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

• DOI: http://doi.org/10.1002/npc.30834
• Date: 01 March 2021
• Published date: 01 March 2021

Bruce R. Hopkins’ NONPROFIT COUNSEL

4 March 2021 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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.) ◆

IRS APPLIES PUBLIC POLICY

DOCTRINE—TWICE

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

Sacraments

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

Medication

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)] ◆

IRS CHIEF COUNSEL ADVISES

DENIALS AS TO 27-MONTH

RULE RELIEF

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).

Background

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.

Self-Declarers

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