Nonprofit Organizations and the Concept of Ownership

• Date: 01 December 2020
• DOI: http://doi.org/10.1002/npc.30802
• Published date: 01 December 2020

Bruce R. Hopkins’ NONPROFIT COUNSEL

December 2020 7

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

beneficiaries to contribute to his or her ABLE account the

lesser of the beneficiary’s compensation for the year or an

amount equal to the poverty line for a one-person house-

hold for the preceding year. Tax-free rollovers from 529

college savings plans to ABLE accounts are permitted. Rules

are provided concerning the return of excess contributions.

Designated beneficiaries of an ABLE account are not

allowed to direct the investment of any contributions

to the account more often than twice annually (IRC §

529A(b)(4)). The regulations clarify that successor bene-

ficiaries have a separate twice-annually investment rule.

Certain uses of checking accounts and debit cards do

not violate the rule that interests in a program may not

be pledged as security for a loan (IRC § 529A(b)(5)).

The regulations address the matter of qualified disability

expenses (IRC § 529A(e)(5)). They retain what the preamble

terms the “broad, but not unlimited” definition of these

expenses in the proposed regulations. These expenses

include those that are for the benefit of the beneficiary

in improving his or her health, independence, or quality

of life. That is, expenses for education, housing, trans-

portation, employment training and support, assistive

technology and personal support services, health pre-

vention and wellness, financial management and admin-

istrative services, legal fees, expenses for oversight and

monitoring, funeral expenses, and other expenses that

may be identified from time to time in future guidance.

The regulations amplify the law that, if distributions do

not exceed the designated beneficiary’s qualified disability

expenses for the year, no amount is included in the bene-

ficiary’s gross income (IRC § 529A(c)(1)). Also addressed

are the tax consequences of a change of beneficiary (IRC

§ 529A(c)(1)(C)). The regulations detail the recordkeep-

ing and reporting requirements (IRC § 529A(d)).

The regulatory framework encompasses definitions

(Reg. § 1.529A-1); qualified ABLE programs (Reg. §

1.529A-2); tax treatment law (Reg. § 1.529A-3); gift,

estate, and generation-skipping transfer tax law (Reg. §

1.529A-4); reporting of the establishment of and contri-

butions to ABLE accounts (Reg. § 1.529A-5); reporting

of distributions from and termination of ABLE accounts

(Reg. § 1.529A-6); electronic furnishing of statements

to designated beneficiaries and contributors (Reg. §

1.529A-7); and applicability dates and transition relief

(Reg. § 1.529A-8). [19.20] ◆

NONPROFIT ORGANIZATIONS

AND THE CONCEPT OF

OWNERSHIP

An individual desiring to engage in certain activities

appropriate for a nonprofit entity formed, with advice of

legal counsel, a nonprofit corporation. Matters did not go

well with this entity, programmatically or financially. This

individual, who was the corporation’s incorporator and

president, and a director, filed a retroactive election for S

corporation status for the entity as of the date of incorpo-

ration. This was done in an effort to enable him to report

passthrough operating losses on his personal income tax

returns. To this end, he claimed that he held an ownership

interest in the organization equivalent to that of a share-

holder. The IRS disagreed, disallowing the passthrough

losses. The US Tax Court, by decision dated September

17, upheld the IRS’s position (Deckard v. Commissioner).

The court observed that this individual was not a

shareholder of record; the corporation, under state law

and its articles of incorporation, was not authorized to

issue stock. These facts were not in dispute; the indi-

vidual nonetheless contended that he held “exclusive

beneficial ownership” of the corporation. Rejecting this

argument, the court embarked on an analysis of the

concept of ownership of a nonprofit corporation.

The court stated that “[n]onprofit corporations are not

generally considered to have owners.” In support of this

view, the court referenced a state court opinion holding

that “[n]on-profit corporations do not have owners,” add-

ing that they “do not have shareholders or any other way

for third parties (whether individuals or entities) to assert

… [an] ‘ownership’ role” (Farrow v. Saint Francis Medical

Center (Sup. Ct. Mo. 2013)). The court wrote that the

absence of owners derives from the fact that these corpo-

rations are “prohibited from distributing profits to insiders

who are in positions to exercise control, such as members,

officers, or directors.” Consequently, the court wrote,

“there is no interest in a nonprofit corporation equiva-

lent to that of a stockholder in a for-profit corporation

who stands to profit from the success of the enterprise.”

This opinion thus concludes that, in light of this pro-

scription on private inurement, “treating [this individual]

as a shareholder of [the corporation] would be funda-

mentally incompatible with the purpose and operation

of subchapter S, which generally taxes an S corporation’s

income currently at the shareholder level.” [1.1(a)]

Commentary: This opinion is surely correct. It fails, how-

ever, to recognize that some states’ law allows nonprofit

corporations, including charitable ones, to issue stock. ◆

OTHER RECENT IRS PRIVATE

LETTER RULINGS

• A tax-exempt voluntary employees’ beneficiary associ-

ation currently provides group term life insurance to its

members. It proposes to begin offering its members

group whole life insurance, by becoming the holder

of a group insurance contract issued by an insurance

carrier. This VEBA only receives contributions from its

members; it does not receive employer contributions.

The members will pay the premiums for this insur-

ance with their own funds on an after-tax basis. The