Sales of Product by Catalog and in Retail Outlets Held Unrelated Business

• DOI: http://doi.org/10.1002/npc.30244
• Date: 01 October 2016
• Published date: 01 October 2016

Bruce R. Hopkins’ NONPROFIT COUNSEL

3

October 2016

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

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

The court added: “The IRS’s only further attempt to

justify the lack of cessation as to some of the applicants

is to refer to its Catch-22 litigation rule as a ‘longstand-

ing policy.’” Its response to that: “To this we would

advise the IRS: if you haven’t ceased discriminatory con-

duct, the fact that you have been failing to cease it for

a long time does not create cessation. You still have not

carried your burden.”

The court stated that, even if it assumed voluntary

cessation on the part of the IRS, it would still conclude

that the government has not carried its burden to estab-

lish mootness because it has not demonstrated that “(1)

there is no reasonable expectation that the conduct will

recur [or] (2) interim relief or events have completely

and irrevocably eradicated the effects of the alleged

violation.”

The court noted that the IRS announced that the

use of watch (BOLO) lists to identify cases or issues

requiring heightened awareness has been “suspended

until further notice.” The court wrote that a “violation

of right that is ‘suspended until further notice’ has not

become the subject of voluntary cessation, with no

reasonable expectation of resumption, so as to moot

litigation against the violation of rights.” “Rather,” the

court continued, “it has at most advised the victim of

the violation—‘you’re alright for now, but there may be

another shoe falling.’” [26.1(j), 26.15]

Commentary: Those who persist in dismissing this

IRS brouhaha as merely instances of mismanagement

at the IRS must grasp the significance of the fact that,

to date, two federal courts of appeal are of an entirely

different mind. One is this appellate court, writing the

above opinion and the opinion in the Z Street case. The

other opinion is that from the Sixth Circuit in United

States v. NorCal Tea Party Patriots (summarized in the

May 2016 issue). The language used in these opinions,

such as the phrases quoted in the first paragraph of this

article, reflects the view that something far more nefari-

ous than management lapses at the IRS has occurred

and continues to occur. This is leading to accretion of

an impressive body of constitutional law concerning

viewpoint discrimination in the exemption application

recognition setting. ◆

TREASURY, IRS ISSUE 2016–

2017 PRIORITY GUIDANCE

PLAN

The Department of the Treasury and IRS, on August

15, issued the 2016–2017 Priority Guidance Plan. The

list of tax-exempt organizations projects is almost the

same as the prior iteration of the Plan (summarized in

the April 2016 issue). The new item is an update of the

IRS’s rules concerning circumstances where an exempt

organization is required to file a new application for

recognition of exemption because it has become a new

legal entity (Rev. Rul. 67-390). We probably can thank

the ABA Tax Section for that one (submission summa-

rized in last month’s issue).

The list of charitable giving projects, however, has

been significantly expanded. As to guidance on qualified

contingencies of charitable remainder annuity trusts,

see the article beginning on page 4. Three new projects

have been added: (1) guidance concerning charitable

contributions of conservation easements, (2) guid-

ance regarding charitable contributions of appropriative

water rights, and (3) guidance regarding the “tax impact

of certain irregularities” in administration of split-inter-

est charitable trusts. (Yes, the oldest of them all remains

on the list: final regulations concerning recordkeeping,

substantiation, and appraisal requirements in reflection

of legislative enactments in 2004 and 2006. Proposed

regulations were issued in 2008.) ◆

SALES OF PRODUCT BY

CATALOG AND IN RETAIL

OUTLETS HELD UNRELATED

BUSINESS

The IRS determined that a public charity, a conserva-

tion and preservation organization, selling a product

(Product) through its online store, by print catalog and

at various retail outlets, is engaging in an unrelated busi-

ness (Tech. Adv. Mem. 201633032).

Facts

The exempt status of this entity, which conducts

workshops and conferences, produces publications, and

engages in research, was not at issue. This organization

also maintains a visitors’ center and a website.

The Product is produced by the organization’s

employees and at operations under contract. It is sold in

packages, the back of which provides instructions “typi-

cal of commercial . . . packages.” The organization’s

office and website addresses are listed, “in small print,”

on the back of the packages.

A “prominent link” on the home page of the orga-

nization’s website connects visitors directly to the online

store where books and other products are sold. The

Product is sold throughout the United States from retail

outlets. Aside from a “few pages” containing informa-

tion about the organization, the catalog is “similar to

the catalogs published by for-profit . . . companies.”

Law and Analysis

The organization did not dispute the facts that

the Product sales amount to a business and that this