“Tax Insurance” Premiums Concerning Charitable Gift Adjustment Ruled Nondeductible

• Published date: 01 February 2021
• DOI: http://doi.org/10.1002/npc.30826
• Date: 01 February 2021

Bruce R. Hopkins’ NONPROFIT COUNSEL

February 2021 7

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

using the standard. The IRS declined to recognize this

organization as a tax-exempt business league on the

ground it is engaged in a business ordinarily conducted

for profit and is performing particular services for a

“select group” of members, thereby providing them

a competitive edge over nonmembers (Priv. Ltr. Rul.

202050016). [14.2(b), (c)]

• A nonprofit organization with a membership of golf

enthusiasts worldwide failed in its effort to secure

recognition of exemption as a charitable and educa-

tional entity (Priv. Ltr. Rul.202050017). The IRS noted

that some of this organization’s activities are educa-

tional in nature, such as mentoring to youth groups

and publishing information on the history of golf.

The IRS, however, relying on what it found on the

entity’s website, concluded that a substantial portion

of the activities of this organization are special and

recreational, in the form of promotion of “fellowship

and friendship” among its members, hosting of

meetings to exchange golf artifacts and memorabilia,

and facilitation of golf tournaments. [4.5(a)] ◆

SUPREME COURT UPDATE

The US Supreme Court, by a 5-4 decision dated No-

vember 27, struck down a New York State executive

order imposing restrictions on the size of gatherings in

houses of worship, in an effort to control the spread of

the coronavirus (Roman Catholic Diocese of Brooklyn v.

Cuomo). The limits were found excessively strict and thus

a violation of the Free Exercise Clause, public health con-

cerns notwithstanding. Another aspect of this opinion is

that it, in the words of the New York Times on November

27, “said the state had treated secular businesses more

favorably than houses of worship.” The opinion stated

that the “list of ‘essential’ businesses includes things

such as acupuncture facilities, camp grounds, garages,

as well as many whose services are not limited to those

that can be regarded as essential.” [10.1(a)(i)]

A case concerning restrictions on church gatherings

during the pandemic, decided by the US District Court

for the Central District of California on September 2, was

remanded by the Court on December 3 for reconsidera-

tion in light of the Diocese of Brooklyn decision (Harvest

Rock Church v. Newsom). [10.1(a)(i)]

The Court, on December 1, heard arguments in a case

where a company is seeking to enjoin enforcement of an

IRS notice that identified a transaction as a transaction

of interest, principally on the ground that the notice was

promulgated in violation of the Administrative Procedure

Act (CIC Services, LLC v. United States). Both the district

court and the US Court of Appeals for the Sixth Circuit held

that the complaint is barred by the Anti-Injunction Act (the

latter holding summarized in the August 2019 issue). ◆

“TAX INSURANCE” PREMIUMS

CONCERNING CHARITABLE

GIFT ADJUSTMENT RULED

NONDEDUCTIBLE

The IRS’s Office of Chief Counsel opined that a part-

nership cannot deduct the cost of premiums paid for an

insurance policy that contemplates reimbursement of the

partners for an adjustment reducing the tax benefits they

are entitled to claim for a charitable contribution made by

the partnership (Chief Couns. Adv. Mem. 202050015).

This “tax insurance” policy will reimburse the partners for

any difference between the tax benefits they claimed and

the benefits they are entitled to receive.

Chief Counsel noted that whether a business expense

deduction (IRC § 162(a)) is available is determined at

the partnership level. The law is that, where an expense

involves a contractual arrangement for reimbursement in

the event of a contingency, the terms of the arrangement

determine whether the expense is sufficiently related to

business activities to support a deduction. In this instance,

the reimbursement is available irrespective of any business

activity of the partnership and thus, Chief Counsel ruled,

the premiums are not deductible as a business expense.

Chief Counsel also ruled that these premiums are not

sufficiently related to the partnership’s income-producing

activities to warrant a deduction as an ordinary and nec-

essary expense incurred for the production or collection of

income or for the management, conservation, or mainte-

nance of property held for the production of income (IRC

§ 212(1), (2)). It was further held that these premiums

are not deductible as an expense related to the determi-

nation, collection, or refund of a tax (IRC § 212(3)), inas-

much as the policy does not provide, fund, or reimburse

any services or materials related to preparing returns,

determining a tax liability, or contesting such a liability. ◆

IRS UPDATES INFLATION

ADJUSTMENTS FOR 2021

The IRS published the annual inflation adjustments for

tax provisions for 2021 (Rev. Proc. 2020-45). Here are the

pertinent items:

• An exception from unrelated business income taxation

involving low-cost articles is applicable with respect to

articles with a cost of no more than $11.30. [25.2(j)]

• $5, $25, and $50 guidelines for disregarding the value

of insubstantial benefits received from a donor in return

for a fully deductible income tax charitable contribution

are $11.30, $56.50, and $113. [Appendices D-F]

• The annual per-person, -family, or -entity dues limita-

tion to qualify for the reporting exception regarding