Nonexempt Business League Corner

Published date01 July 2020
Date01 July 2020
July 2020 7
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]
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]
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)]
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.
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

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