Form 1023‐EZ Regulations Issued

• DOI: http://doi.org/10.1002/npc.30442
• Published date: 01 March 2018
• Date: 01 March 2018

Bruce R. Hopkins’ NONPROFIT COUNSEL

7

March 2018

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

trine; it may be considered the first dibs rule, favoring

for-profit companies. Thus, according to this element of

the doctrine, since there are for-profit schools, hospitals,

museums, theaters, publishing firms, and the like, there

ought not be nonprofit, exempt schools and the like. ◆

OTHER RECENT IRS PRIVATE

LETTER RULINGS

◆The IRS is in the process of revoking the tax-exempt

charitable status of a US entity, on the grounds that it is

a mere conduit of funds it raises in the United States and

distributes to a foreign charity (Priv. Ltr. Rul. 201751015).

The agency’s examination yielded no information about

the organization’s control or discretion over the grantee’s

use of the funds (what the IRS termed “expenditure

responsibility”) or how the foreign organization utilizes

the funds. As the IRS stated the matter, the federal tax

law (IRC § 170(c)(2)(A)) “would be nullified if contribu-

tions inevitably committed to go to a foreign organiza-

tion were held to be deductible solely because, in the

course of transmission to the foreign organization, they

came to rest momentarily in a qualifying domestic orga-

nization.” [29.2(e)]

◆A nonprofit organization was formed to foster public

exposure to the arts in a geographic region. It is a mem-

bership entity, with two classes of members: working

and consignment. The latter category of membership

is for individuals who wish to be affiliated with the

organization but not be a working member; they may

sell their works at this gallery, paying a commission. The

IRS ruled that this organization does not qualify for tax

exemption as a charitable entity because it is operating

for the private interests of the artist members whose art

the organization sells (Priv. Ltr. Rul. 201751016). Educa-

tion of the public by means of display of the artwork was

held to be “secondary.” [20.12(a)]

◆Here we go again. A nonprofit organization was

formed with a membership composed of “business

owners and professionals from a broad variety of com-

panies and industries.” The members meet monthly to

“foster future business relationships.” The “common

business interest” among this entity’s members is to

“grow their businesses by nurturing relationships with

fellow members who may become referral resources

and/or provide introductions to prospects and potential

referral sources.” As may be expected, the IRS ruled that

this organization does not qualify for tax exemption as

a business league because it was “not formed for the

improvement of one or more lines of business; rather, [it

was] formed to benefit [its] members’ business interests”

(Priv. Ltr. Rul. 201751023). [14.2(a)]

◆An organization that sought recognition of exemp-

tion as a social welfare entity has as its purpose the

promotion of the political and social welfare of its mem-

bership. All members must be registered members of a

political party. The IRS concluded that the primary activ-

ity of this organization is the conduct of bingo games,

which is not a social welfare purpose (being “intrinsically

recreational”) (Priv. Ltr. Rul. 201802018). Other activities

of this entity are the vetting and endorsement of political

candidates and purchasing of tickets to political fundrais-

ing events, which are not social welfare activities either.

The other activities are bull roasts, which were found to

be social and political. Thus, this organization failed to

secure the desired exemption. [13.1, 13.2, 13.4(b)] ◆

FORM 1023-EZ REGULATIONS

ISSUED

The IRS issued revised instructions for the emerging

refurbished Form 1023-EZ, the streamlined application

for recognition of tax-exempt charitable status. One of

the significant changes is addition of a text box wherein

an applicant will describe its mission, using no more than

255 characters. The instructions state: “Provide a brief

summary of your tax-exempt 501(c)(3) purposes and

the activities you engage in to further these purposes.”

The IRS has provided three examples of qualifying activi-

ties summaries and three examples of summaries that

flunked (based on applications of the private benefit

doctrine).

The instructions also expand the discussion of the

meaning of the terms public charity and private founda-

tion. Any commentary I might supply on this aspect of

the matter has already been nicely provided on January

5 in Paul Streckfus’s EO Tax Journal, when he wrote that

the “underlying problem is that the average person fill-

ing out a 1023-EZ is probably not going to be able to

make any sense of foundation classification issues with-

out in-person [presumably professional] instruction, no

matter how many pages of text there are.” [26.1(h)] ◆

TAXPAYER ADVOCATE

STRIKES AGAIN

The Office of the National Taxpayer Advocate, on

January 10, released its 2017 Annual Report to Con-

gress, summarized in an IRS news release (IR-2018-3).

Predictably, the report addressed the IRS’s streamlined

application for recognition of exemption. There it is said

that the IRS had, in 2017, an “erroneous approval rate”

of 42 percent.

The report states that the erroneous grants of rec-

ognition of exemption “can have significant repercus-

sions”: (1) they “can harm the organizations by failing

to give them an opportunity to correct problems before