IRS Chief Counsel Advises Denials as to 27‐Month Rule Relief

Date01 March 2021
Published date01 March 2021
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
section provides that no funds may be used by the IRS
to target groups for regulatory scrutiny based on their
ideological beliefs (§ 107).
Other provisions in this legislation restore Pell grants
for incarcerated students, authorize establishment of two
Smithsonian museums, provide businesses a full deduc-
tion for business meal expenses, and stop surprise billing
by hospitals of patients who receive out-of-network
care. (The latter is the subject of Title I of Division BB of
the appropriations act, which is the No Surprises Act.)
The IRS recently concluded that two organizations are
engaging in activities that are illegal under federal law and
thus are acting contrary to public policy, thereby preclud-
ing eligibility for tax-exempt status as charitable entities.
Religious Organization’s Illegal
The IRS declined to recognize a religious organiza-
tion as a tax-exempt entity because the sacraments it
provides its members in connection with its programs
involve federally illegal substances, in violation of the
public policy doctrine (Priv. Ltr. Rul. 202053019).
This entity is a nationwide religious organization—
but not a church—with a membership of individuals who
share a similar religious doctrine. This doctrine embodies
the notion that the utilization of certain sacraments is a
“fundamental aspect of not only their personal religion,
but of being human.” The organization operates on the
premise that everyone has the “right to utilize [these]
sacraments in any way, shape or form so long as it is
responsible and not done in a way that results in undue
harm to themselves or others.”
This organization offers online courses, ceremonies,
retreats, and counseling for its members. Individuals are
considered as eligible for membership only after they
complete the courses. These sacraments are provided
to members for use in their own religious practices. This
entity’s financial support is derived from contributions
from its members.
The sacraments consist of “numerous natural organic
plants and fungi and their constituents.” They are forms
of cannabis and peyote (not used for Indian religious
purposes); they are controlled substances under federal
law, which prohibits their manufacture, possession, or
distribution. [6.2(a)]
Unlawful Distribution of In-Aid-of-Dying
The IRS ruled that an organization failed the oper-
ational test because it develops, manufactures, and
distributes medicine in aid of dying, which is illegal under
federal law (Priv. Ltr. Rul. 202101007). (Assisted suicide,
euthanasia, and mercy killing are criminal offenses.)
Again, the IRS held that the commission of criminal acts
is contrary to public policy. This organization also was
held to be operating in a commercial manner and not
for scientific purposes. [4.9(a), 6.2(a)]
The IRS’s Office of Chief Counsel, in a memorandum
made public on December 24, advised the TE/GE Division
as to the basis for various denials of relief in connection
with the 27-month rule concerning late filing of appli-
cations for recognition of exemption by organizations
seeking charitable (IRC § 501(c)(3)) status (20205201F).
Nearly all entities, to achieve recognition of exemp-
tion as charitable organizations, are required to file an
application for recognition of exemption (Form 1023)
(IRC § 508(a)). Generally, when they file within 27
months of the date of their formation, the recognition is
retroactive to that date (the 27-month rule). Also, gener-
ally, where the 27-month rule is not met, the recognition
commences as of the postmark date of the application.
There is a procedure, however, for seeking relief from
failure to satisfy the rule (Reg. § 301.9100-3); this entails
filing Schedule E of the Form 1023.
Many applicants requesting relief from the 27-month
rule had not filed the requisite annual information
returns for years prior to filing their application. Before
a law revision in 2006, requests for relief were generally
granted. In that year, however, a law was enacted that
caused exempt organizations to lose their exempt status,
by operation of law, if they failed to file or submit a
return for three consecutive years (IRC § 6033(i)).
That development generated this conundrum: What
is the point of granting relief (i.e., recognizing an earlier
exemption effective date) when the organization would
automatically have its exemption revoked prior to the
application date (because of the failure to file), even if it
otherwise qualified for exemption?
A regulatory election is an election the due date of
which is prescribed by regulation or IRS guidance.
Certain charitable organizations (and most nonchari-
table entities) are eligible to self-declare their tax-exempt
status (e.g., churches and very small public charities).
Self-declarers are ineligible for this regulatory relief, Chief
Counsel advised, because they did not fail to make a

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