Nonexempt Business League Corner

• DOI: http://doi.org/10.1002/npc.30744
• Published date: 01 July 2020
• Date: 01 July 2020

Bruce R. Hopkins’ NONPROFIT COUNSEL

July 2020 7

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

The club expects to receive one distribution of

credits that it would sell. The resulting income, which

will exceed the percentage limitations on nonmember

revenue, will be used by the club for its exempt pur-

poses. The IRS, relying on the percentages guideline that

excludes unusual amounts that are not derived from the

active conduct of businesses not traditionally carried on

by exempt clubs, ruled that this income from the credits

sale will not disturb the club’s exemption because it will

be a new source of income for the club and the sales

activity will be a “one-time event that is not expected

to recur” (Priv. Ltr. Rul. 202019027). The IRS reviewed

several factors it used in concluding that the activity will

not be derived from active conduct of a nontraditional

business. [15.4] ◆

PRIVATE FOUNDATION

CORNER

• A complex set of facts involving irrevocable trusts, a

will challenge, and a settlement agreement produced

nine decisions by the IRS (Priv. Ltr. Ruls. 202016002–

202016006). In one of them, the IRS ruled that an

exchange between a spouse and a charitable trust

(which is becoming subject to IRC § 4947(a)(1)) will

not be self-dealing because the spouse’s status as a

disqualified person will arise only as a result of the

transaction (Reg. § 53.4941(d)-1(a)). The spouse will

be a disqualified person with respect to the trust when

the settlement agreement is executed. [12.4(a)]

• A private foundation is being divided into several

private foundations, due to family squabbles over

foundation operations, in a classic foundation termi-

nation case (IRC § 507(b)(2)). An IRS private letter rul-

ing approving this restructuring touches many of the

Chapter 42 rules: no tax on investment income (IRC

§ 4940), no self-dealing (IRC § 4941), no jeopardizing

investments (IRC § 4944), and no taxable expenditures

(IRC § 4945) (Priv. Ltr. Rul. 202017026). As to the lat-

ter, although the transferor foundation will be paying

the legal, accounting, and other expenses relating to

the transaction, the IRS accepted the representation

that these payments will be reasonable. [12.4]

NONEXEMPT BUSINESS

LEAGUE CORNER

• A nonprofit membership organization was formed to

promote the common business interests of food truck

operators in a state. Its primary source of revenue is

a web-based scheduling service that allows “private

locations” to request food trucks. The IRS ruled that

this entity does not qualify as a tax-exempt business

league principally because it is performing particular

services for its members, serving as a convenience

and economy to its members in the operation of their

businesses (Priv. Ltr. Rul. 202015022). Also, said the

IRS, the methods this organization uses in conducting

these services illustrate that it is engaging in a business

normally carried on in a for-profit manner. [14.2(b), (c)]

• Another group of franchise owners has failed to secure

recognition of tax exemption as a business league

(Priv. Ltr. Rul. 202017028). A nonprofit corporation

advances the common business interests of these

owners by working to foster knowledge through the

sharing of timely, accurate, and relevant information;

unite the owners by providing a forum for produc-

tive communications; and promote profitability and

improve business conditions for the owners. The IRS

ruled that this organization’s activities (1) are not

directed to improvement of business conditions of a

line of business, (2) amount to particular services for

its members, (3) are services for the convenience of

its members, and (4) serve private interests. [14.2]

• A nonprofit organization was established to support

health care startup companies by helping them

develop their clinical concepts into viable business

opportunities. This organization’s goal primarily is to

provide them access to financial assistance. The IRS

rejected this entity’s effort to be recognized as an

exempt business league, on the grounds that it is

operated for the economic benefit of its members

rather than promoting the common business interests

of an industry (Priv. Ltr. Rul. 202018008). [14.2(a)] ◆

OPERATIONAL TEST

PRECLUDES EXEMPTION

• A nonprofit entity provides job training programs

for disabled individuals, with a focus on veterans.

It is helping individuals living with disabilities to

develop valuable employment skills that will enable

them to regain and maintain a level of self-suf-

ficiency. Although the IRS stated that providing

this job training is a charitable and educational

activity, it was found to be incidental in relation to

a substantial, nonexempt purpose, the description

of which is redacted, although it is portrayed as a

“commercial” one. Thus, recognition of tax-exempt

status as a charitable entity was denied (Priv. Ltr. Rul.

202015034).

• An organization has as its mission the maintenance

and sustaining of the legacy of a family name

through the “preservation of its rich, historical tra-

ditions by engaging in and promoting initiatives that

affirm its cultural, social and economic values.” This

entity organizes, promotes, and conducts a biannual

family reunion and “gala event” that draws family

and friends from around the United States, lasting