Public Charities' Affiliation Again Sets Tax Law Trap

• Published date: 01 April 2018
• Date: 01 April 2018
• DOI: http://doi.org/10.1002/npc.30452

Bruce R. Hopkins’ NONPROFIT COUNSEL

April 20186THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

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

The law should be the same as it is now, such as in

the context of the deductibility of contributions to US

charities that operate to benefit foreign charities. In that

setting, there is no deduction if the domestic entity is

functioning merely as a conduit of the transferred funds.

The IRS has, over the years, been quite adept at making

these distinctions. The most recent example of this type

of analysis is in Priv. Ltr. Rul. 201751015 (summarized in

last month’s issue).

The IRS should be required to do so in connection

with distributions to and from donor-advised funds. The

point is that not all distributions from donor-advised

funds should be precluded as constituting public support

in their entirety. Using the word in the best of senses, a

donor-advised fund is always an intermediary.

The same approach is taken with respect to charity-

sponsored events. This notice does not, and thus pre-

sumably the proposed regulations will not, differentiate

between the flashy mega-galas, with fabulous entertain-

ment, ample drink, and excellent food (where patrons

really want to attend), and events with nothing more than

the proverbial rubber chicken and boring speeches (where

just about everyone would just as soon be elsewhere). A

donor/advisor may accede to be in attendance at an event

to support a charity and help provide dutiful applause as

awards are being handed out, even though that individ-

ual really did not want to go. There is no private benefit

being provided on these occasions. But, apparently, the

IRS doesn’t want to make these distinctions either.

Then, matters flip when it comes to satisfaction of char-

itable pledges. Contrast what is being proposed with the

rule in the private foundation context that a grant made in

fulfillment of the legal obligation of a disqualified person

constitutes an act of self-dealing (Reg. § 53.4941(d)-2(f)

(1)). With foundations, there is no expressed concern

about “mere indications of charitable intent.”

This distinction is justified on the rationale that the

“relationship between a private foundation and its

disqualified persons typically is much closer than the

relationship between a DAF sponsoring organization

and its Donor/Advisors.” But not always. Originally, the

IRS’s biggest rap against donor-advised funds was that

they are merely vehicles to use in circumventing the pri-

vate foundation rules. Today, philanthropists of modest

means utilize donor-advised funds in lieu of private foun-

dations—and can be quite attached to them. [11.8] ◆

PUBLIC CHARITIES’

AFFILIATION AGAIN SETS TAX

LAW TRAP

The IRS granted a tax-exempt charitable organization

an extension of time to revoke its election of the expen-

diture test (IRC § 501(h)), thereby enabling it to sidestep

tax penalties and perhaps loss of exemption (Priv. Ltr. Rul.

201804005).

Three public charities operate to promote health;

they are X (formerly known as Y), V, and W. V formally

affiliated with Y. As part of that process, Z, an organiza-

tion of which V is the sole member, became the sole

member of Y. Y then changed its name to X.

Prior to its affiliation with Y, V retained a “profes-

sional services firm” to perform due diligence on the

operations and financial state of Y. Y had made the

lobbying election. The matter of Y’s revocation of the

election in advance of the affiliation was not, during this

due diligence effort, raised. A few weeks after the affili-

ation, it was discovered that the lobbying election had

been made many years beforehand by Y. Forms 990 filed

by Y reference this election.

Given the amount of the lobbying expenses by V and

its affiliates, and the potential risk to X in being viewed

as affiliated with V, W, and other affiliates, X immediately

consulted with its tax law advisors to assist in prepara-

tion of a request to the IRS for discretionary relief (Reg. §

301.9100). The above ruling is the result. Presumably, Y

will timely file the revocation, to eliminate the possibility

of an affiliated group and the attendant adverse tax law

consequences. [22.3(d)(viii)]

Commentary: This outcome has been reported at

least once before. See the discussion of Priv. Ltr. Rul.

201239012 in the November 2012 issue. The lesson is

that anytime there is an affiliation of public charities this

matter of the lobbying election should be on the due

diligence checklist. As noted, the fact of the election is

referenced in the Form 990. ◆

OTHER RECENT IRS PRIVATE

LETTER RULINGS

◆A nonprofit organization has as its primary activity

the operation of a “banquet center” that is rented to

the public for fees. It is used for events such as wed-

dings, luncheons, parties, and business events. Catering

services are also available. Advertising of the facility is

accomplished by means of a website. The IRS, not sur-

prisingly, ruled that these operations do not accomplish

charitable purposes (Priv. Ltr. Rul. 201803009). What is

surprising is that although the IRS discussed the com-

merciality doctrine in its law summary, it did not apply

the doctrine as the sole basis for its analysis. Instead,

the IRS focused on the fact that the operation of the

banquet center is an unrelated business—a violation of

the operational test. This ruling does note that the cen-

ter is open to the public during regular business hours,

and it uses its rental income to pay for the cost of sales,

upkeep of the facility, employment of staff, and the mak-

ing of interest payments on debt. (Yes, this property is

debt-financed.) These are activities, the IRS noted, that