Senate Committee Reviewing IRS Rulemaking Practices

• Published date: 01 April 2018
• DOI: http://doi.org/10.1002/npc.30454
• Date: 01 April 2018

Bruce R. Hopkins’ NONPROFIT COUNSEL

7

April 2018

THE LAW OF TAX-EXEMPT ORGANIZATIONS MONTHLY

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

are “normally carried on by for-profit businesses.” But

this ruling offers a glimmer of hope: fact situations like

this one can be analyzed and resolved by approaches

other than the increasingly nonsensical commerciality

doctrine—namely, the operational test and the unrelated

business rules. [4.5(a), 4.11, 24.4(g)]

◆Will they ever learn? A nonprofit organization, with

the purpose of “administration and operation of prop-

erty owned by the homeowner’s association as well as

maintenance of townhomes owned by the members

of the homeowner’s association,” sought recognition

of exemption as a social welfare organization. Its activi-

ties include the conduct of landscape, exterior surface

sealing program application, snow removal, and roof

replacement services for members. Owners in the devel-

opment are required to become members of the organi-

zation; it charges members dues and assessments based

on estimated expenses and a monetary reserve. As well

it should, the IRS ruled that this entity’s activities do not

primarily promote civic betterment or social welfare,

inasmuch as it is primarily operating for the private ben-

efit of its members (Priv. Ltr. Rul. 201805014). The group

of individuals involved was said by the IRS to not be a

community that resembles an area that could reasonably

be identified as governmental—they are members of a

condominium association. [13.2]

◆A nonprofit organization was formed to benefit and

protect its members by the exchange of knowledge and

grant of assistance to those who are sick or disabled.

It was created to perpetuate the teachings of an indi-

vidual, unite the brethren of three families, and promote

community welfare and sponsor social and educational

activities. This entity sought recognition of exemption

as a domestic fraternal society (an IRC § 501(c)(10)

organization). This effort failed because the organiza-

tion is not fraternal in nature, is not chartered by a

parent entity, and is not operated under a lodge system.

The IRS observed that this organization lacks members

“who have banded themselves together to work in

union to accomplish some worthy object” (Priv. Ltr. Rul.

201805015). [19.4(b)]

◆The IRS routinely accords advance approval of private

foundations’ individual grant procedures (IRC § 4945(g)

(1)). These rulings usually entail straightforward schol-

arship and fellowship programs. The facts of a recent

ruling, however, are noteworthily unique. A private

foundation is to operate a scholarship program to “help

individuals who have a need to enter a different career

path due to a life-changing illness of the individual or

due to the individual’s need to take care of a dependent

with a medical or similar condition.” Scholarships may

be awarded for an advanced (master’s or doctorate)

degree, a degree for a different undergraduate major

than the individual previously obtained, or a technical

degree. Each applicant will be required to demonstrate

that the degree he or she will pursue will enable the indi-

vidual to change his or her lifestyle to better address the

issues arising from the condition of the applicant or the

applicant’s dependent. The IRS approved the procedures

in this case (Priv. Ltr. Rul. 201805016). [12.4(e)]

◆A nonprofit organization advised the IRS that it

intended to develop open-source technology that helps

individuals with hand amputations transition from dis-

abled to fully abled status. In addition to creating

hardware, the organization will develop sophisticated

open-source software to control the proposed hands. It

will also develop related technology required to create a

bionic hand with human hand functionality. This develop-

ment work will be accomplished by teams of individuals

internationally, largely in academic settings. It developed

that the organization’s founder and president will be the

initial and substantial beneficiary of the organization’s

grants. This state of affairs was found by the IRS to

constitute private inurement, precluding tax exemption

as a charitable entity (Priv. Ltr. Rul. 201808019). The

organization was found to not be educational because

its activities merely provide information in the manner of

a product manual. The IRS added that providing services

or selling products at cost does not alone qualify an

organization for tax exemption. [6.3(a), 8.1]

◆A nonprofit organization was formed to restore a

hotel located near its community’s historical business dis-

trict. The organization purchased the building; it is now

fundraising to make the necessary renovations. Once

renovated, the hotel will be operated in a commercial

manner, replete with coffee shop, wine cellar, and spa.

This hotel is not located in a blighted area. Educational

material will be on display to convey the historic nature

of the facility. The hotel has not been accorded any his-

torical designation. Finding any charitable or educational

purposes of this organization to be incidental, the IRS

ruled that this organization is ineligible for tax exemption

(Priv. Ltr. Rul. 201808020). [4.11(d)] ◆

SENATE COMMITTEE

REVIEWING IRS RULEMAKING

PRACTICES

The matter of IRS compliance with the federal law

concerning the rulemaking process has arisen again, this

time due to a report by the Cause of Action Institute.

As has been discussed in these pages previously (most

recently, in the November and December 2016 issues),

federal law requires agencies to conduct an economic

analysis of a proposed rule that is likely to have a signifi-

cant economic impact on small entities. Federal agencies

include this information when publishing the proposal in

the Federal Register.

The IRS does not conduct these economic analyses—

the import of this report. The agency is of the view that its