IRS Issues Guidance as to Charitable Giving of Virtual Currency

• Date: 01 April 2020
• Published date: 01 April 2020
• DOI: http://doi.org/10.1002/npc.30711

Bruce R. Hopkins’ NONPROFIT COUNSEL

4 April 2020 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

Subsidiary, the IRS observed that it “provides no guard-

rails or limitations with respect to services that might be

inconsistent with [the Charity’s] exempt purpose.” The IRS

added that “[n]or does the Agreement demonstrate how

the employees of [the Charity] providing services to Sub-

sidiary and the group members under the Agreement will

in fact be providing such services as employees of Subsid-

iary under the direction and control of Subsidiary, when

the majority of Subsidiary’s board of directors and all the

employees of Subsidiary are employees of [the Charity]

and there is no identified separation of roles in connec-

tion with directing and controlling their performance of

services.” Thus, the IRS concluded that “services provided

under the Agreement to carry out the activities of the PAC

are provided by [the Charity’s] employees under an agree-

ment for the [Charity] to provide such services.”

The IRS stated that even if the Subsidiary and the

PAC fully reimburse the Charity for its costs (direct and

indirect) in preparing the specialized mailing list and

performing the other services provided to the PAC, the

Charity would still be engaging in nonexempt activities.

That is, these activities are still political campaign activ-

ities even though the Charity is fully reimbursed for its

costs (Rev. Rul. 2007-41, situation 4).

The IRS observed that although the Charity repre-

sented that the Subsidiary will contract with a third party

to assist in fundraising, it will be the directors, officers,

and/or common law employees of the Subsidiary who

will make the solicitations. The IRS, not surprisingly,

placed great emphasis on the fact that neither the Sub-

sidiary nor the PAC has its own employees, office space,

or equipment separate from the Charity. Thus, it will be

the Charity’s employees “who, pursuant to the Agree-

ment, would solicit contributions to PAC from other

employees of [the Charity].” The “direct performance”

of these political campaign activities by the Charity’s

employees, at the Charity’s offices during regular busi-

ness hours, “makes these activities inseparable from [the

Charity’s] own operations.”

Thus, the IRS concluded that the operation of the

PAC, including the Charity’s provision of services and

other resources to the Subsidiary and the PAC pursuant

to the Agreement, and the creation and provision of a

specialized mailing list, will constitute participation or

intervention in a political campaign by the Charity.

The IRS also noted that the services provided by the

Charity in accordance with the Agreement are performed

by the Charity’s employees but these services “further the

operations of” the Subsidiary and the PAC and do not fur-

ther charitable purposes. These activities provide a “direct

benefit” to the Subsidiary and the PAC. The IRS thus

concluded that the Charity will be “providing specialized

services for the benefit of Subsidiary and PAC, which serve

private rather than public interests.” [23.2, 30.2, 20.13(a)]

Commentary: This is more than a political campaign

activities ruling. It is an attribution-of-functions ruling.

The lesson is that there cannot be a credible separation

of activities between a charitable organization and other

related entities where the latter lack their own employees,

office space, equipment, and the like. It is not enough to

simply “represent” to the IRS that a charity’s employees

are not acting on its behalf in certain circumstances. The

IRS looks for protective “guardrails” in this context and

could not find any in this tripartite close entanglement.

An illustration of how to avoid the attribution problem

in this context appears in Priv. Ltr. Rul. 201127013 (sum-

marized in the September 2011 issue). ◆

IRS ISSUES GUIDANCE AS

TO CHARITABLE GIVING OF

VIRTUAL CURRENCY

The IRS has updated its website guidance, in Q-and-A

format, as to the applicability of the federal tax law to

virtual currency transactions. Added were two answers

concerning the gift substantiation and appraisal, and

charity reporting, requirements.

General Principles

The federal tax law is developing as to its application

to virtual currency. The IRS defines virtual currency as

a “digital representation of value that functions as a

medium of exchange, a unit of account, and/or a store

of value” (Notice 2014-21). In some environments, this

currency operates in the same manner as “real” currency

— that is, the “coin and paper money of the United

States or of any other country that is designated as legal

tender, circulates, and is customarily used and accepted

as a medium of exchange in the country of issuance.”

Virtual currency that has an equivalent value in real

currency, or that acts as a substitute for real currency,

is “convertible” virtual currency, with Bitcoin being an

example. Bitcoin can be, in the words of the IRS, “dig-

itally traded between users and can be purchased for,

or exchanged into, U.S. dollars, Euros, and other real or

virtual currency.”

General Tax Law Concepts

The IRS is of the view that, for federal tax purposes,

virtual currency is to be treated as property. This currency

“does not have legal tender status in any jurisdiction.”

Thus, “[g]eneral tax principles applicable to property

transactions apply to transactions using virtual currency.”

For example, (1) a person who receives virtual cur-

rency as payment for goods or services must, in com-

puting gross income, include the fair market value of

the virtual currency, measured in US dollars, as of the

date the virtual currency was received; (2) a person has

gain or loss, either ordinary or capital, on an exchange

of virtual currency for other property; (3) virtual currency