Other Recent IRS Private Letter Rulings

• Date: 01 May 2017
• DOI: http://doi.org/10.1002/npc.30318
• Published date: 01 May 2017

Bruce R. Hopkins’ NONPROFIT COUNSEL

5

May 2017

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

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

benefits and related administrative services. This entity

was established by means of an agreement among par-

ticipating school districts for the purpose of purchasing

and providing health and medical insurance coverage for

the parties through a plan designed to contain the cost

of the insurance.

The plan has become self-insured, providing health-

related benefits through an administrative-services-only

arrangement. Any public school district, integrated unit,

or vocational-technical school established by the law of

a governmental unit and that provides free public educa-

tion is eligible to become a participant.

Law and Analysis

The IRS ruled that this entity cannot qualify as a tax-

exempt social welfare organization because it restricts

its benefits to employees of member school districts and

thus is primarily serving a “private group” rather than a

community. The IRS also ruled that this exemption was

precluded because this entity’s net earnings were inuring

to the benefit of its member school district’s employees.

But the IRS quickly added that most of these par-

ticipants are public school districts, with the majority of

the entity’s trustees being chief school administrators.

The local school districts are public members with taxing

authority, receiving funding from, and being overseen

by, the state.

Provision of these health and welfare benefits was

held to be an essential governmental function (within

the meaning of IRC § 115(1)). Consequently, the income

of this entity was ruled to be excludable from gross

income under the federal tax law. Further, this entity was

held not required to file annual information returns (IRC

§ 6012(a)(4)). [13.1, 19.22(a)]

Commentary: This ruling is another example of an

entity securing recognition of tax exemption as a quasi-

governmental unit rather than as a conventional exempt

(IRC § 501(c)) organization, and be better off with that

classification. Also, the IRS was incorrect in finding that

this organization was violating the private inurement

doctrine, in that few of the employee beneficiaries are

insiders with respect to the entity. ◆

OTHER RECENT IRS PRIVATE

LETTER RULINGS

• A nonprofit organization was formed to provide

publishing and marketing services for authors. In

its application for recognition of tax exemption, it

stated that it will “provide authors with the latest in

publishing technology and customized marketing for

their publications.” This organization also publishes

books, primarily for religious organizations. The

IRS declined to recognize exemption of this entity,

stating that it was “set up as a commercial print-

ing operation,” in that more than an insubstantial

part of its activities “consists of providing services

for fees comparable to for-profit entities,” includ-

ing payment of royalties to authors (Priv. Ltr. Rul.

201710033). This organization was said to “exhibit

several factors indicative of commercial operations,”

including “regular and ongoing book sales, compe-

tition with other publishers, common retail pricing

structures, marketing and advertising, and reliance

on sales and fees versus contributions.” [4.11]

• The IRS declined to recognize exemption as a chari-

table organization in the case of an applicant entity

that failed to provide sufficient information during

the application process (Priv. Ltr. Rul. 201710036).

The agency took note of the fact that this organi-

zation has a sole director. This individual is to be

compensated in this capacity. The IRS wrote that

this director has “sole oversight and authority” over

the organization, “creating the potential for abuse.”

The agency added that “in factual situations where

there is evident potential for abuse of the exemp-

tion provision, a petitioner must openly disclose all

facts bearing on the operation and finances of its

organization.” Here, as noted, there was inadequate

disclosure. [5.7(c), 20.12(a), 26.1(a)(iii)]

• In this ruling, the criteria for unusual grants were

stretched, albeit for a good outcome (Priv. Ltr. Rul.

201711014). The grantor was the founder of the

grantee; the grantor controlled the grantee (by an

overlapping directorate). The grantor is a tax-exempt

cemetery association (an IRC § 501(c)(13) entity).

The IRS rationalized that the grant was part of the

association’s “efforts to reorganize itself and sepa-

rate out charitable portions of its activities from its

primary cemetery function,” although it is not clear

what that has to do with anything. The transfer is

of real estate (not cash), which was rationalized as

furthering the grantee’s exempt purposes. The board

majority representing the association were said

(without any stated evidence) to be “representative

of the community rather than of any selfish inter-

est” in the association and “may be expected to act

in [the grantee’s] best interests and not be unduly

influenced by their affiliation” with the association.

Governance geeks take note. [12.3(b)(i), (iv)] ◆

NEW UBI DATA PUBLISHED

The IRS, writing in its Winter 2017 Statistics of Income

Bulletin, published on February 28, revealed that for tax

year 2012 tax-exempt organizations reported $12 billion

in gross unrelated business income. This is a 6-percent

increase from 2011. Deductions totaled $11.7 billion.

Total returns filed: 46,168.