Informative, Strange PLR

• Date: 01 June 2017
• Published date: 01 June 2017
• DOI: http://doi.org/10.1002/npc.30329

Bruce R. Hopkins’ NONPROFIT COUNSEL

June 20174THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

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

vices,” as F. The IRS pronounced N and F to be “virtually

indistinguishable.”

The IRS then invoked the private inurement doctrine,

finding that N is operating for the “substantial” purpose

of facilitating sales for the benefit of G and H. In fact

(without citing anything in support of the allegation),

N was said to have been formed to purchase materials

from F. The IRS also noted that the majority of N’s board

is related and held that N, in its application, failed to fully

describe all of its activities and its anticipated sources

and revenue. [4.5(a)]

Commentary: There are two excellent aspects of this

ruling. One is that the IRS refrained from invoking the

commerciality doctrine, which, based on recent rulings, it

easily could have. It has been said in these pages that the

IRS could apply the operational test instead of the com-

merciality doctrine. This ruling nicely illustrates that point.

The other refreshing aspect of this ruling is that, despite

harping on the fact of a related board, the IRS did not

invoke its erroneous governance stance in denying rec-

ognition. There was no twisted citation to Bubbling Well

Church and the like.

Nonetheless, this ruling contains four errors:

1. It states that N’s purchase of items from F is evidence

of a substantial nonexempt purpose. That is not the

law. A public charity can lawfully purchase goods

and/or services from a related for-profit company,

as long as the transaction’s terms are reasonable. It

is called a related-party transaction. They are to be

reported on Form 990, Schedule R.

2. A public charity can engage in the same activities

as a for-profit company and still be exempt. This is

the case with, for example, schools, hospitals, and

theaters.

3. The ruling suggests that board members cannot

simultaneously be service providers, which is not

the law.

4. The ruling states that G and H “are compensated

and their salaries consume a large part of [N’s]

revenue.” The issue is whether these salaries are

reasonable (a point not discussed in the ruling). The

size of an individual’s compensation in relation to

the payor’s total revenue is not a factor employed in

ascertaining whether the compensation is excessive

(other than in situations involving spikes in compen-

sation levels). ◆

ORGANIZATIONAL TEST

CORNER

An organization had its exemption as a charitable

entity revoked because its statement of purposes and

activities were insufficiently charitable. The entity stated

that its mission is to “improve the quality of life for citi-

zens and business owners through its role in economic

development, fostering a sense of community and

culture & educational advancement.” This organization

was said to violate the organizational test, in that its

purposes are too broad and its articles of incorporation

do not include a dissolution clause, and the operational

test, because of its community-based and economic

development activities (Priv. Ltr. Rul. 201715004). One

gets the impression that this entity was informally

advised to try again under IRC § 501(c)(4).

An organization was granted recognition of tax

exemption because of its purpose of “promoting

democracy” in the United States, and to “foster and

promote education among our young people to assist

those who are in need” and “promote brotherhood

among all people.” On examination, it was found that

all this organization was doing was leasing an apartment

complex. That, the IRS concluded, is not charitable activ-

ity (Priv. Ltr. Rul. 201716048). The tenants, by the way,

are not members of a charitable class.

Without analysis, the IRS ruled that operation of an

electronic waste disposal facility is not a charitable or other

similar exempt function (Priv. Ltr. Rul. 201716052). Presum-

ably, there is no lessening of the burden of a government.

Easy call: This is an application of the commerciality doc-

trine or, better yet, failure of the operational test. [4.5(a)] ◆

INFORMATIVE, STRANGE PLR

A nonprofit corporation applied for recognition of tax

exemption as a charitable organization. The IRS denied

this recognition, on the grounds that the entity did not

provide sufficient information on the substance of its

activities (Priv. Ltr. Rul. 201712017). This outcome, by

itself, is no news. But there are two aspects of this ruling

warranting mention.

The organization indicated, in its application, that it

will be working in “close connection” with a tax-exempt

social welfare organization, sharing staff, equipment,

and facilities. This organization failed to provide the IRS

with a shared resources agreement, leading the agency

to fear that some of its funds may be used for political

campaign purposes. Its website indicates it will become

the “place for political action, ideas, education and

camaraderie.” There is chatter about “political action,

educating voters with the intent of ‘playing to win’

local contests, and helping officials.” There is talk about

hosting candidate debates; the IRS lamented that this

organization did “not describe how you decide which

candidates will be invited and whether the same ques-

tions will be asked of all candidates.”

Lessons: (1) when applying for recognition of exemp-

tion, be certain that the language in the application and

on the applicant’s website are consistent and conform