Nonexempt Business League Corner

• Published date: 01 January 2020
• DOI: http://doi.org/10.1002/npc.30676
• Date: 01 January 2020

Bruce R. Hopkins’ NONPROFIT COUNSEL

6 January 2020 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

PRIVATE BENEFIT DOCTRINE

CORNER

• A nonprofit organization sought recognition of

exemption as a charitable and educational entity, on

the basis of the purpose of owning and maintaining

a “historically significant” building to be operated

for library and educational purposes. This entity has

a membership of several hundred individuals, each

of whom own an “equal share” in the organization.

Members have the right to the revenues generated

by the activities conducted by the organization.

Needless to say, tax exemption was not forthcoming

here, on private benefit grounds, in that the orga-

nization’s activities are “directed to the support and

promotion of the economic interests” of its members

(Priv. Ltr. Rul. 201944015).

• An organization that purported to be a sponsoring

organization maintaining donor-advised funds had its

tax exemption revoked, on the grounds that nonchari-

table purposes are being served and private interests

are being benefited (Priv. Ltr. Rul. 201944017). The

gifts involved are of limited liability company interests.

The IRS determined that the activities taking place

amount to situations where shareholders in S corpo-

rations attempt to transfer the incidence of taxation

on corporation income by purportedly contributing S

corporation voting stock to a charitable organization,

while retaining the economic benefits associated with

the stock. This type of transaction was held by the

IRS to be substantially similar to the S corporation tax

shelter scheme identified by the IRS in Notice 2004-30

(summarized in the June 2004 issue) and thus a listed

transaction. The exemption was revoked retroactively

to the year in which the organization became a par-

ticipant in this abusive tax-avoidance scheme.

• A nonprofit membership organization of school

sports officials has as its primary activity contract-

ing on behalf of its members with local schools in a

state to provide them with qualified sports officials

for sports such as football, basketball, volleyball, and

softball. This entity trains its members and assigns

them to officiate games. It collects payments from

the schools and distributes them to its member offi-

cials for their services. The organization also main-

tains and promotes high standards of officiating. Not

surprisingly, the IRS determined that this entity is ineli-

gible for recognition as an exempt charitable and edu-

cational organization on the grounds it is operating

in a commercial manner (charging fees that are not

substantially below cost) and for the private interests

of its members (Priv. Ltr. Rul. 201945029). (Recently,

there has been a spate of similar rulings, denying rec-

ognition of exemption to organizations like this one

as exempt business leagues.) [20.13(a)] ◆

NONEXEMPT BUSINESS

LEAGUE CORNER

• A membership organization attempted to secure

recognition of tax exemption as a business league. Its

function is to hold monthly meetings to hear early-

stage companies “pitch their product or service” for

the purpose of offering investment opportunities

for its members. Benefits of membership include

“increased deal flow of top emerging companies

across a broad range of industries” and “improved

deal terms through collective deal screening.” Not-

ing that the tax regulations provide that a “stock or

commodity exchange” cannot be an exempt busi-

ness league (Reg. § 1.501(c)(6)-1), the IRS declined

to recognize exemption in this case, on the grounds

that the organization is performing particular services

for the entrepreneurs involved and for its members

(Priv. Ltr. Rul. 201944014). This ruling illustrates the

distinction between an organization providing par-

ticular services to its membership and outside the

membership. [14.2(c)]

• Another networking organization has been denied

recognition of tax exemption as a business league

(Priv. Ltr. Rul. 201945028). This entity has the goal of

building long-term relationships with “like-minded

business people.” As is the case with its counter-

parts, the organization’s membership is confined to

professionals, business owners, and similar decision-

makers. Only one member is permitted from each

designated business category. As it should, the IRS

ruled that this group is not entitled to exemption

because improvement of business conditions in a line

of business is not being furthered, in that its purpose

is to further the “private business interests” of its

members. [14.2(a)] ◆

OTHER RECENT IRS PRIVATE

LETTER RULINGS

• A nonprofit organization owns the intellectual prop-

erty rights to items of software. The software

will “facilitate creative engagement of people with

diverse cultures, ideologies, experiences and exper-

tise in decision-making for the benefit of their

communities." This software will be made available

to the public in commercial and noncommercial

versions. The organization did not allocate its time

and resources as between the two versions, but that

made no difference to the IRS, which ruled that nei-

ther version accomplishes charitable purposes (Priv.

Ltr. Rul. 201944016). The agency wrote that the

“provision of free services to other organizations,

whether for profit, exempt or governmental, is not