Table of Contents

Date01 October 2008
Published date01 October 2008
In issuing one of the most preposterous private letter rulings to emanate
from the Exempt Organizations Division in quite some time, the agency has
held that an organization cannot qualify as a charitable entity, in part because
it has not adopted a conflict-of-interest policy and lacks an independent board
(Priv. Ltr. Rul. 200830028).
The board of this organization consists of four individuals. One of them
is the entity’s founder, who is also a director and chair of the board, and its
pastor. Another board member is the founder’s spouse, who is cochair of the
board, secretary, and treasurer. The third member is a son of this couple, who
is the assistant secretary. The fourth board member is another son.
This organization also sought qualification as a church. The IRS ruled that it
“lack[s] all of the significant elements used to determine whether an organiza-
tion is a church for tax purposes” and that it “also lack[s] many of the other
elements associated with churches.” The agency added that “all of the signifi-
cant factors used in determining church status weigh against you.”
The IRS considered the lack of an independent board in the context of the
private benefit doctrine. Noting that this family exercises “complete control”
over the organization, its assets, the IRS wrote, “could be used to benefit the
family.” The IRS concluded: “The structure of your organization indicates that
it can be used to benefit private individuals, such as [the founder] and his fam-
ily, and you lack safeguards that would help to prevent such use.” In addition,
the IRS said, “you have provided no evidence that the organization will not be
used for the benefit of private individuals.” [5.6, 10.3, 20.11]
Commentary: This ruling is, from the standpoint of law analysis, a travesty. No
other agency of the federal government can get away with this sort of behavior
(application of nonexistent rules and decisions based on pure speculation). The
IRS, like the rest of us, is bound (or is supposed to be) by rules of law.
Yet, here, this organization was denied recognition of tax-exempt status, in
part because it is engaging in two practices that are not required by the federal
tax law as a condition for exemption (or any other classification, with inappli-
cable exceptions): it did not adopt a conflict-of-interest policy and it lacks an
independent board. How can a government agency action be lawfully based on
an insinuation of requirements that are not mandated by the law’s criteria?
The IRS, in this ruling, piously intoned: “Exemption from federal income tax-
ation is not a right, it is a matter of legislative grace that is strictly construed.”
While that is indisputably true, the agency should give some credence to the
Analysis of current developments in tax
and related law for nonprofit organiza-
tions and their professional advisors.
Volume 25 Number 10
October 2008
Also in This issue
IRS Issues Package of
Proposed Substantiation and
Reporting Regs 2
IRS Issues Instructions for
Redesigned Form 990 6
IRS Memo Concerns
Public Charity Policical
Activity on Internet 6
Guidelines Issued for Applications
Submitted by Supporting
Organizations with
Donor-Advised Funds 7
Legislative Interest in Vehicle
Use Deduction 7
Other Developments 8
© 2008 Wiley Periodicals, Inc.
Published online in Wiley InterScience
Now in its
25th year!
The IRS, on June 19, issued final regulations that provide guidance on the
tax effect of receipt of unrelated business taxable income (UBTI) by charitable
remainder trusts (T.D. 9403). The regulations, which affect remainder trusts that
have UBTI in tax years beginning after December 31, 2006, accompany the
change in the statutory law made by enactment of the Tax Relief and Health Care
Act of 2006 (see the February 2007 issue). A summary of the regulations in pro-
posed form is in the May 2008 issue.
Prior to this law change, a charitable remainder trust could not be tax-exempt for
any year in which the trust had any UBTI. A trust in this circumstance was taxed on its
income, for each such year, under subchapter J as though it were a nonexempt, com-
plex trust. T
oday, however, charitable remainder trusts that have UBTI remain exempt
from federal income tax but are subject to a 100-percent excise tax on their UBTI.
This excise tax is imposed by IRC ß 664(c)(2)(A). The amount of UBTI is deter-
mined pursuant to IRC § 512; the modifications in IRC § 512(b) apply, including the
$1,000 specific deduction created by IRC § 512(b)(12). This excise tax is treated as
imposed under the excise tax rules that apply to private foundations and other tax-
exempt organizations (IRC chapter 42). Currently, the appropriate form to report
and pay the excise tax on charitable remainder trusts with UBTI is Form 4720.
For 2007, a charitable remainder annuity trust on the calendar year has
$60,000 of ordinary income, including $10,000 of gross income from a partnership
that constitutes unrelated business income to the trust. The trust does not have any
deductions that are directly connected with that incme. The trust has, for 2007,
administration expenses (deductible in computing taxable income) of $16,000,
resulting in net ordinary income of $44,000. The amount of UBTI is computed by
Analysis of current developments in tax
and related law for nonprofit organiza-
tions and their professional advisors.
Volume 25 Number 8
August 2008
NYT Takes Measure
of Charitable Sector 2
IRS Rules Restructuring Plan
Will Eliminate Excess Business
Holdings 3
Churches and Politics:
New Developments 5
TIGTA Lightly Rebukes
TE/GE Division on PACI 5
Millionaires’ Amendment
Ruled Unconstitutional 7
Other Developments 7
Bruce R. Hopkins’
© 2008 Wiley Periodicals, Inc.
Published online in Wiley InterScience
Now in its
25th year!

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