No "insider" inurement finding reinstates charitable exemption.

• Author: Josephs, Stuart R.

A 1969 letter ruling held that the United Cancer Council, Inc. (UCC) was a tax-exempt organization and an eligible charitable donee. In 1984, UCC entered into a five-year contract with Watson & Hughley Co. (W&H), a professional fundraiser. From 1984-1989, W&H helped UCC conduct a nationwide direct-mail fundraising campaign. Under the contract, UCC received approximately $2.3 million in net fundraising revenue. W&H received more than $4 million in fees from UCC and derived substantial income from exploiting the co-ownership rights in UCC's mailing list that had been granted under the contract.

On Nov. 2, 1990, the IRS revoked the favorable letter ruling retroactively to June 11,1984. UCC initiated a Tax Court petition for a declaratory judgment that it qualified as a tax-exempt organization and an eligible charitable donee.

In United Cancer Council, Inc., 100 TC 162 (1993), the Tax Court found That W&H was an "insider" for purposes of the inurement prohibitions of Secs. 501(c)(3) and 170(c)(2)(C). There was an inurement of net earnings to W&H. Thus, the Tax Court held that UCC failed to qualify as a tax-exempt organization and an eligible charitable donee. The Tax Court also held that the Service's retroactive revocation of...