Capital Investment Company Ruled Ineligible for Charitable Tax Exemption

• DOI: http://doi.org/10.1002/npc.30798
• Published date: 01 December 2020
• Date: 01 December 2020

Bruce R. Hopkins’ NONPROFIT COUNSEL

4 December 2020 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

• Review the Tax Exempt and Government Entities Divi-

sion’s efforts to identify and examine exempt organ-

izations with unreported or underreported unrelated

business income tax.

• Assess whether the streamlined application for rec-

ognition of exemption results in fewer compliant

tax-exempt organizations.

• Review the IRS’s policies and audit procedures to iden-

tify improper conduct by exempt organizations and

determine whether the IRS has sufficient information

to combat abuse and enforce federal tax laws.

• Determine the effectiveness of the division’s imple-

mentation of the Compliance Planning and Classifi-

cation Unit to consolidate examination identification

planning, assignment, and monitoring.

• Assess the IRS’s implementation of the notice require-

ment for exempt organizations that have not filed an

annual information return or notice for two consec-

utive years.

• Provide various statistical information and data trends

related to the division. ◆

ASSOCIATION’S JOB-

PLACEMENT SERVICE RULED

UNRELATED BUSINESS,

INCOME NOT ROYALTIES

The IRS national office, by technical advice memoran-

dum, ruled that operation of an online job-placement

service by a public charity constitutes an unrelated busi-

ness and that the resulting income does not qualify as a

royalty (TAM 202039018).

The exempt organization involved is an association

of practitioners, academicians, and graduate students

in a particular field. Its primary activity is publication of

a journal; it provides other educational activities and

resources. This association also sponsors a job-place-

ment program that connects employers and qualified

candidates, and provides job seekers access to employ-

ment opportunities. The organization has operated the

program for more than 40 years; recently, it contracted

with a for-profit vendor to manage the program on the

organization’s website. Three employees and an inde-

pendent contractor provide services to the association

in operation of the program, which is maintained in the

organization’s name. The association maintains a place-

ment service team to assist its members with employ-

ment opportunities. The vendor is paid a fee pursuant to

a service agreement. Nearly all of the revenue earned by

operation of the program is remitted to the association.

The association’s position is that the payments remit-

ted to it from the vendor are royalties for the vendor’s

use of the association’s name, trademarks, website

address, and mailing list, and that these royalties are

excluded from unrelated business income taxation (IRC §

512(b)(2)). Indeed, this argument has it that the program

is the business of the vendor.

The IRS emphasized that there is no transfer of the

organization’s name or other intangible property to the

vendor by means of any written agreement. To the det-

riment of the organization’s argument, the agreement

in place is a straightforward service agreement, not a

licensing agreement. The website pages involved are

part of the association’s overall webpages. The IRS con-

cluded the program is the association’s activity, which

merely involves outsourcing certain operations to the

vendor on its behalf. [25.1(g)]

Commentary: The facts and legal analysis in this case are

similar to those in the Tax Court’s decision in New Jersey

Council of Teaching Hospitals v. Commissioner (summa-

rized in the March 2018 issue). Not surprisingly, the IRS

heavily relied on that opinion in writing this TAM. ◆

CAPITAL INVESTMENT

COMPANY RULED INELIGIBLE

FOR CHARITABLE TAX

EXEMPTION

A nonprofit corporation was formed to increase the

capital available to organizations that develop and/or op-

erate long-term affordable housing for the economically

and physically disadvantaged, community facilities such

as schools and community health centers, businesses

providing access to healthy foods, sustainable energy

projects, and other projects that may increase social

welfare. The bulk of its work focuses on enhancing

economic opportunities in low-income and underserved

communities and on improving air quality and mitigation

of the potential negative effect of climate change.

This entity will raise capital from impact investors. It

has established a method of analysis whereby potential

investment opportunities are screened to help deter-

mine the merits of each potential portfolio company. It

will provide these services for a management fee. The

organization strives to provide a market or near-market

return for investors.

The IRS declined to recognize this organization as a

charitable entity, ruling that it fails the operational test

because a substantial portion of its activities consists of

managing funds for fees (Priv. Ltr. Rul. 202041009). The

IRS wrote that this entity, “like any other investor, [is] try-

ing to secure the highest returns possible for [its] clients.”

The organization was held to be operating in a commer-

cial manner, with any charitable activities incidental.

The organization claimed that its conflict-of-inter-

est policy and code of ethics, enforced by the state of