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

• Date: 01 November 2020
• DOI: http://doi.org/10.1002/npc.30787
• Published date: 01 November 2020

Bruce R. Hopkins’ NONPROFIT COUNSEL

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

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] ◆

IRS RULES NO PROPERTY-

PRICE MANIPULATION IN

SELF-DEALING CASE

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