Other Recent IRS Private Letter Rulings

• Published date: 01 September 2019
• Date: 01 September 2019
• DOI: http://doi.org/10.1002/npc.30638

Bruce R. Hopkins’ NONPROFIT COUNSEL

6 September 2019 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

such matters.” (The complaint actually quotes Fidelity

Charitable’s policy guidelines that state that contributed

stock will be liquidated “at the earliest date possible.”)

Another defense recites that “substantial disclosure”

was made “of all material facts and circumstances, includ-

ing in the donor application, contribution form and letter

of intent, program circular and/or other agreements and

account documents.” Still another affirmative defense is

that the “Internal Revenue Code and/or Internal Revenue

Service Regulations prohibit or foreclose the recovery

Plaintiffs seek.” (The basis for this defense is not clear.)

Complaint

The complaint in this case is rather unusual. It goes

on for pages about commercial donor-advised funds

and private foundations, competition among sponsor-

ing organizations, and treatment of gifts of “complex

assets.” (Fidelity Charitable pointed out that publicly

traded stock is not a complex asset.) It is florid in its

characterizations, referencing “false promises,” “egre-

gious” conduct, “stonewalling,” “sweet spot,” “outra-

geous mishandling” of the contribution, “big fish” (i.e.,

wealthy individuals), “outrageous actions,” and “incom-

petence.” This complaint must be one of the very few to

employ the term “gobsmacking.” It even recites an old

joke (“liquidating” stock does not mean tossing stock

certificates in the ocean).

The complaint contains odd statements. It opens

with the observation that “[p]rivate charitable giving is

critically important to funding public and social goods

in the United States.” Goods? It advises the court that

donor-advised funds “fill a gap in the otherwise stark

landscape of philanthropic vehicles.” Are DAFs really

that colorful? Some recitations are just wrong, such as

the one stating that gifts of appreciated stock to private

foundations are deductible only to the extent of basis.

The complaint charges that Fidelity Charitable “acted,

at best, with egregious incompetence in liquidating the

… shares,” adding that, “[a]t worst, its outrageous con-

duct was motivated by improper self-interest – the desire

to get as much money as possible under management by

year’s end, no matter the cost to the Fairbairns.”

The complaint states that “it is beyond likely that

Fidelity Charitable acted based on improper, self-inter-

ested motivations” and “Fidelity Charitable knew when

it made these promises that it had no intention of keep-

ing them.” [11.8] ◆

Commentary: This is not really a donor-advised fund

case. Essentially, it involves a breach-of-contract claim.

This case (if not settled) will turn more on its facts, rather

than law. The documents will probably favor Fidelity

Charitable. Did Fidelity Charitable’s representative really

make the four promises? The Fairbairns say he did;

Fidelity Charitable says he didn’t. Can these promises (if

made) override the written policies? Usually, agreements

state they can be amended only by a writing.

PROGRESS! IRS APPLIES

UNRELATED BUSINESS

LAW RATHER THAN

COMMERCIALITY DOCTRINE

(TWICE)

In two private letter rulings, the IRS denied recognition

of tax-exempt status, or revoked it, by application of the

unrelated business rules, in instances where the flawed

and outmoded commerciality doctrine would likely have

been applied.

Medical Equipment Sales and Rentals

An organization was recognized by the IRS as a tax-

exempt charitable entity because it represented that it

provides durable medical equipment and supplies to

patients discharged from hospitals yet needing ongoing

health care. The organization’s primary activity, however,

was sale and rental of this equipment and supplies to the

public at commercially competitive prices. It has a financial

assistance policy, but utilization of the policy is an insig-

nificant portion of its overall activities. The IRS revoked

this organization’s exemption on the grounds it is primarily

engaging in unrelated business (Priv. Ltr. Rul. 201925015).

Consulting Services

An organization provides business development,

content development and distribution, and marketing

and consulting services to clubs and other types of non-

profit organizations. The entity charges a fee for these

services. The IRS ruled that this organization’s principal

purpose is carrying on an unrelated business and thus

failed to qualify as a tax-exempt charitable organization

(Priv. Ltr. Rul. 201925017). [4.9, 24.2] ◆

Note: In addition to the foregoing, the IRS revoked the

exempt status of an organization because it is engaging

in substantial nonexempt purposes (managing an auto-

mobile repair shop and real estate holdings), and denied

recognition of exemption for engaging in substantial

nonexempt purposes (operation of a real estate agency),

rather than using the commerciality doctrine (Priv. Ltr.

Ruls. 201926016, 201929021). [4.5(a)]

OTHER RECENT IRS PRIVATE

LETTER RULINGS

◆A considerate reader returned our attention to Priv.

Ltr. Rul. 201911008. Because it looked like just another

Wendy Parker ruling, it was not summarized in these

pages. Thus, a major mistake on the part of the IRS

was missed. This ruling states that the private benefit

doctrine was violated because one individual is the sole