IRS Rules No Property‐Price Manipulation in Self‐Dealing Case

Date01 November 2020
Published date01 November 2020
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
in application.” The new rules, it is said, would “impress
on them a rigid and controlling hierarchical view of polity
and structure which they reject on theological grounds, and
thus violate rights protected” under the Religious Freedom
Restoration Act and the First Amendment.
One of the elements of the proposal that is roundly
attacked is the uniform governing instrument require-
ment. First noted is the “overwhelming amount of
work” inherent in the proposed requirement. More
important, from a law standpoint, is the fact that the
proposal is “theologically untenable” for denominations
that have “chosen respective ecclesiastical structures
and relationships that best express their beliefs about
where authority resides and how it is exercised, and how
and by whom ultimate decisions about key theological
issues are made.” The proposal “would introduce new
and unprecedented levels of interference with religious
denominations’ ability to express their own polity by
attempting to dictate requirements on the corporate
structures of religious denominations based solely on
their source of documented tax-exempt status.”
Perhaps more significantly, this submission makes
the obvious point that, for central organizations with
a substantial number of subordinates (e.g., from 5,000
to more than 30,000), the option in the proposal as to
control is “unattainable.” It is said that “it would not
be possible, or even good governance practice, to have
significant overlap between the central and subordinate
organizations’ governance or for the central organiza-
tion to be adequately informed to appoint governing
bodies in each of the subordinate organizations.” (This
submission does not develop this point as well as it
could, because this definition of control would defy all
known concepts of fiduciary responsibility — no one
individual could possibly meaningfully simultaneously
serve on that many boards or office positions.) The sub-
mission does note that meeting this requirement would
“devolve to a rubber-stamp process.” More significantly,
it is said that it would lead to an “active process that
unconstitutionally interfered where a church had cho-
sen a polity of self-governing and autonomous local
churches and religious organizations.”
The submission observes that existing law “has
afforded church denominations access to the group ruling
process in a way that does not intrude on ecclesiastical
determinations.” Under the proposed rules, however,
“those ecclesiastical relationships, particularly in congre-
gational denominations, would be clearly at odds with the
requirements for compliance with the group exemption
program.” As to the organizations filing the comments,
their affiliated organizations “are not required to deliver
granular information on their finances and activities” to
the central organizations. “In many cases,” the comments
state, the “foundational beliefs of the denomination not
only do not support the authority of the central organi-
zation to demand such details, but outright prohibit them
from imposing such requirements on the autonomous and
self-governing entities affiliated with the faith community.”
Aside from the unworkability of the proposed rules in
general, this commentary attacks the proposal on consti-
tutional law grounds. As case law makes clear, “how a
denomination chooses to organize and govern itself is a
matter of religious doctrine.” The submission states that
“what the IRS proposes violates rights assured to the
commenters under the Religious Freedom Restoration
Act.” It asserts that the IRS is attempting to “achieve
greater administrative consistency and convenience for
itself, at the expense of the religious community.”
Aside from the RFRA, it is said, the “First Amendment
would bar the IRS from effectively dictating polity and struc-
ture matters inside a denomination.” The submission states
that the IRS “cannot close the group exemption process to
all churches except those able to ecclesiologically impose
specific civil forms on subordinates,” inasmuch as that
approach “would operate as distinct preference for the
most rigid kind of hierarchy in violation of the First Amend-
ment.” “In sum,” the submission states, “what the IRS
proposes is a set of new norms that would require these
faith communities to exercise oversight and supervision of
religious entities that, unlike secular charities, are already
exempt by law in ways that are anathema to them.”
The submission concludes that the proposed changes
“threaten [religious subordinates’] ability to continue partic-
ipating in the group exemption process, immensely increase
the complexity of compliance where subordinates are closely
aligned by their shared faith, and present a significant risk of
forcing them to choose between their religious beliefs as
expressed in their organizational structure and compliance
with a tax [law] administration program.” [26.11]
The IRS ruled that a purchase of artwork by one of a
private foundation’s directors from an artist whose work
is on public display as the result of funding by a grantee
of the foundation is not self-dealing as a transfer of
foundation assets for the benefit of a disqualified per-
son (IRC § 4941(d)(1)(E)) (Priv. Ltr. Rul. 202035002). This
ruling is a rare application of the property-price manipu-
lation rule (Reg. § 53. 4941(d)-2(f)(1)).
A private foundation proposed a program whereby
it will make grants to a foreign charity (FC), which will
use the funds to make grants to an arts organization in
the foreign country. Grants from FC to these secondary
grantees will fund purchases of works of art from collab-
orating artists for public display by these grantees. FC is
a national arts organization. The secondary grantees are
nonprofit organizations that will adhere to the private

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