IRS Declines to Apply EBT Rules, Revokes Exemptions

Published date01 March 2020
Date01 March 2020
March 2020 5
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
A nonprofit corporation was formed for charitable
purposes, including the making of distributions of funds
to other charitable organizations. In its application for
recognition of exemption, this entity stated that it “plans to
hold convention type rallies where motorcycle enthusiasts
come together to share their common interests” and that
these events are “designed to raise money for different
charities” that have been recognized as such by the IRS.
The annual information return analyzed by the IRS
states that this organization’s most significant activities
include a “week-long experience catering to individuals
whom [sic] are active in riding motorcycles activities for
these individual[s] including rides, vendors, entertain-
ment, food, drinking and camping [sic].” The organiza-
tion’s mission was stated as being to “raise funds [for
charity] through a series of various activities during . . .
Bike Week.” The percentage of funds granted to chari-
ties during this reporting period is redacted.
The IRS revoked the tax-exempt status of this
organization, on the grounds that the activities conducted
by the entity are “primarily social in nature” (Priv. Ltr. Rul.
202001018). Seizing on an answer on the Form 990,
the IRS concluded that the “principle [sic] purpose” of
the entity “is to provide an experience for motorcycle
enthusiasts.” The IRS wrote that the “funds donated to
charitable organizations are merely donations.” First, the
funds are grants; second, that sentence makes no sense.
Then, the IRS concluded that the organization’s program
service activity of raising funds and supporting charities
is a “minor and insignificant matter.”
The IRS has improperly analyzed this aspect of this
case. The law is clear that an organization with the sole
functions of raising money for and making grants to
charities is itself a charitable entity. (The IRS wrote that
this organization “does not serve a broad charitable
class”; that rule is inapplicable in this context.) The
law is also clear that the fundraising activity may be a
social activity. This part of the case should have been
resolved by application of the commensurate test. If the
grantmaking is truly “minor and insignificant,” the test is
failed. But that fact is unclear because the ratio of gross
receipts to grants is redacted. [4.7, 7.14]
An organization established to operate a ministry is
funded solely by contributions. The minister has sole
control of the entity’s checking account and debit card. A
redacted amount of expenses was used for this individual’s
personal use. The IRS revoked the entity’s tax exemption,
on the grounds of private inurement (Priv. Ltr. Rul.
202001022). The IRS asserted that there was no intent by
the organization to treat any of these economic benefits
as compensation, so that this use of entity funds entailed
automatic excess benefit transactions. The tax regulations
concerning the interplay of the private inurement doctrine
and the excess benefit transaction rules (Reg. § 1.501(c)
(3)-1(f)(2)(ii)) were applied, with the IRS concluding that
consideration of all five of the factors weighs in favor of
revocation. The private inurement involved in this case was
ruled to be “significant,” “routine,” and “continuous.”
An organization formed to provide housing,
employment, and other services to veterans was
recognized by the IRS as a tax-exempt, charitable entity.
This entity hired veterans to solicit cash contributions
for it, allowing them to retain a (redacted) percentage
of the funds as payment for their services. Forms W-2
or 1099 were not issued; no payments were made
for employment tax purposes. The IRS classified these
payment arrangements as automatic excess benefit
transactions (without any discussion as to whether any
of the payees were disqualified persons), yet concluded
that the “skimming” of the “bucket contributions” was
so “significant,” “multiple,” and “repeated” (applying
the above regulations) that the tax exemption should
be revoked on private inurement and private benefit
grounds (Priv. Ltr. Rul. 202001023). [21.16]
The IRS issued a ruling finding that a proposed grant
to a public charity constitutes an unusual grant (Priv. Ltr.
Rul. 201952009). All the requisite criteria for this type of
grant were held to be present (Reg. § 1.170A-9(f)(6)(ii)),
including the facts that the grant will be made in cash,
the grantee has a long history of carrying on exempt
programs and public solicitation, and the grantee has a
representative governing body (Reg. § 1.509(a)-3(c)(4)).
The only striking aspect of the facts in this case is that
the grant request was made by a third party, without the
private foundation’s knowledge. [12.3(b)(i), (iv)]
Estates and trusts are allowed a charitable deduction
for payments for charitable purposes (IRC § 642(c)).
The trustees of a trust caused it to make charitable gifts
during a tax year. They intended to have the contributions
treated as though made in the prior tax year, pursuant to
an election (Reg. § 1.642(c)-1(b)(1)). Due to inadvertence,
however, the trust’s tax advisor failed to timely file the
trust’s Form 1041, the form on which the election is
made, for the second year. The IRS has the authority to
grant a reasonable extension of time within which to
make an election of this nature (Reg. § 301.9100-1(c)).
The trustees requested that extension in this case; the

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