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

Date01 October 2019
Published date01 October 2019
October 2019 3
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.
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).
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-

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