Other Recent IRS Private Letter Rulings

Date01 December 2020
Published date01 December 2020
December 2020 7
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]
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.
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

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