Consulting Organization Denied Exemption by Tax Court

DOIhttp://doi.org/10.1002/npc.30486
Published date01 July 2018
Date01 July 2018
Bruce R. Hopkins’ NONPROFIT COUNSEL
5
July 2018
THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY
Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc
More Law and Analysis
The court found that Bibler met the first two prongs
of the statutory exception, in that he provided evidence
to show that he was serving on the school’s board solely
in an honorary capacity and did not participate in the
day-to-day or financial operations of the organization.
The third prong of the exception requires that the
person not have “actual knowledge” of the failure on
which the penalty is imposed. Because the board was
told that the taxes were not paid, Bibler had the requisite
actual knowledge. The court then assumed he was a
responsible person.
The court held that, for a responsible person to be
deemed to have acted willfully, he or she must have
either had knowledge of the tax delinquency and know-
ingly failed to rectify it when there were available funds
to pay the government or deliberately or recklessly dis-
regarded facts and known risks that the taxes were not
being paid.
The government asserted that, once the board
was advised that the taxes were not paid, Bibler was
negligent in signing checks put before him to pay
obligations other than the taxes owed the IRS by the
school. But the court held that was not willful conduct,
because he believed that the taxes were being paid by
the school’s CEO. The court quoted the Sixth Circuit in
stating that “to hold a responsible person liable when
he or she reasonably believed taxes were being paid
would be to engulf conduct that Congress, in requiring
‘willfulness,’ never intended to be covered by the law”
(Byrne).
CONSULTING ORGANIZATION
DENIED EXEMPTION BY TAX
COURT
The US Tax Court, on April 30, held that an organiza-
tion established to provide “quality management con-
sulting services” to medical providers did not qualify for
tax exemption as a charitable entity, primarily because
of lack of an exempt function (Abovo Foundation, Inc.
v. Commissioner).
Facts
These consulting services included “defining, identi-
fying, analyzing, measuring and controlling systems and
processes to ensure desirable outcomes.” Also, the orga-
nization intends to provide “uplifting services for the
elderly and veterans,” housing for low-income individu-
als, and “internal auditing services.” The organization is
to be funded by contributions and fees.
This entity’s founder, president, CEO, and sole
employee will perform the services to clients (at a $350/
hr. rate), receive a $217,000 salary, and be eligible for
an annual performance-based bonus (not to exceed
$100,000).
Law and Analysis
The court concluded that this organization is a
“facade” for its founder’s consulting activities. Its ser-
vices would “not serve an exempt purpose,” be “com-
mercial in nature,” and serve its founder’s interest.
The court added that the organization “would
develop [the founder’s] business relationships, further his
consulting career as a board certified expert in patient
safety and risk management, and potentially pay him
annual compensation in excess of $300,000.” [4.5(a)]
Commentary: This brief opinion stands for the proposi-
tion that the provision of “consulting” services is not
likely to be a charitable undertaking. The IRS has issued
several private letter rulings on this point. (Although
even the IRS can veer off track, such as when it held that
a private foundation’s provision of “technical assistance
services” is a functionally related business (Priv. Ltr. Rul.
201701002 (summarized in the March 2017 issue).)
This opinion is not an endorsement of the commerci-
ality doctrine. Yes, the court said that the organization’s
activities are “commercial in nature.” But the Living Faith
elements were not inventoried.
The court also stated that the organization’s services
“would not serve an exempt purpose.” This is one of
these cases where use of the operational test or perhaps
a finding that the entity’s activities are primarily unre-
lated business is all that is needed on this point.
MINISTERIAL EXCEPTION
AND ECCLESIASTICAL
ABSTENTION DOCTRINE HELD
TO BAR COURT’S REVIEW
OF RELIGIOUS GROUPS’
GOVERNANCE
The US District Court for the District of Oregon, on
April 26, held that the ministerial exception and the
ecclesiastical abstention doctrine precluded the court
from resolving disputes concerning internal governance
matters of religious organizations (Puri v. Khalsa).
Facts
Siri Singh Sahib Bhai Sahib Harbhajan Singh Khalsa
Yogiji, aka Yogi Bhajan, was a Sikh Dharma spiritual leader
who helped promulgate the Sikh religion and Kundalini
yoga in the United States. He established several nonprofit
organizations and for-profit businesses. Fundamental to
this dispute is the intent of Yogi Bhajan as to who is to
be on these entities’ governing boards. He died in 2004.

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