Nonprofit Organization Not Exempt Because It Is Not Club

• DOI: http://doi.org/10.1002/npc.30046
• Published date: 01 March 2015
• Date: 01 March 2015

Bruce R. Hopkins’ NONPROFIT COUNSEL

5

March 2015

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

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

include ensuring that contributions will be made to their

intended recipients.

In addition to this fundraising capacity, the organi-

zation will provide a location where organizations

can keep their donors current with photographs and

comments about its activities. This website is to be

integrated into other social networking sites in order

to utilize the power of viral marketing, helping these

organizations spread their message.

The organization will charge transaction fees in the

form of small percentages of the gift amounts, plus a

fee for each check or credit card transaction. These fees,

expected to be in the range of $7,500 to $18,000 in

each of its first two years, are intended to solely cover

the costs of operation. The organization contracted with

a for-profit company to create and maintain the web-

site. This company is owned by the nonprofit entity’s

three directors. This company will maintain all rights to

the Web technology involved.

The IRS concluded that this organization is providing

fundraising and public relations services in a commer-

cial manner (Priv. Ltr. Rul. 201452017). Its services are

provided to any public charity paying for them. The fees

involved are not substantially below costs. The organiza-

tion is not controlled by a charitable entity.

In addition, the organization was seen as operating

primarily as a conduit of business for the related for-profit

company, in violation of the private benefit doctrine. Its

activities drive business to the company, the IRS asserted.

The nonprofit organization’s operations were character-

ized as “little more than an advertising and business

development branch” of the company. For good meas-

ure, the IRS complained about its board of directors, cast

as a “small group” of “entirely related individuals.” (This

second observation is not correct; only two of the three

directors are related (by marriage).) [4.10, 20.11] ◆

PRIVATE BENEFIT DOCTRINE

DOOMS TAX EXEMPTION

FOR NONPROFIT TIME BANK

NETWORK

A nonprofit organization, formed to facilitate com-

munity-wide mutual assistance to and by members of

the community, failed in its attempt to secure recogni-

tion of tax exemption as a charitable entity because of

the extent of the private benefit accorded its member-

ship (Priv. Ltr. Rul. 201452018).

This organization described itself to the IRS as

conducting a “community self-help program” involv-

ing exchanges of “hours of service with hours of

assistance.” When an individual becomes a member

of this organization, he or she provides a list of skills

and services they are willing to provide as well as a list

of their needs. Membership is open to all adults in the

community involved.

A credit system is used to track hours of service pro-

vided. Each hour of service carries a value of one share. The

way an individual gains shares is by serving other members.

An individual served will lose one of his or her shares for

every hour of service provided. Individuals are connected by

means of a volunteer coordinator or the entity’s website.

Once a match is made, the service provider makes the

requisite arrangements with the service recipient. After

a service is provided, credits are given to the provider’s

account and deducted from the recipient’s account. The

organization stated that this “system of mutual assistance

is predicated on the goodwill of a caring community.”

The organization plans to solicit contributions to

pay for website maintenance and efforts to obtain new

members. There is no charge for these memberships.

The IRS determined that this organization does not

engage in charitable activities but rather administrative

ones, and serves the private interests of its members.

This system of mutual benefits was held to be akin to a

barter exchange. The “main beneficiaries” of this opera-

tion, the IRS wrote, “are your members rather than the

general public.” [20.11] ◆

NONPROFIT ORGANIZATION

NOT EXEMPT BECAUSE IT IS

NOT CLUB

It should not come as a surprise to see that an organi-

zation promoting a for-profit company’s firearms and

accessories by means of an online forum cannot qualify

as a tax-exempt organization, be it a social club (as

attempted) or other exempt entity. The IRS has so ruled

(Priv. Ltr. Rul. 201451030). It is the underlying rationales

that make the ruling noteworthy.

The organization has a membership, although any-

one who signs up to utilize the website qualifies as a

“member.” The site, however, is open to the public. By

means of the forum, members can obtain and exchange

information about the company and its products. Thus,

the members make contact with each other through the

posting of comments.

This organization does not have a facility where

members gather. As the ruling puts it, the entity does

“not engage in any face-to-face interaction amongst or

between members.”

The voting membership of the organization consists

only of the members of its board of directors. This

board, consisting of the founder and three others, con-

trols the day-to-day operations of the organization.