Private Benefit Doctrine Corner

Published date01 January 2020
Date01 January 2020
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
A nonprofit organization sought recognition of
exemption as a charitable and educational entity, on
the basis of the purpose of owning and maintaining
a “historically significant” building to be operated
for library and educational purposes. This entity has
a membership of several hundred individuals, each
of whom own an “equal share” in the organization.
Members have the right to the revenues generated
by the activities conducted by the organization.
Needless to say, tax exemption was not forthcoming
here, on private benefit grounds, in that the orga-
nization’s activities are “directed to the support and
promotion of the economic interests” of its members
(Priv. Ltr. Rul. 201944015).
An organization that purported to be a sponsoring
organization maintaining donor-advised funds had its
tax exemption revoked, on the grounds that nonchari-
table purposes are being served and private interests
are being benefited (Priv. Ltr. Rul. 201944017). The
gifts involved are of limited liability company interests.
The IRS determined that the activities taking place
amount to situations where shareholders in S corpo-
rations attempt to transfer the incidence of taxation
on corporation income by purportedly contributing S
corporation voting stock to a charitable organization,
while retaining the economic benefits associated with
the stock. This type of transaction was held by the
IRS to be substantially similar to the S corporation tax
shelter scheme identified by the IRS in Notice 2004-30
(summarized in the June 2004 issue) and thus a listed
transaction. The exemption was revoked retroactively
to the year in which the organization became a par-
ticipant in this abusive tax-avoidance scheme.
A nonprofit membership organization of school
sports officials has as its primary activity contract-
ing on behalf of its members with local schools in a
state to provide them with qualified sports officials
for sports such as football, basketball, volleyball, and
softball. This entity trains its members and assigns
them to officiate games. It collects payments from
the schools and distributes them to its member offi-
cials for their services. The organization also main-
tains and promotes high standards of officiating. Not
surprisingly, the IRS determined that this entity is ineli-
gible for recognition as an exempt charitable and edu-
cational organization on the grounds it is operating
in a commercial manner (charging fees that are not
substantially below cost) and for the private interests
of its members (Priv. Ltr. Rul. 201945029). (Recently,
there has been a spate of similar rulings, denying rec-
ognition of exemption to organizations like this one
as exempt business leagues.) [20.13(a)]
A membership organization attempted to secure
recognition of tax exemption as a business league. Its
function is to hold monthly meetings to hear early-
stage companies “pitch their product or service” for
the purpose of offering investment opportunities
for its members. Benefits of membership include
“increased deal flow of top emerging companies
across a broad range of industries” and “improved
deal terms through collective deal screening.” Not-
ing that the tax regulations provide that a “stock or
commodity exchange” cannot be an exempt busi-
ness league (Reg. § 1.501(c)(6)-1), the IRS declined
to recognize exemption in this case, on the grounds
that the organization is performing particular services
for the entrepreneurs involved and for its members
(Priv. Ltr. Rul. 201944014). This ruling illustrates the
distinction between an organization providing par-
ticular services to its membership and outside the
membership. [14.2(c)]
Another networking organization has been denied
recognition of tax exemption as a business league
(Priv. Ltr. Rul. 201945028). This entity has the goal of
building long-term relationships with “like-minded
business people.” As is the case with its counter-
parts, the organization’s membership is confined to
professionals, business owners, and similar decision-
makers. Only one member is permitted from each
designated business category. As it should, the IRS
ruled that this group is not entitled to exemption
because improvement of business conditions in a line
of business is not being furthered, in that its purpose
is to further the “private business interests” of its
members. [14.2(a)]
A nonprofit organization owns the intellectual prop-
erty rights to items of software. The software
will “facilitate creative engagement of people with
diverse cultures, ideologies, experiences and exper-
tise in decision-making for the benefit of their
communities." This software will be made available
to the public in commercial and noncommercial
versions. The organization did not allocate its time
and resources as between the two versions, but that
made no difference to the IRS, which ruled that nei-
ther version accomplishes charitable purposes (Priv.
Ltr. Rul. 201944016). The agency wrote that the
“provision of free services to other organizations,
whether for profit, exempt or governmental, is not

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