Nonexempt Business League Corner

• Date: 01 October 2017
• DOI: http://doi.org/10.1002/npc.30384
• Published date: 01 October 2017

Bruce R. Hopkins’ NONPROFIT COUNSEL

7

October 2017

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

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

charitable contributions were relied on by the IRS in finding

that the organization is operating in a commercial manner.

Another nonprofit organization was formed to provide

“intellectual and organizational infrastructure for com-

mercializing innovative products and services.” It plans to

partner with universities, research institutions, and other

nonprofit entities to identify solutions that “enhance com-

mercial and social value and accessibility.” (Whoever pre-

pared this application for recognition had never heard of

the commerciality doctrine.) The organization will charge

for its services, in accordance with a prototype consulting

agreement. This organization was denied recognition of

exemption because it will be in direct competition with

for-profit businesses, it advertises on its website, and too

much of its revenue will be derived in the form of fees

(Priv. Ltr. Rul. 201733015). [4.3(a), 4.11(d)]

Note: In the second of these rulings, the IRS observed

that “providing consulting services at cost is a commercial

operation.” Not many commercial operations last very

long charging for their services at cost. Earlier this year,

the IRS released a ruling holding that a charitable organi-

zation providing technical advice for a fee to its “clients”

was engaged in a related business (see the March 2017

issue). Consulting organizations serve clients. ◆

CASE STUDY: HOW NOT

TO FRAME A CHARITY’S

DISSOLUTION CLAUSE

A nonprofit organization has a dissolution clause stat-

ing that, in that event, its net assets will be distributed

for one or more charitable or like purposes (Priv. Ltr. Rul.

201729023), which is suitable. Elsewhere in its documents,

however, it is provided that, on dissolution, the assets will

be divided “equally among Executive Board Members and

Trustees”—a formulation clearly outside of what is permis-

sible. The organization’s assets would then be dispersed to

“like-minded” entities of these individuals’ choosing. But

that is insufficient to save the defective clause.

Matters worsen. The president or CEO of this organi-

zation is empowered to have “his portion of the assets”

deposited into a trust account for his children or grandchil-

dren for the furthering of their educational requirements.

Things actually deteriorate further. The document also

provides that, if a building or parcel of land is involved in

a dissolution, the asset or assets will be divided equally

“among those members who were directly involved with

the purchase of the asset.” Capital equipment that is not

auctioned by the organization is to be divided among board

and executive staff members. The trust account approach

for the president or CEO is also available in these settings.

A more blatant violation of the dissolution require-

ments for charitable organizations is not likely to be

found. [4.3(b)] ◆

ORGANIZATION MANAGES

TO GENERATE FOUR WAYS

TO PRECLUDE EXEMPTION AS

SOCIAL CLUB

An organization was formed as a club to enable its

members and nonmembers to shoot trap, hold events

for members and nonmembers, and educate individu-

als as to the sport of trap shooting. It holds at least two

major shooting events annually. Essentially, the purpose of

this entity’s events is to allow anyone the opportunity to

practice their trap shooting skills and compete for prizes.

The IRS ruled that this organization does not qualify for

tax exemption as a social club (Priv. Ltr. Rul. 201732035).

First, the organization was found to be engaging in busi-

ness by making its recreational facilities open to the pub-

lic, rather than conduct activities for social, recreational,

and other nonprofitable purposes. Second, its revenue

from event fees from nonmembers “far exceeds” the

permissible amount from sources outside the member-

ship. Third, the club’s activities and facility are available to

the public on a regular, recurring basis. Fourth, the income

from public sources is inuring to the benefit of its mem-

bers by being used for maintenance of the clubhouse and

event grounds. [15.1(b), 15.2]

Note: This private inurement rationale does not appear

valid, in that the club’s members, as such, are not insid-

ers with respect to the organization. ◆

NONEXEMPT BUSINESS

LEAGUE CORNER

• A software user group sought recognition of exemp-

tion as a business league. Membership in this entity

is available to any organization that is licensed to use

any version of the software system, which is commer-

cially available. The organization will operate a forum,

where 75 percent of the interaction will be about

this system, and publish a newsletter. This entity was

denied recognition of exemption on two grounds: it

is not operated to improve the conditions of one or

more lines of business and it is providing particular

services to its members (Priv. Ltr. Rul. 201731015).

• Getting off to a bad start in seeking recognition of

exemption as a business league, an organization,

in its application for recognition and on its web-

site, billed itself as a “business networking referral

group.” The entity is a group of business owners

seeking to grow their businesses through referrals.

The membership consists of one representative from

an industry or profession. The IRS, as expected,

denied recognition of exemption to this organiza-

tion on the grounds that it is not an association