Private Foundation Wins Big in Stock Valuation Dispute

• Published date: 01 October 2019
• Date: 01 October 2019
• DOI: http://doi.org/10.1002/npc.30644

Bruce R. Hopkins’ NONPROFIT COUNSEL

4 October 2019 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

tions to report the names and addresses of donors of

contributions of at least $5,000 (Reg. § 1.6033-2(a)(2)(II)

(f)). Charitable organizations and political organizations

are generally required to report this information.

The purpose of the revenue procedure was to lift this

disclosure requirement for most of the other categories

of exempt organizations. The revenue procedure was

issued in accordance with the IRS’s general authority to

grant relief from the reporting requirements where the

information is deemed “not necessary for the efficient

administration of the internal revenue laws” (Reg. §

1.6033-2(g)(6)). Under the revenue procedure, organiza-

tions relieved of the obligation to report donor informa-

tion must nonetheless continue to keep the information

accessible to the IRS.

Law and Analysis

The court found that the revenue procedure is a

legislative rule, subject to the APA’s procedural require-

ments. It stated that the case “involves a challenge to

the process by which the IRS attempted to amend a

regulation.” The defendants contended (unsuccess-

fully, obviously) that the revenue procedure was merely

an interpretive rule, noting that exempt organizations

still have to retain the information for IRS examination

purposes, not subject to the APA. (Revenue rulings and

revenue procedures are almost never made subject to a

review and comment process.)

What the plaintiffs won (in the absence of a reversal)

is the right to submit comments on the proposal before

it is adopted. The reasons underlying adoption of the

revenue procedure are summarized in the September

2018 issue. [28.11(i)] ◆

Commentary: It is important to note what this opinion

is not about. The case is not about the substance or

content of the revenue procedure’s rules. It is not about

the merits of the policy change. Also, the case does not

involve a challenge to the IRS’s (or Treasury’s) exercise of

discretion in making the change.

PRIVATE FOUNDATION WINS

BIG IN STOCK VALUATION

DISPUTE

A private foundation has scored a big win in a stock

valuation dispute, as reported in the Omaha World-Her-

ald on July 26. The Ryan Foundation, located in Omaha,

Nebraska, has substantial expectancies in the form of

stock in a privately held company, Streck Inc. For four-

and-a-half years, the foundation, Streck, and family mem-

bers of its founders (all disqualified persons, of course)

have been litigating over the value of the Streck stock.

A Nebraska district court, on July 23, assigned a

value of $893 million to the stock, over $300 million

more than the defendants’ valuation (Wayne L. Ryan

Revocable Trust et al. v. Constance “Connie” Ryan and

Streck, Inc.). The court wrote that Dr. Wayne Ryan (now

deceased), the scientist who founded Streck and one of

the foundation’s founders, “created Streck’s value” and

that “[w]hat has been taken here is Dr. Ryan’s life work.”

The court added that “what he [Dr. Ryan] lost here is

substantial, and that is reflected in the fair value of his

shares as determined” by the plaintiffs’ valuation analy-

sis. The defendants’ appraisal was rejected by the court,

which concluded that the appraiser had a “downward

bias … designed to lower the valuation” that “renders

his conclusion unreliable” and “not credible.”

The court held that the date of valuation of the

Streck stock is October 29, 2014. The portion of the

stock value to be paid to Dr. Ryan’s estate (with that

value passing to the foundation) is $467 million, plus

over $253 million in interest. [12.4(a)] ◆

IRS APPLIES COMMERCIALITY

DOCTRINE IN DENYING

EXEMPTION FOR

COFFEEHOUSE

The IRS ruled that an organization the primary activity

of which is operation of a coffeehouse is not entitled to

recognition of tax exemption as a charitable entity, prin-

cipally by application of the commerciality doctrine (Priv.

Ltr. Rul. 201934008).

Facts

A nonprofit corporation has as its primary activity the

operation of a coffeehouse. The purpose of this estab-

lishment is to function as a “fundraising organization

for nonprofits that serve” the community involved and a

“community launch point and gathering venue featuring

local art and music.”

Generally, the prices charged by this coffeehouse are

the same as those at similar facilities. The coffeehouse is

planned to be open during typical business hours for a

coffeehouse in the metropolitan area. The organization

will have employees and volunteers.

This entity’s financial support during its first year

of operations will be in the form of contributions and

grants. Thereafter, its gross income will be derived from

the coffeehouse’s operations. Its expenses are projected

to be for occupancy, salaries, insurance, supplies, office

costs, repairs, and the like. Profits will be “funneled”

(the IRS’s terminology) to other nonprofit organizations

as determined by the organization’s customers and com-

munity members. The organization plans to rely on its

website and word of mouth for advertising, along with

radio advertising and building signage.