Nonexempt Business League Corner

• Published date: 01 October 2019
• Date: 01 October 2019
• DOI: http://doi.org/10.1002/npc.30648

Bruce R. Hopkins’ NONPROFIT COUNSEL

6 October 2019 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

charitable deduction (IRC § 2055) was allowed. Thus,

the IRS ruled, the final payment to the remainder interest

beneficiaries will not be considered a termination of the

trust’s private foundation status. Without the requisite

termination (IRC § 507(a)), the IRS ruled, a termination

tax will not apply to the trust. [16] ◆

FUNDRAISING CHARITY LOSES

EXEMPTION BECAUSE OF

CORPORATE SPONSORSHIP

PROGRAM

An individual formed a for-profit company specializ-

ing in the sale of replacement windows and other home-

improvement services to residential customers. The

company initially largely promoted its business by means

of telemarketing. The ability to market in that fashion

dwindled when the National Do Not Call Registry program

was implemented. This individual thus formed a chari-

table entity (not subject to the program’s restrictions)

for the purpose of conducting a “corporate sponsorship

program,” which provides telemarketing services for

businesses (including his). The IRS recognized the orga-

nization’s exemption, and then subsequently revoked it.

Pursuant to this program, a participating business is

obligated to make a charitable contribution to the char-

ity only when a potential customer agrees to an in-home

product demonstration. The US Tax Court concluded

that the program, “by design and in effect, permits for-

profit businesses (such as [the one in this case]) to invoke

[the charity’s] name as part of a telemarketing pitch

intended, first and foremost, to generate sales leads and

revenues.” The “real purpose” of the calls, wrote the

court, is “business promotion.”

The Tax Court upheld revocation of this exemption,

stating that “[g]enerating sales leads in support of a

for-profit enterprise” is not a charitable purpose (Giv-

ing Hearts, Inc. v. Commissioner (decision dated July

29)). The court found violation of the operational test,

on the grounds that more than an insubstantial part of

the entity’s activities is not in furtherance of an exempt

purpose. [4.5(a)] ◆

Commentary: This opinion could make sense if the

court were writing in a vacuum. It was not, however,

as the law concerning charitable sales promotions,

commercial co-ventures, and corporate sponsorship

programs (the latter the subject of IRC § 513(i)) attest. In

a charitable sales promotion/commercial co-venture, it is

always the case that the for-profit entity involved is not

obligated to make a contribution to the charity involved

until there is a purchase from the company. The court

made a major point about this, as if the practice is wrong

(it’s not). It is also always the case that, in connection

with these programs and corporate sponsorship pro-

grams under the federal tax law, there is an element of

“business promotion” involved. Indeed, as to this matter

of not engaging in exempt functions, fundraising of any

type is rarely a charitable undertaking. Engaging in fun-

draising, including charitable sales promotions, is not a

violation of the operational test.

NONEXEMPT BUSINESS

LEAGUE CORNER

◆Here we go again. A nonprofit membership corpora-

tion was established to “assist in the growth of small

and medium sized businesses.” The sole qualification for

membership in this entity is “being a decision maker for

a business.” Only one member of each business or pro-

fession is permitted to be a member. This entity advised

the IRS that its “common business interest is being a col-

lection of independent business owners networking with

one another.” Not surprisingly, the IRS ruled that this

business referral group does not qualify for tax exemp-

tion as a business league because it does not promote a

line of business (Priv. Ltr. Rul. 201931009). [14.2(a)]

◆And, again, here we go again. A nonprofit organi-

zation was formed to recruit and encourage an “ade-

quate membership of outstanding men and women

to serve as well-trained officials for the benefit of the

school systems and youth” in its area. Translation: It

is an association of individuals providing officiating

services for middle and high school volleyball games.

It also provides employment opportunities for its mem-

bers. Recognition of tax exemption for this organization

was denied, primarily because the entity is provid-

ing particular services to its members (Priv. Ltr. Rul.

201931010). (As the next case illustrates, these facts

also give rise to the provision of unwarranted private

benefit.) [14.2(c)(i), (ii)]

◆A nonprofit organization was created to operate a

network of therapists in a particular field for “one-stop

shopping, providing better care coordination and qual-

ity improvements for [its] members, reducing costs for

members, creating a network large enough to manage

population health, and negotiating rates with a larger

market share due to the collaboration of the individual

practices.” The IRS did not recognize this organization

as an exempt business league inasmuch as it is provid-

ing its members with “bargaining power and acting as

a bargaining agent to negotiate for better terms and

conditions of doing business with vendors, suppliers,

and service providers, with whom [its] members do busi-

ness.” These activities were ruled to generate unwar-

ranted private benefit (Priv. Ltr. Rul. 201931013). (In

cases like the two immediately preceding ones, the IRS

almost always also rules that the organization is not serv-

ing a line of business.) [14.2(d-1) (2020 supp.)]