Promises to Not Charitably Deduct

• Date: 01 June 2017
• DOI: http://doi.org/10.1002/npc.30332
• Published date: 01 June 2017

Bruce R. Hopkins’ NONPROFIT COUNSEL

5

June 2017

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

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

to the tax law rules; (2) when a charitable organization

and a social welfare entity (or other type of exempt

organization) operate in tandem, it is best to have a

resource-sharing agreement, to prevent charitable dol-

lars from being used for nonexempt purposes; and (3)

be cautious, when a charitable organization is involved,

of participating in activities that could be construed as

political campaign intervention, such as “educating vot-

ers” and hosting campaign debates.

The other mentionable aspect of this ruling entails

proper phraseology. It is, of course, common and proper

for an exempt organization to have chapters. In this

regard, however, it is inadvisable to, as this organiza-

tion did on its website, advise the IRS that it is “using a

franchise model.” The organization terms these entities

its “branches,” charging them a fee for the affiliation. It

provides the branches a “10-point primer for conducting

operations.” This approach was characterized by the IRS

as an “offering [of] a product or service for a fee that

is not furthering an educational or charitable exempt

purpose” and an activity “indicative of a for-profit, com-

mercial operation.”

When establishing chapters, an affiliation agreement is

appropriate, as is a guide for chapters’ operations. When

tossing around words like “franchise model,” it can lead to

formation of chapters as being a “commercial” undertak-

ing, which is, of course, absurd. [4.11(d), 30.2] ◆

NO LINE OF BUSINESS

REPRESENTED, NO EXEMPT

BUSINESS LEAGUE

A nonprofit organization was organized exclusively

for the development of agents licensed to sell insurance

and other financial products offered by a company in a

particular state. These agents are independent contrac-

tors. The overall intent is to “promote a common busi-

ness interest” among these individuals.

This organization intends to schedule multiple events

and activities across the state where its members will

receive education, training, and networking opportuni-

ties, plus an annual banquet where members will be rec-

ognized for their achievements. Members are required

to pay all appropriate assessments made by, and be

approved by, the organization’s board of directors.

All members are entitled to vote. This entity’s finan-

cial support is derived from membership dues. These

funds are to be expended for member events.

This entity thus resembles a typical tax-exempt busi-

ness league, with one significant exception: it is not

organized to improve business conditions of one or

more lines of business. Rather, the training and network-

ing opportunities are provided only to individuals who

are agents of the company, which, as the IRS put it in

a ruling denying recognition of exemption (Priv. Ltr. Rul.

201715003), is “one specific brand.” This organization’s

efforts, the IRS stated, are designed to make its mem-

bers successful in their capacity as the company’s agent.

Its activities “do not benefit the entire insurance indus-

try or improve the business conditions of the insurance

industry as a whole.” [14.2(a)]

Note: That last observation was overstated. While this

organization is not an exempt business league, it need

only benefit a segment of the insurance industry or

improve the business conditions of a segment of the

insurance industry in the state. ◆

DEER HERD LOSS MITIGATION

NOT AGRICULTURAL ACTIVITY

Despite the purpose of “preservation of nature and

animals,” the IRS ruled that an organization does not

qualify as a tax-exempt agricultural entity because its

actual purpose is to protect its members from significant

losses if their deer herds experience dissipation, appar-

ently due to disease. Under this plan, available only

to breeding farms (rather than hunting preserves), an

operating committee appoints at least five appraisers to

review genetics and production records in valuing the

herd. The committee reserves the right to see the inven-

tory records and contact necessary parties to confirm the

positive herd or any “mandated eradications.”

On the occasion of a deer loss, this organization’s

members are required to contribute on a prorated basis

to the organization to limit the loss experienced by the

affected member. The organization stated that its objec-

tive is not to generate a profit for any farmer but to

“limit members’ losses and prevent great hardship on

any one member.”

This program is, of course, essentially insurance. The

IRS used that as the basis for ruling that, in the absence

of this organization, its members would have to insure

themselves; the organization relieves them of that respon-

sibility (Priv. Ltr. Rul. 201716049). These activities, the IRS

concluded, “are not aimed at the overall betterment of

conditions within the farming industry.” [16.2] ◆

PROMISES TO NOT

CHARITABLY DEDUCT

This matter concerns a charitable remainder unitrust,

the noncharitable beneficiary of which is its grantor

(or, perhaps, at death, another individual). This trust is

not exempt from federal income tax (IRC § 501(a)). The

unitrust payments are to continue for the longer of the

noncharitable beneficiaries’ lifetimes or 20 years. The