or was ever reported on any tax return. Furthermore, a similar certificate, presumably created by President, was present in the organizational documentation of ORG granting membership to President's mother in ORG, signed by President.
President and BM-1 signed all checks written out of ORG and CO-1 bank accounts. CO-1 lists as its sole shareholder of record, BM-2, President's 89 year old mother who has been living in Country for over 10 years. No individual tax returns have been filed by BM-2 either, though she is a United States Citizen and owns, or is nominee for, extensive real estate investments and CO-1.
President and BM-1 (President's girlfriend) have been living in a house which President purchased in the name of the charity (ORG), for $$ in 20XX, which they claim was purchased with the intent of housing foreign students. Automobiles purchased on President's personal credit cards, were titled in the name of ORG as well. President's bankruptcy trustee sought to reposes these vehicles unsuccessfully, and then settled President's personal bankruptcy for a payment of $$ made by President in 20XX.
President signed checks from the account CO-1 to ORG. Total deposits into the only known account bearing the ORG name were as follows: $$ in 20XX and $$ in 20XX. In early 20XX the ORG account was closed and other entities' accounts were used for all transactions.
President filed for personal chapter 7 bankruptcy in 20XX, with $$.00 in unsecured debt. Loan documents were furnished during examination which state CO-1 lent the $S to ORG for the purchase of the home on Address and $$ to President to settle his bankruptcy. However, these loans did not have any repayments, repayment schedule and were not recorded with state or local governing authorities. Neither President, nor ORG had any known sources of income with which to repay these loans. Attempting to classify these transfers as loans is in the (self-serving) interest of President because loans are not treated as taxable income.
Large, unusual and questionable wire transfer was made from ORG account to account in Country. $$ was wired (memo Hsbcchkhh) on 09/01/20XX from the ORG account. $$ was withdrawn from CO-1 bank account on 03/31/20XX and $$ from CO-1 account on 04/21/20XX. Neither President, nor his representative, BM-3 has furnished explanations or foreign bank account records, though requested in writing. ORG did not file Employment Tax Returns or Forms 1099.
There is no evidence that any charitable activities were ever conducted by ORG. The power of attorney used the word “sham” in his description of ORG. The only students who received any funds were close relatives of President and these totaled only a few thousand dollars.
President's history shows a clear pattern of opening gratuitous tangles of corporations and of not filing any individual or corporate tax returns. The addition of a tax exempt charity to the milieu adds layers of complication and protection for President. This scheme distorts the financial and tax consequences to President and to the respective entities. President has not filed any Forms 1040 since 19XX.
The Power of Attorney for ORG stated in his own words that the organization is a sham; that the taxpayer, President, and his family were led into creating the Exempt Organization by a defunct accounting firm which then promoted Exempt Organizations. The taxpayer claims that he tried to arrange scholarships but found the process too difficult and did not follow through.
President's main concern is that the home on Address and other land parcel were regrettably titled in the name of ORG, but that they are his personally. He would like to eliminate the exempt organization and keep its assets, provided he pays taxes attributable to the activities and distributions which were neglected due to this distorting arrangement.
Forms 4720 reporting the withdrawals from the ORG bank account in 20XX and 20XX as excess benefit transactions should be filed. Accordingly, the President and BM-1 are liable for the 25% excise tax under IRC § 4958(a)(1) and the 200% excise tax under IRC § 4958(b).
Those excise taxes are pretty nasty. It starts out at 25% and goes to 200% if it is not fixed. Apparently I'm not the only one who thinks mucking around with not-for-profit status is particularly villainous.