Income From Nonrecurring Event Ruled Not Destructive of Club's Exemption

Published date01 July 2020
Date01 July 2020
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
inconsistent with the conservation purpose. It stated that
donee organizations “might hesitate before they aban-
don a donation that they have a legal duty to protect.”
But, the court added, “that reasoning doesn’t apply
when a nonprofit inadvertently loses its ability to protect
a donation because of an artificial time limit.” [9.7]
Commentary: The donor in this case raised six argu-
ments on its behalf, all of which failed, of course. One
defense it did not tender is the subject of this opinion’s
one footnote: The charitable deduction might have been
salvaged by dint of a savings clause that states that,
in any event, the public charity must exclusively hold
the property for conservation purposes. It is difficult
to believe that a general and vague clause such as this
negates the quite specific 45-day provision. That would
not be an interpretation of the agreement — it would be
a rewriting of it. The court noted the existence of “model
agreements” containing provisions on this point, so
perhaps it is anticipating (maybe encouraging) this argu-
ment in coming cases, either before it or other courts.
Can a nonentity be a tax-exempt organization? The
conventional answer is no (e.g., George v. Commissioner
(summarized in the October 2015 issue)). But individual
retirement accounts are generally tax-exempt (IRC §
408(e)(1)); “accounts” are not legal entities. The cre-
ators of IRAs recognized this conceptual anomaly and
generally resolved it by characterizing them as trusts (IRC
§ 408(a)), which are, of course, separate legal entities.
But what about the custodial IRA account? It is
treated as a trust but only under certain circumstances,
such as where the account’s assets are held by a bank
(IRC § 408(h)). These IRAs are merely treated as trusts
for federal tax law purposes but are not, in fact, trusts.
A court faced this esoteric question when a custodial
IRA was named as a defendant in a bankruptcy pro-
ceeding (Lakeview Development Corp. v. UBS Financial
Services, Inc., US Bank. Ct. for D. Col.).
This court, by decision dated March 25, held that a
custodial IRA is not a separate legal entity. It is, rather,
the court stated, “only a receptacle for a person’s
assets.” This receptacle “enjoys certain tax attributes and
is subject to certain tax penalties.” But, the court con-
tinued, these assets “remain the assets of the individual
owner.” This led the court to the conclusion that, in any
lawsuit involving the assets, the individual owner is the
real party in interest. Thus, the complaint against this IRA
was dismissed.
So, yes, occasionally, a nonentity can be an exempt
organization. [4.1(a)]
An organization classified as a tax-exempt business
league sought reclassification as a charitable and edu-
cational organization. It did not change its enumerated
purposes. It failed in its bid for revised exemption (Priv.
Ltr. Rul. 202017035).
This entity’s primary activity is conduct of an annual
“competition.” This function occurs in coordination
with an industry trade show. The competition consists of
events that, in the words of the ruling, “educate current
and future mechanics about the best methods, prac-
tices, and techniques for performing complex repairs by
providing a forum where educators, instructors, and stu-
dents gather to share collective experience and knowl-
edge.” Recognition of exemption as a charitable and
educational organization was denied on the grounds
that this entity’s primary purpose is promotion of the
“private interests” of the industry.
It appears that the IRS was mistaken about this
organization’s primary purpose. Nonetheless, let’s con-
cede this ruling is technically correct. The lesson taught
here is twofold: (1) an attempt to cause the IRS to
change the classification of a noncharitable exempt
entity to an exempt charitable entity will almost always
be fruitless and (2) the far preferable way to proceed in
this regard is to pursue the desired exemption using a
new entity. The activities described in the ruling appear
to be charitable and educational in nature.
These activities should have been placed in either
a supporting organization or a school, controlled by
the business league. Actually, they still can be. [4.5(a),
A tax-exempt social club owns considerable acre-
age, including large patches of old-growth forest and
an undeveloped shoreline on which its members hike,
hunt, and fish. In an effort to reduce greenhouse gas
emissions, the state involved enacted a statute setting
limits on these emissions and allowing certain business
to buy, sell, and trade the rights to produce emissions.
Businesses may purchase emission credits from car-
bon dioxide “offset projects” managed by entities not
covered by the statute. Regulated companies may use
carbon dioxide offset credits to fulfill their compliance
obligation. The club wants to participate in this credit
program without adversely affecting its exempt status.

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