Recent Applications of Commerciality Doctrine

Date01 October 2020
Published date01 October 2020
October 2020 5
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
intent and failure to comply with the appraisal require-
ments. The donors prevailed in the US Tax Court on all
points, by decision dated August 17, including valuation
and avoidance of accuracy-related penalties (Emanouil v.
The appraisals attached to the returns did not include
a statement explicitly stating they were prepared for
income tax purposes and did not state the expected
date of the contribution. The court held, however, that
the appraisals substantially complied with the qualified
appraisal requirements. The tax returns included a Form
8283 that specified the date of the contribution. The
court wrote that the appraisals in this case “do not have
[the] multiple cumulative defects that we have previously
held to be fatal for deducting charitable contributions.”
The court held that the donors “provided sufficient
information to permit the IRS to evaluate the reported
contributions and to investigate and address concerns
about overvaluation and other aspects of the reported
charitable contributions.” The court added that the IRS
“perform[ed] that investigation without any impediment
arising from the two alleged defects in the appraisals.”
The court also held that the contributions were made
with donative intent and were “received as gifts.” The
transfers were not made, the court concluded, as an
inducement for a zoning board’s approval of the project.
The court mused as to a “circumstance in which two
parties with mutual interests and a high level of trust
could conduct some business with each other (here, the
application for and approval of permits) that depended
on a side agreement (here, for the donation of additional
property) that was never reduced to writing and could
never be enforced.” That is, said the court, “in effect,
what the [IRS] posits.” The court found that circum-
stance “unlikely” in this case.
It was observed that the town and the developer
“seem to have had civil and cooperative business deal-
ings, but they were hardly allies.” Indeed, the court took
note of the fact that the developer, about eight years
before this project commenced, sued the town concern-
ing another property acquisition, “so they had no reason
for special trust of each other.” [3.1(c), 21.5(c)]
An organization operating a used car dealership
apparently was under the belief that it is entitled to
tax exemption as being charitable. Its income is solely
from the sale and repair of vehicles. Rates charged
are comparable to those of for-profit businesses; it
provides products and services to “anyone willing to
pay for them.” It has “compensated employees.” Not
surprisingly, the IRS denied recognition of exemption
to this entity, on the grounds it is operating for a
“substantial nonexempt commercial purpose” (Priv.
Ltr. Rul. 202031010). The IRS observed that the
organization failed the operational test because its
“sole activity” is the “conduct of a trade or business
for the production of income.” Were that the correct
statement of the operational test, there would be
significantly fewer tax-exempt organizations. [4.9(g)]
An organization recognized as a tax-exempt cham-
ber of commerce (an IRC § 501(c)(6) entity) sought
conversion of exempt status to that of a charitable
and educational entity. To this end, it stressed its pro-
vision of education on the benefits of historic pres-
ervation, production of public events, coordination
of volunteer upkeep of public spaces, and provision
of educational programs for small businesses and
entrepreneurs; it claimed to lessen the burdens of
government. The IRS, however, focused on this enti-
ty’s other activities, such as promoting the benefits
of shopping at locally owned businesses, operating
farmers’ and artisans’ markets, conducting market
analyses to focus economic development efforts,
and engaging in reinvigoration of a downtown city
district. The IRS declined to change this organiza-
tion’s exempt status, finding that its market and retail
events are commercial in nature and that its efforts
to assist small businesses amount to the provision of
private benefit (Priv. Ltr. Rul. 202032007). This situ-
ation illustrates the merits of bifurcation rather than
conversion: establishment of a separate charitable
and educational entity to function in tandem with
the chamber of commerce. [4.9(g), 20.13(a)]
A nonprofit organization was formed to “supply
food to the indigent.” Its primary activity is operation
of a farm-to-table restaurant, with a menu inspired
by crops of the region. This restaurant, open to the
public, is to be a place “where people gather to
enjoy good food, good atmosphere, good company,
and give back to the community all at the same
time.” A portion of tables in this establishment will
be reserved for nonpaying families. Not surprisingly,
the IRS did not recognize this organization as a char-
itable or educational entity, on the grounds that it is
operating a business in direct competition with other
businesses and largely used by paying customers, in
contravention of the commerciality doctrine (Priv. Ltr.
Rul. 202032008). [4.9(g)]
A private foundation is ceasing operations and
distributing all its assets. It will make a grant to a
public charity, to establish endowed funds for the
benefit of other public charities. The grantee’s board
will determine use of the granted funds. Other

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