Other Recent IRS Private Letter Rulings

• Published date: 01 March 2017
• Date: 01 March 2017
• DOI: http://doi.org/10.1002/npc.30299

Bruce R. Hopkins’ NONPROFIT COUNSEL

7

March 2017

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

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

OTHER RECENT IRS PRIVATE

LETTER RULINGS

• An association of owners of stores in a franchise

sought recognition of tax-exempt status as a busi-

ness league (an IRC § 501(c)(6) entity). Its purposes

include assisting franchisee members with the fran-

chise’s current and new policies, resolving member

owners’ issues, and hosting trade shows with ven-

dors for the mutual benefit of franchisees and ven-

dors. Quite properly, the IRS denied recognition of

exemption to this organization on the grounds that

its activities are not directed to improving business

conditions of one or more lines of business and that

it is providing particular services to its members (Priv.

Ltr. Rul. 201649017). As to the latter, this association

advises its members in the operation of their indi-

vidual businesses and helps them network with ven-

dors. Obviously, the promotion of a single business

franchise within a line of business does not improve

conditions of the line of business. [14.2(a), (c)(i), (ii)]

• A trust was established by various political subdivisions

of a state to hold assets to be used to provide self-

funded, pooled insurance programs for their employ-

ees. The trust is managed by a nine-member board

of trustees; each board member is elected by the

participating employers. The board administers vari-

ous plans, providing coverage or medical, pharmacy,

dental, vision, mental health, and disability insurance

for the employees of the participating employers. On

dissolution of this trust, all its net assets are to be dis-

tributed to the political subdivisions. Not surprisingly,

the IRS ruled that, inasmuch as the income of the trust

derives from the exercise of an essential governmental

function and accrues to a state or a political subdivision

of the state, the trust’s income is excludable from gross

income for federal tax purposes (IRC § 115) (Priv. Ltr.

Rul. 201652001). [19.22(b)]

• An organization has been holding itself out as a tax-

exempt veterans’ organization (an IRC § 501(c)(19)). It

operates a social club for the pleasure of its members

and their guests, and engages in games of chance.

This organization’s membership classes are regular and

social members. The organization was examined by the

IRS and found to have failed the membership test for

exempt veterans’ groups (Reg. § 1.501(c)(19)-1(b)) (Priv.

Ltr. Rul. 201652028). The facts of this ruling are heavily

redacted, but it is clear that there are too many social

members in relation to regular members for this entity

to qualify for exemption. The IRS retroactively revoked

this organization’s tax exemption. [19.11(a), 27.3]

• An organization formed as a controlled foreign cor-

poration wrote 10 ostensible insurance contracts. On

the basis of this activity, the organization attempted

to secure recognition as a small tax-exempt insurance

company (an IRC § 501(c)(15) entity). The IRS ana-

lyzed the risk of the contracts to determine whether

they qualify as contracts of insurance, annuity con-

tracts, or reinsurance contracts. For the most part, the

IRS concluded that these contracts did not represent

insurance “in the commonly accepted sense,” in that

there is no insurance risk but only investment or busi-

ness risk. The agency stated that the risk distribution

requirement cannot be satisfied if the issuer of the

contract enters into such a contract with only one

policyholder. Recognition of exemption was denied

because the organization did not qualify as an insur-

ance company for federal income tax purposes in the

first instance (Priv. Ltr. Rul. 201652030). [19.9]

• A limited liability company was formed to “man-

age the internal affairs of all held companies from a

non-commercial perspective and to track all donated

inventory ‘stock’ to retail markets, per point of

purchase that tenders receipts, or evidence(s) of

money to offset any alleged tax liabilities.” This LLC

was said to generate “profits” by “adopting ‘insur-

ance’ on internal stocks through privately held and

managed companies.” The IRS, unable to ascertain

what that verbiage means, nonetheless concluded

that “[n]othing in your application [for recognition

of exemption] described charitable or educational

activities” (Priv. Ltr. Rul. 201701020). The agency

determined that this entity is ineligible for tax-exempt

status because of violation of the private benefit doc-

trine. Also, inasmuch as the sole member of this LLC

is an individual, the IRS wrote that its “net earnings

are set to inure to [this] private individual,” in viola-

tion of the organizational test. [4.3, 4.5(a), 20.12(a)]

• A nonprofit corporation was established to facilitate

development of research concerning multiple sclerosis

and other neurodegenerative diseases; support edu-

cational opportunities for multiple sclerosis patients,

families, and caregivers; and assist in advancement

of alternative care delivery systems in a state. Thus

far, all its research (clinical trials) is sponsored by phar-

maceutical companies. (The organization stated that

it plans to eventually conduct “investigator-driven”

research.) The IRS characterized these relationships

as services to the companies, which are “incident to

their commercial operations and to the marketing of

their products” (Priv. Ltr. Rul. 201701022). The clinical

testing to determine the efficacy of drugs was said to

serve the private interests of the pharmaceutical com-

panies. The very fact that the organization receives

a fee for its research was, for the IRS, evidence of

unwarranted commerciality. Also, the IRS rejected

the claim that this organization engages in scientific

research because the companies have given it the

“experimental methods and procedures to follow,”

and it does not have any rights to the intellectual

property created by it. [9.1, 9.2] ◆