Private Benefit Doctrine Precludes Exemption

Date01 January 2021
Published date01 January 2021
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
Nonprofit and For-Profit ‘Arms’
A nonprofit corporation was formed to train, support,
and serve males in a community in the core standards and
beliefs of a particular brand. It will conduct online and
one-on-one mentoring, after-school programs, school
and church partnerships, community sports events, and
community service missions.
The founder of this organization also formed a for-
profit entity. The for-profit entity is portrayed by the
nonprofit entity as its “partner organization.” Both organ-
izations are promoting the brand. The for-profit entity
holds the rights to the brand and its logo. The for-profit
entity will help the nonprofit entity create the materials
that will promote the brand so that the latter entity can
reach its target audience. The founder is the president
and managing director of the nonprofit organization; this
individual is the CEO of the for-profit company.
The ultimate goal of the for-profit entity is to support
all the endeavors of the nonprofit entity. The company
is focusing on reaching as many customers as it can
with content to mentor males and gain exposure for
the brand. The company is said to be the “face” of the
brand by selling products and services; the nonprofit
entity is cast as the “hand” of the brand by serving the
community. The nonprofit corporation represented to
the IRS that it is the “nonprofit arm,” while the company
is the “for-profit arm.”
The IRS declined to recognize the nonprofit corpo-
ration as a tax-exempt charity entity, on the grounds
that the “arrangement” with the for-profit company
violates the restriction on private benefit (Priv. Ltr. Rul.
202041007). The IRS wrote that the applicant’s activi-
ties are, “in substantial part, designed to enhance the
profitability” of the for-profit company. The nonprofit
corporation was faulted for being dependent on the
for-profit entity for its operations. The IRS observed that
the two organizations “operate together and partner to
create and promote the materials used by both” entities.
Indeed, the IRS concluded that the nonprofit organiza-
tion’s activities are “so interrelated with [those of the for-
profit company] that it is difficult to clearly distinguish
between” the two entities. [20.13(c)]
Leasing of Land to Insider
A nonprofit corporation sought recognition of
exemption as a charitable entity, holding itself out as
a Type I supporting organization. Its basic function is to
generate revenue for the supported organization. This
is to be done by development of an orchard, which is
part of a farm. The farmland is owned by two for-profit
corporations. The nonprofit corporation is to, once it
has obtained recognition of exemption and funding,
purchase the land.
The principal owner of one of these for-profit compa-
nies is the president of the applicant corporation. Once
the nonprofit entity purchases the land, the plan is to
lease the farm to the for-profit entity, which will operate
the farm and pay fair market value rent.
The IRS concluded that the purpose for which the
nonprofit corporation was formed is to prepare the farm-
land and then lease it to the company owned by the non-
profit entity’s president, which amounts to impermissible
private benefit (Priv. Ltr. Rul. 202041016). [20.13(d)]
Matters worsen. The other for-profit company is
owned by an individual and his father. The funding of
the applicant organization is to be provided in the form
of a grant from a donor-advised fund created by the indi-
vidual’s parents. The IRS characterized this donor-advised
fund as one “controlled by related parties” (which, if it
is a true DAF, cannot be the case). The IRS cast the par-
ents’ contribution to the fund as a way to provide them
a tax deduction for the funding of their son’s for-profit
business. [20.13(a)]
Struggling Artists and Art Sales
A nonprofit organization was formed with the
mission of promoting and supporting struggling art-
ists—that is, its members—in its community. This entity
operates a gallery where its members sell their work
and receive most of the sales proceeds. Observing that
its members directly and substantially benefit from the
exhibition and sale of their art at the gallery, the IRS ruled
(per the dictates of Rev. Rul. 71-395) that this organi-
zation is significantly serving private interests and thus
cannot be tax-exempt as a charitable and educational
entity (Priv. Ltr. Rul. 202044011). [20.13(a)]
The IRS’s Office of Chief Counsel ruled that an individ-
ual, a US resident and primary beneficiary of a foreign
charity, is treated as having received the charity’s assets
upon on dissolution of the charity, and thereafter trans-
ferred the assets by gift, at the individual’s direction, to
a bank account over which the individual lacked any
ownership or control, thereby triggering gift tax liability
(Chief Couns. Adv. Mem. 202045011). The charity in-
volved was established as a stiftung (the law principles
of which are summarized in the February 2020 issue).
This charity’s objectives included the “defrayal of
expenses for the upbringing and education, the fitting
out and furtherance, the livelihood in general and
the economic furtherance in the widest sense of the

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