Nonprofit Pharmacy Fails to Gain Recognition of Exemption

• DOI: http://doi.org/10.1002/npc.30417
• Date: 01 January 2018
• Published date: 01 January 2018

Bruce R. Hopkins’ NONPROFIT COUNSEL

January 20186THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

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

NONPROFIT PHARMACY

FAILS TO GAIN RECOGNITION

OF EXEMPTION

A nonprofit corporation was formed to “help alleviate

the burden of poverty by rendering pharmacy services in

a charitable manner to the poor and disabled.” More-

over, it will provide pharmacy services to the “clients and

employees of nonprofit corporations.” The organization

is to become “informed regarding the medical, social

and economic problems of underprivileged, mentally

challenged and aging members of our population,” and

“promote the establishment of such other related edu-

cational, wellness and supportive social services.”

Prescription pricing of this establishment will be based

on usual and customary pricing for clients with private

insurance or Medicare. For the poor, indigent, and under-

insured population, however, prescription pricing will be

at pharmacy cost. It will serve individuals who are already

receiving services from other nonprofit organizations serv-

ing the indigent and underinsured. Any profit derived from

serving those who are insured and economically stable will

be used to support the disadvantaged population. It will

seek to defray the costs of co-pays by identifying available

funds from sources such as grant programs offered by

major pharmaceutical firms and private foundations.

The IRS was not moved. The organization was cast as

a business, selling pharmaceutical products to the public

in a manner indistinguishable from a commercial phar-

macy. The agency noted that this entity’s primary source of

revenue will be from the sales of these products, with no

significant amount of total support coming in the form of

grants and contributions. The organization was faulted for

“sell[ing] nothing at below cost.”

The organization was found to be ineligible for exemp-

tion, failing the operational test, operating for the primary pur-

pose of carrying on unrelated business, and functioning in the

same manner as a commercial pharmacy providing services

to the public (Priv. Ltr. Rul. 201743018). [4.5(a), 4.11(d)] ◆

FOUNDATION’S RETURN

OF FUNDS TO WHICH IT

WASN’T ENTITLED RULED

NOT TAXABLE EXPENDITURE

The IRS ruled that payments that may be made by a

private foundation to a trust, as to which the foundation

is the sole beneficiary, to cover trust claims and expenses

will not be taxable expenditures, because the foundation

will be returning funds to which it was not entitled in the

first instance (Priv. Ltr. Rul. 201745001).

Facts

A private foundation became the sole beneficiary of

a trust, which has A and B as co-trustees. The foundation

requested acceleration of distributions of trust assets to

it before A and B know the full extent of potential claims

against and liabilities of the trust. The trustees, facing

personal liability, are willing to accelerate distributions

to the foundation if it indemnifies them. The foundation

has agreed to refund monies to the trustees should any

claims or liabilities as to the trust materialize.

Law

A federal district court held that the return of monies

to an individual by a private foundation that the founda-

tion should not have received and was not entitled to

keep is not an “amount paid or incurred” by a founda-

tion for purposes of the rules concerning the making of

expenditures for a noncharitable purpose (IRC § 4945(d)

(5)) (Underwood v. United States (N.D. Tex. (1978)).

Analysis

The IRS, relying on Underwood, reasoned that, pur-

suant to this agreement, the return of distributions by

the foundation would be a “return of assets that [the]

[f]oundation would not have received had the final dis-

tributions not occurred until all liabilities and expenses of

the [t]rust had been administered and are assets which it

was not entitled to keep.” Thus, the IRS concluded that

any payments under this agreement would not be tax-

able expenditures. [12.4(e)] ◆

OTHER RECENT IRS PRIVATE

LETTER RULINGS

◆A nonprofit organization undertakes an annual fish-

ing tournament for members of the military services. This

is a three-day event, with a dinner, a tour of a military

installation, and the tournament. This organization’s

objective is to “match service members with experienced

boaters who possess the expertise and commitment to

help soldiers learn about fishing and guide them through

a positive experience on the water.” The organization

was ruled to be providing substantial social and recre-

ational activities, rather than engaging in any charitable

undertakings such as promotion of patriotism, and thus

not qualified for exemption (Priv. Ltr. Rul. 201743019).

[4.5(a), 7.16(d)]

◆A nonprofit organization is planning on operating a

mobile home park for the benefit of its members, who

will be park residents. The IRS ruled that this organiza-

tion is not eligible for exemption as a charitable entity, in

part because the park is being acquired to keep lot rents

low, which constitutes unwarranted private benefit to the

membership (Priv. Ltr. Rul. 201744020). The organization

argued that the residents are low-income individuals, using