Revocation of Exemption Upheld, Not Barred by Equitable Estoppel Doctrine

• Date: 01 November 2020
• DOI: http://doi.org/10.1002/npc.30790
• Published date: 01 November 2020

Bruce R. Hopkins’ NONPROFIT COUNSEL

6 November 2020 THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

securities were “exclusively owned and controlled” by

the fund and that the fund “maintains full discretion” as

to subsequent sale of the securities. Shortly after each

contribution, the fund redeemed the securities for cash.

The IRS took the position that these transactions

should be treated in substance as a taxable redemption of

the securities by the donor, followed by a charitable con-

tribution of the redemption proceeds, and sought pen-

alties. The US Tax Court disagreed with the government,

by decision dated September 3, observing that the donor

“sought the tax advantages of donating appreciated

property rather than cash proceeds” (Dickinson v. Com-

missioner). Indeed, the court proclaimed that “[d]onating

appreciated property to a charity allows the taxpayer to

avoid paying tax that would arise if the taxpayer instead

sold the property and donated the cash proceeds.”

The court respected the form of these transactions.

First, the court found that the donor contributed the prop-

erty “absolutely” and parted with title to it. This finding

was based on the text of the letters. The government’s

effort to “make much” of the fund’s redemption policy

was dismissed by the court, which wrote that a “pre-

existing understanding among the parties that the donee

would redeem donated stock does not convert a post-

donation redemption into a predonation redemption.”

Second, the court held that the donor made the

contributions before the securities gave rise to income

by way of sale, thus avoiding application of the assign-

ment-of-income doctrine. The court explained that

“[w]here a donee redeems shares shortly after a dona-

tion, the assignment of income doctrine applies only if

the redemption was practically certain to occur at the

time of the gift, and would have occurred whether the

shareholder made the gift or not.” [3.1(i)]

Commentary: This opinion makes it clear (although

no additional clarity was needed) that transfers into

donor-advised funds are authentic contributions. DAF

critics clamor that these transfers are not really gifts

because the donor retains the ability to advise as to sub-

sequent grantmaking and/or investment. This argument

fails because exclusive right, title, and interest to and in

the contributed property are transferred to the sponsor-

ing organization. Period. ◆

REVOCATION OF EXEMPTION

UPHELD, NOT BARRED

BY EQUITABLE ESTOPPEL

DOCTRINE

The IRS granted recognition of tax-exempt status as

a charitable entity to an organization, only to, years

later, revoke that status. The IRS initially determined this

organization was exempt because it provided funding

of funeral costs for members of a charitable class —

namely, families of deceased seniors. A subsequent IRS

examination led to the agency’s conclusion that this

entity’s actual operations differed from its initial rep-

resentations in significant ways, in that it was not serving

a charitable class (it assisted merely its members), it was

operating in a commercial manner (it charged fees), and

it is serving private interests (rather than providing bene-

fits to the community).

The US Tax Court, by decision dated September 9,

agreed with the IRS, writing that the organization’s “pri-

mary activity was not directed towards meeting the spe-

cial needs of the charitable class, the elderly, by relieving

distress or providing a community benefit,” but instead

provided benefits only to its dues-paying members (The

Korean-American Senior Mutual Association, Inc. v.

Commissioner). Moreover, the “amount of the burial

payment was calculated on the basis of the number

of years the deceased member had paid the other fees

rather than the inability of the deceased member to pay

burial expenses.”

The court also rejected the organization’s argument

that the IRS should be equitably estopped from revoking

its tax-exempt status. The court stated that the IRS’s

decision to recognize this exemption at the outset was a

“mistake of law” by the IRS and held that the doctrine

of equitable estoppel does not prevent the IRS from cor-

recting these mistakes. [27.3] ◆

GOVERNMENT’S STATEMENTS

ABOUT EASEMENTS

APPRAISER HELD NOT RETURN

INFORMATION DISCLOSURES

In connection with one of the high-profile syndi-

cated conservation-easement transactions cases being

litigated (United States v. Zak (see the February 2020

issue)), an individual who is accused of providing false

(read, inflated) appraisals for clients in the case filed a

counterclaim alleging that the United States improperly

disclosed his tax return information (in violation of IRC

§ 6103). The ostensible impermissible disclosures were

made by IRS and Justice Department officials in press re-

leases, in other comments to the media, and at speaking

engagements.

The US District Court for the Southern District of

Georgia, on August 26, dismissed this claim without

prejudice, relying largely on an exemption concerning

data that cannot be associated with, or otherwise iden-

tify, a particular taxpayer (IRC § 6103(b)(2)). Also, certain

information may be revealed where the disclosure is nec-

essary in obtaining information not otherwise reasonably

available (IRC § 6103(k)(6)). The court concluded that