IRS Issues Guidance as to Charitable Giving of Virtual Currency

Date01 April 2020
Published date01 April 2020
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).
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

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