Other Recent IRS Private Letter Rulings

Published date01 September 2019
Date01 September 2019
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.)
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.
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)]
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

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