Private Foundations Held Liable for Taxes as Transferees of Transferee

• Published date: 01 October 2016
• Date: 01 October 2016
• DOI: http://doi.org/10.1002/npc.30249

Bruce R. Hopkins’ NONPROFIT COUNSEL

October 20166THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

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

was none-too-subtle in stating its mission: It enables

“business owners and professionals to get together

on a weekly basis to network, build relationships

and provide each other with referrals to help grow

each other’s businesses.” There is only one member

per industry category. Because this organization is

an “association comprised of carefully screened and

selected non-competing businesses,” the IRS ruled

that it is not promoting common interests of a line

of business and is providing particular services to its

members, and thus is ineligible for exemption (Priv.

Ltr. Rul. 201633037). [14.2(a), (c)] ◆

OTHER RECENT IRS PRIVATE

LETTER RULINGS

• An organization was formed as a social welfare

(IRC § 501(c)(4)) entity, with exemption obtained

by means of a group exemption. Following exami-

nation, the IRS proposed retroactive revocation of

exemption because the entity has been primarily

engaged in nonexempt activities. The ruling involved

(Priv. Ltr. Rul. 201630016) is so heavily redacted

that it cannot be determined what the exempt and

nonexempt activities have been (although there is

reference to the sale of fireworks and conduct of

“meat raffles”). Whatever happened, the ruling

explains that the organization’s functions evolved

into a “popular and lucrative” business, leading to

loss of exemption. [13.3]

• An organization, formed as a nonprofit mutual

benefit corporation, sought recognition of exemp-

tion as a charitable entity. It provides funds to

members and their family members who have lost

a family member, to pay funeral expenses. The

organization advised the IRS that it was serving an

immigrant community that lacks information con-

cerning life insurance or the saving of money. The

IRS denied recognition of exemption, primarily on

the grounds of conduct of nonexempt functions and

violation of the private benefit doctrine (Priv. Ltr. Rul.

201632020). (This organization filed for recognition

using Form 1023-EZ; the IRS reviewed the applica-

tion and sought additional information.) [20.12(a)]

• A nonprofit corporation was formed to “provide

ministry” by “teaching various topics to [individuals

to] strengthen their relationships and spiritual walk

with God.” The IRS’s case development process

revealed that this entity’s sole activity is the provi-

sion of “mobile retreats on a specially converted bus

to accommodate a group of thirty-eight retreaters.”

In addition to the transportation, the organization

provides sleeping accommodations on the bus and

meals for the participants. The IRS dismissed the

religious aspects of this organization’s activities,

holding that it does not qualify for recognition of

tax exemption because a substantial purpose of it

is “to transport persons to participate in social and

recreational activities,” with its services indistinguish-

able from “those provided by a for-profit bus charter

company” (Priv. Ltr. Rul. 201632021). [4.11(a)]

• An organization functioning as a Mardi Gras soci-

ety, replete with masked parade and ball, and that

promotes cultural festivals sought recognition of

exemption as a charitable entity. The festivals are

free to the public, with family activities such as live

music, parades, and fireworks. It advised the IRS

that it attempts to “intertwine the festivals with

sharing and preserving the history of local pirates or

privateers.” The organization makes grants for chari-

table and educational purposes. The IRS declined

the recognition, ruling that the entity’s social and

recreational purposes “override” its grantmaking

functions (Priv. Ltr. Rul. 201632022). That is not

the state of the law. The IRS should have applied

the commensurate test to determine if the level of

grantmaking is commensurate with resources; if it is,

what it does to raise funds is irrelevant. [7.14(a), (b)]

• An entity formed to provide scholarships for partici-

pants in a beauty pageant was denied recognition

of exemption as a charitable entity because of the

undue private benefit provided to the contestants

(Priv. Ltr. Rul. 201634025). An organization had its

exemption as a charitable entity revoked because it

is being operated to enable a for-profit company to

avoid compliance with do-not-call registry laws (Priv.

Ltr. Rul. 201634029). [20.12(d)] ◆

PRIVATE FOUNDATIONS

HELD LIABLE FOR TAXES

AS TRANSFEREES OF

TRANSFEREE

Highly appreciated assets of an organization (totaling

about $300 million) were sold to another organization;

the latter entity used an allegedly fraudulent tax strategy

to offset or defer capital gain. This gave rise to unpaid

federal income taxes and an accuracy-related penalty.

The IRS could not find any assets of the seller from

which to collect the assessed liability; it determined that

any additional collection efforts would be futile. The

agency then began looking about for transferees that

might be liable, focusing on some private foundations.

The selling organization had conveyed assets to its

shareholders, one of which was a private foundation.

The Tax Court concluded that the conveyance was not

a fraudulent one; thus, the foundation was held to not

be liable as a transferee (Salus Mundi Foundation v.