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

• Published date: 01 July 2020
• DOI: http://doi.org/10.1002/npc.30742
• Date: 01 July 2020

Bruce R. Hopkins’ NONPROFIT COUNSEL

6 July 2020 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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. ◆

NONENTITIES AS EXEMPT

ORGANIZATIONS

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)] ◆

IRS PLR TEACHES LESSON

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),

12.3] ◆

INCOME FROM

NONRECURRING EVENT

RULED NOT DESTRUCTIVE OF

CLUB’S EXEMPTION

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.