Motorsports Organization Ruled Ineligible for Exemption, Largely on Private Benefit Grounds

• Date: 01 July 2016
• DOI: http://doi.org/10.1002/npc.30213
• Published date: 01 July 2016

Bruce R. Hopkins’ NONPROFIT COUNSEL

5

July 2016

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonprofit Counsel DOI:10.1002/npc

printers and copiers, and provide the firm with “fully

functional” offices, staff lawyers, and secretarial assis-

tance. It has provided money to the firm to enable it to

relocate its offices, pay lease and website termination

fees, cover moving expenses, and pay a bar application

fee for the couple.

The IRS first ruled that this nonprofit organization

cannot qualify for recognition of exemption as a chari-

table entity on private inurement grounds (Priv. Ltr. Rul.

201620011). This basis for denial was that the “majority

of your board members have an interest in [the law firm]

with whom you have a comprehensive contract.” Of

course, that statement, taken alone, is no basis whatso-

ever for a finding of private inurement. The two board

members are said to be “profiting” from the arrange-

ment. But dealings with insiders is not a per se basis for

a conclusion that private inurement is occurring. There is

not a word in the ruling about the fees to be paid being

excessive or unreasonable.

This agreement is chock full of goodies for the mar-

ried couple and the firm. There is no explanation in the

ruling about why those items are in the contract. Some

of the elements may be explained by application of the

business judgment rule. But there seems little doubt that

element of the facts was overdone; the lawyers should

have been more judicious.

Second, the IRS applied the private benefit doctrine,

using the est of Hawaii rationale. The IRS wrote that the

“fact that you are [the firm’s] only client shows you are

operating to benefit” the firm. That statement, by itself,

is nonsense, assuming the fees are set on a fair market

value basis. But the facts gave the IRS the argument that

the two organizations are “functionally inseparable.”

The IRS said that the law firm would not be operational

without the nonprofit entity, although there is nothing

in the facts to support that conclusion.

Overall, the structure of this arrangement is a dis-

aster. These lawyers should have known better—or

secured competent legal advice. They probably should

simply have founded a public interest law firm and been

done with it. [7.16(d), 20] ◆

MOTORSPORTS

ORGANIZATION RULED

INELIGIBLE FOR EXEMPTION,

LARGELY ON PRIVATE

BENEFIT GROUNDS

The IRS ruled that a nonprofit organization promot-

ing stock car races is not eligible for tax exemption as a

charitable or educational entity or as a qualified amateur

sports organization (Priv. Ltr. Rul. 201619010).

Facts

A nonprofit corporation was formed to, in the words

of its articles of incorporation as originally filed, “benefit

racers, promoters and spectators of motorsports” in a

particular locality. The organization represented to the

IRS that it amended its articles to state that the entity

“promotes and provides amateur sporting events that

benefits [sic] the entire community in allowing amateur

racers a venue to learn and practice the sport and pro-

viding [sic] the community at large family entertainment

of watching the sport.” The IRS, however, was not pro-

vided a copy of this amendment.

Generally, this organization is a venue for stock car

drivers to participate before community audiences. It

conducts approximately 17 races annually. Drivers are

charged entry fees; spectators pay to attend. Advertising

in race programs and during race events is sold to area

businesses. Contributions are accepted in support of a

fireworks display, for which there is no charge. Other

revenue includes concession stand receipts. About 35

percent of its expenses are for prizes.

Novice racers are coached. The minimum age of partici-

pation is 13 years. Young drivers are taught sportsmanship

and mechanics of a racing vehicle, and provided training

on the track. Beginners may attend training days where

experienced drivers are available to provide assistance.

This corporation is a member of a national organiza-

tion, owned by an individual, that sanctions national

and international motorsports events. It attempts to

prepare participants to compete in these events. Overall,

in addition to these sporting and training activities, this

organization stated that it provides “affordable family

entertainment.”

Law and Analysis

The IRS was not at a loss in finding ways this organi-

zation failed to qualify for exempt status as a charitable

or educational organization.

First, this entity was said to not meet the organi-

zational test. Not surprisingly, the agency relied in this

regard on the articles of incorporation as originally filed,

not the ostensible amendment.

Second, the organization ran afoul of the private

benefit doctrine. The entity’s primary activities are provi-

sion of a facility and scheduling events for racers who

can earn substantial cash prizes. It promotes sports by

inviting individuals to learn the rules and participate in

race events. It enforces standards for the equipment to

be used and the official rules.

Third, this entity is engaged in business with the

public. It does not provide any formal or ongoing

instruction. The paying public was said to derive “some

benefit,” which was overwhelmed by the private inter-

ests being served.

Fourth, this entity was ruled to not constitute a

qualified amateur sports organization (IRC 501(j)). There