Other Recent IRS Private Letter Rulings

• Date: 01 October 2020
• Published date: 01 October 2020
• DOI: http://doi.org/10.1002/npc.30779

Bruce R. Hopkins’ NONPROFIT COUNSEL

October 2020 5

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

intent and failure to comply with the appraisal require-

ments. The donors prevailed in the US Tax Court on all

points, by decision dated August 17, including valuation

and avoidance of accuracy-related penalties (Emanouil v.

Commissioner).

The appraisals attached to the returns did not include

a statement explicitly stating they were prepared for

income tax purposes and did not state the expected

date of the contribution. The court held, however, that

the appraisals substantially complied with the qualified

appraisal requirements. The tax returns included a Form

8283 that specified the date of the contribution. The

court wrote that the appraisals in this case “do not have

[the] multiple cumulative defects that we have previously

held to be fatal for deducting charitable contributions.”

The court held that the donors “provided sufficient

information to permit the IRS to evaluate the reported

contributions and to investigate and address concerns

about overvaluation and other aspects of the reported

charitable contributions.” The court added that the IRS

“perform[ed] that investigation without any impediment

arising from the two alleged defects in the appraisals.”

The court also held that the contributions were made

with donative intent and were “received as gifts.” The

transfers were not made, the court concluded, as an

inducement for a zoning board’s approval of the project.

The court mused as to a “circumstance in which two

parties with mutual interests and a high level of trust

could conduct some business with each other (here, the

application for and approval of permits) that depended

on a side agreement (here, for the donation of additional

property) that was never reduced to writing and could

never be enforced.” That is, said the court, “in effect,

what the [IRS] posits.” The court found that circum-

stance “unlikely” in this case.

It was observed that the town and the developer

“seem to have had civil and cooperative business deal-

ings, but they were hardly allies.” Indeed, the court took

note of the fact that the developer, about eight years

before this project commenced, sued the town concern-

ing another property acquisition, “so they had no reason

for special trust of each other.” [3.1(c), 21.5(c)] ◆

RECENT APPLICATIONS OF

COMMERCIALITY DOCTRINE

• An organization operating a used car dealership

apparently was under the belief that it is entitled to

tax exemption as being charitable. Its income is solely

from the sale and repair of vehicles. Rates charged

are comparable to those of for-profit businesses; it

provides products and services to “anyone willing to

pay for them.” It has “compensated employees.” Not

surprisingly, the IRS denied recognition of exemption

to this entity, on the grounds it is operating for a

“substantial nonexempt commercial purpose” (Priv.

Ltr. Rul. 202031010). The IRS observed that the

organization failed the operational test because its

“sole activity” is the “conduct of a trade or business

for the production of income.” Were that the correct

statement of the operational test, there would be

significantly fewer tax-exempt organizations. [4.9(g)]

• An organization recognized as a tax-exempt cham-

ber of commerce (an IRC § 501(c)(6) entity) sought

conversion of exempt status to that of a charitable

and educational entity. To this end, it stressed its pro-

vision of education on the benefits of historic pres-

ervation, production of public events, coordination

of volunteer upkeep of public spaces, and provision

of educational programs for small businesses and

entrepreneurs; it claimed to lessen the burdens of

government. The IRS, however, focused on this enti-

ty’s other activities, such as promoting the benefits

of shopping at locally owned businesses, operating

farmers’ and artisans’ markets, conducting market

analyses to focus economic development efforts,

and engaging in reinvigoration of a downtown city

district. The IRS declined to change this organiza-

tion’s exempt status, finding that its market and retail

events are commercial in nature and that its efforts

to assist small businesses amount to the provision of

private benefit (Priv. Ltr. Rul. 202032007). This situ-

ation illustrates the merits of bifurcation rather than

conversion: establishment of a separate charitable

and educational entity to function in tandem with

the chamber of commerce. [4.9(g), 20.13(a)]

• A nonprofit organization was formed to “supply

food to the indigent.” Its primary activity is operation

of a farm-to-table restaurant, with a menu inspired

by crops of the region. This restaurant, open to the

public, is to be a place “where people gather to

enjoy good food, good atmosphere, good company,

and give back to the community all at the same

time.” A portion of tables in this establishment will

be reserved for nonpaying families. Not surprisingly,

the IRS did not recognize this organization as a char-

itable or educational entity, on the grounds that it is

operating a business in direct competition with other

businesses and largely used by paying customers, in

contravention of the commerciality doctrine (Priv. Ltr.

Rul. 202032008). [4.9(g)] ◆

OTHER RECENT IRS PRIVATE

LETTER RULINGS

• A private foundation is ceasing operations and

distributing all its assets. It will make a grant to a

public charity, to establish endowed funds for the

benefit of other public charities. The grantee’s board

will determine use of the granted funds. Other