IRS Declines to Apply EBT Rules, Revokes Exemptions

• Published date: 01 March 2020
• DOI: http://doi.org/10.1002/npc.30699
• Date: 01 March 2020

Bruce R. Hopkins’ NONPROFIT COUNSEL

March 2020 5

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

IRS MISANALYZES

FUNDRAISING CHARITY CASE

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] ◆

IRS DECLINES TO APPLY EBT

RULES, REVOKES EXEMPTIONS

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] ◆

OTHER RECENT IRS PRIVATE

LETTER RULINGS

◆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