Capital Investment Company Ruled Ineligible for Charitable Tax Exemption

Published date01 December 2020
Date01 December 2020
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.
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.
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

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