Rev. Proc. Changing Gift Disclosure Rules Set Aside for Procedural Reasons

• DOI: http://doi.org/10.1002/npc.30643
• Date: 01 October 2019
• Published date: 01 October 2019

Bruce R. Hopkins’ NONPROFIT COUNSEL

October 2019 3

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

tion of the term educational organization to include a

primary-function requirement and/or a merely-incidental

test, it had the chance to do so but elected not to.

The court cited many cases in support of this rule of

statutory construction. This line of law was summarized

in Scalia and Garner, Reading Law: The Interpretation

of Legal Texts (2012) (cited by the court): “[W]here [a]

document has used one term in one place, and a materi-

ally different term in another, the presumption is that the

different term denotes a different idea” (p. 170). This is

one of the so-called contextual canons used in constru-

ing statutes; it states a presumption of consistent usage.

The court held that the government’s position that

Mayo is not entitled to the refunds it seeks is “premised

entirely on Mayo’s alleged inability to satisfy the primary-

function and merely-incidental requirements” in the tax

regulation. Thus: “Because those requirements exceed

the bounds of authority given by [IRC § 170(b)(1)(A)(ii)],

they are unlawful.” [4.4, 8.3(a), 12.3(a)] ◆

Commentary: This court opinion is wrong. It is true

that the primary-function requirement is not in IRC §

170(b)(1)(A)(ii) but is in IRC § 170(b)(1)(A)(iii). But that

fact alone does not warrant the court’s conclusion. This

is clear because the court ignored not only relevant law

but also a much more relevant contextual canon: the

whole-text canon. Scalia and Garner seemed to have

anticipated this decision, writing “[p]erhaps no interpre-

tive fault is more common than the failure to follow the

whole-text canon, which calls on the judicial interpreter to

consider the entire text, in view of its structure and of the

physical and logical relation of its many parts” (p. 167).

The “entire text” is not merely IRC § 170(b)(1)(A)(ii)

and (iii). It is the full IRC § 170(b)(1)(A). There, the Inter-

nal Revenue Code provides for nine categories of “pre-

ferred” public charities. Eight of them do not contain

the primary-function requirement. There is no support

for assigning, in this opinion, much importance to the

conclusion that Congress “unambiguously chose not to

include a primary-function requirement in” IRC § 170(b)

(1)(A)(ii). There isn’t any such requirement in the other

seven provisions, either. The greater likelihood is that the

statute writers had a reason to insert such a requirement

only in § 170(b)(1)(A)(iii). The opinion is silent on this

point, which should have been explored. In any event, all

the contextual canon relied on by the court does is give

rise to a presumption of unlawfulness.

What the court has additionally done is violate

another contextual canon: the absurdity doctrine. This

canon states that a provision may be judicially corrected

where the failure to do so would result in a disposition

that no reasonable person could approve (Reading Law,

at 234). It is not reasonable to conclude that an entity

is an educational organization where only 13 percent of

its activities is educational in nature and only 6 percent

of its revenue is derived from educational undertakings.

Under this opinion, as another example, a religious

organization can be a church if only a small percentage

of what it does is in conformity with IRC § 170(b)(1)(A)

(i). The opinion states, in effect, that public charity status

can be achieved where the tail wags the dog.

It may also be noted that the primary-function

requirement for schools has been a part of the tax law

for decades. For example, the IRS ruled in 1976 that a

nonprofit organization established to primarily operate a

museum is not an educational organization even though

it provides some educational programming (Rev. Rul.

76-167). If the Mayo Clinic decision stands, rulings such

as this will be voided and the federal tax law concept of

what it means to be a public charity will be upended.

Another contextual canon the court could have

applied is the harmonious-reading canon, pursuant to

which the provisions of a text should be interpreted

in a way that renders them compatible, not contradic-

tory (Reading Law, at 180). The primary purpose rule

has been in the law of tax-exempt organizations since

Congress, in 1913, employed the term-of-art exclusively

in IRC § 501(c)(3). That was done in the tax-exemption

context, of course, but Congress lumped all institutional

public charities (churches, schools, hospitals, etc.) into

one generic classification as well (IRC § 509(a)(1)).

Congress has had ample opportunities over many

years to add a primary-function requirement to any or

all of the eight other subsections of IRC § 170(b)(1)(A)

if it thought that was necessary. Of course, it has never

done so. No court, until now, has interpreted the law of

public charities in a way that enables an entity to qualify

as a public charity by simply tangentially qualifying. It

can only be hoped that a higher court, starting with the

Eighth Circuit, will prevent the public charity classifica-

tion law from devolving into chaos.

REV. PROC. CHANGING GIFT

DISCLOSURE RULES SET ASIDE

FOR PROCEDURAL REASONS

A federal district court, by decision dated July 30,

ruled that a revenue procedure issued last year that

attempted to relieve many categories of tax-exempt

organizations from the requirement of disclosing donor

information must be set aside on the grounds that the

Treasury Department and the IRS did not follow the

Administrative Procedure Act’s notice-and-comment pro-

cedures (Bullock et al. v. Internal Revenue Service et al.

(D. Mont.)). This case concerns Rev. Proc. 2018-38 (sum-

marized in the September 2018 issue).

Facts

The tax regulations expand on the scope of the

reporting on annual information returns (IRC § 6033(b))

by generally requiring all types of tax-exempt organiza-