Fundraising Charity Loses Exemption Because of Corporate Sponsorship Program

Published date01 October 2019
Date01 October 2019
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
charitable deduction (IRC § 2055) was allowed. Thus,
the IRS ruled, the final payment to the remainder interest
beneficiaries will not be considered a termination of the
trust’s private foundation status. Without the requisite
termination (IRC § 507(a)), the IRS ruled, a termination
tax will not apply to the trust. [16]
An individual formed a for-profit company specializ-
ing in the sale of replacement windows and other home-
improvement services to residential customers. The
company initially largely promoted its business by means
of telemarketing. The ability to market in that fashion
dwindled when the National Do Not Call Registry program
was implemented. This individual thus formed a chari-
table entity (not subject to the program’s restrictions)
for the purpose of conducting a “corporate sponsorship
program,” which provides telemarketing services for
businesses (including his). The IRS recognized the orga-
nization’s exemption, and then subsequently revoked it.
Pursuant to this program, a participating business is
obligated to make a charitable contribution to the char-
ity only when a potential customer agrees to an in-home
product demonstration. The US Tax Court concluded
that the program, “by design and in effect, permits for-
profit businesses (such as [the one in this case]) to invoke
[the charity’s] name as part of a telemarketing pitch
intended, first and foremost, to generate sales leads and
revenues.” The “real purpose” of the calls, wrote the
court, is “business promotion.”
The Tax Court upheld revocation of this exemption,
stating that “[g]enerating sales leads in support of a
for-profit enterprise” is not a charitable purpose (Giv-
ing Hearts, Inc. v. Commissioner (decision dated July
29)). The court found violation of the operational test,
on the grounds that more than an insubstantial part of
the entity’s activities is not in furtherance of an exempt
purpose. [4.5(a)]
Commentary: This opinion could make sense if the
court were writing in a vacuum. It was not, however,
as the law concerning charitable sales promotions,
commercial co-ventures, and corporate sponsorship
programs (the latter the subject of IRC § 513(i)) attest. In
a charitable sales promotion/commercial co-venture, it is
always the case that the for-profit entity involved is not
obligated to make a contribution to the charity involved
until there is a purchase from the company. The court
made a major point about this, as if the practice is wrong
(it’s not). It is also always the case that, in connection
with these programs and corporate sponsorship pro-
grams under the federal tax law, there is an element of
“business promotion” involved. Indeed, as to this matter
of not engaging in exempt functions, fundraising of any
type is rarely a charitable undertaking. Engaging in fun-
draising, including charitable sales promotions, is not a
violation of the operational test.
Here we go again. A nonprofit membership corpora-
tion was established to “assist in the growth of small
and medium sized businesses.” The sole qualification for
membership in this entity is “being a decision maker for
a business.” Only one member of each business or pro-
fession is permitted to be a member. This entity advised
the IRS that its “common business interest is being a col-
lection of independent business owners networking with
one another.” Not surprisingly, the IRS ruled that this
business referral group does not qualify for tax exemp-
tion as a business league because it does not promote a
line of business (Priv. Ltr. Rul. 201931009). [14.2(a)]
And, again, here we go again. A nonprofit organi-
zation was formed to recruit and encourage an “ade-
quate membership of outstanding men and women
to serve as well-trained officials for the benefit of the
school systems and youth” in its area. Translation: It
is an association of individuals providing officiating
services for middle and high school volleyball games.
It also provides employment opportunities for its mem-
bers. Recognition of tax exemption for this organization
was denied, primarily because the entity is provid-
ing particular services to its members (Priv. Ltr. Rul.
201931010). (As the next case illustrates, these facts
also give rise to the provision of unwarranted private
benefit.) [14.2(c)(i), (ii)]
A nonprofit organization was created to operate a
network of therapists in a particular field for “one-stop
shopping, providing better care coordination and qual-
ity improvements for [its] members, reducing costs for
members, creating a network large enough to manage
population health, and negotiating rates with a larger
market share due to the collaboration of the individual
practices.” The IRS did not recognize this organization
as an exempt business league inasmuch as it is provid-
ing its members with “bargaining power and acting as
a bargaining agent to negotiate for better terms and
conditions of doing business with vendors, suppliers,
and service providers, with whom [its] members do busi-
ness.” These activities were ruled to generate unwar-
ranted private benefit (Priv. Ltr. Rul. 201931013). (In
cases like the two immediately preceding ones, the IRS
almost always also rules that the organization is not serv-
ing a line of business.) [14.2(d-1) (2020 supp.)]

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