TIGTA Issues 2020 Audit Plan

• Published date: 01 December 2019
• DOI: http://doi.org/10.1002/npc.30667
• Date: 01 December 2019

Bruce R. Hopkins’ NONPROFIT COUNSEL

December 2019 7

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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

program who have been approved to receive medical

marijuana in the state, sought recognition of exemption

as a charitable entity. This organization also oversees the

dispensaries that distribute the marijuana. Not surpris-

ingly, this recognition was denied, with the IRS ruling

that the organization is engaging in activities that are

illegal under federal law and are contrary to federal

public policy (Priv. Ltr. Rul. 201940008). The fact that the

distribution of marijuana for limited purposes is legal in

the state was, of course, not determinative. [6.2, 6.3(i)]

◆A nonprofit organization was formed to serve member

organizations engaged in the accounting profession. Its

primary activity is provision of management consulting

services, with a focus on owners of small accounting

businesses. These fee-based services will be tailored to the

specific needs of each business. The IRS declined to rec-

ognize this entity as a tax-exempt business league, on the

grounds that it is providing particular services to its mem-

bers and is conducting a business ordinarily carried on for

profit (Priv. Ltr. Rul. 201940009). [14.2(b)(i), 14.2(c)(i), (ii)]

◆A nonprofit organization was formed to principally

provide billing, legal, accounting, human resources, per-

sonnel, and support staffing to health care companies for

a fee. This entity has a medical staff that sees patients in

their homes and provides services for them. The admin-

istrative services include purchasing of medical and office

supplies, developing and revising various policies and

operating procedures, establishing and maintaining credit,

and establishing and implementing guidelines for recruit-

ment, hiring, firing, and compensation of employees. Not

surprisingly, the IRS refused to recognize this organization

as an exempt charitable entity because it is operating in

a commercial manner (Priv. Ltr. Rul. 201940011). [4.9(g)]

◆A nonexempt charitable trust (an IRC § 4947(a)(1))

entity operating a scholarship grant program. The IRS

determined that the trust’s procedures for awarding these

grants comply with the requisite advance IRS approval

requirements (Priv. Ltr. Rul. 201940013). This trust, how-

ever, engaged in scholarship grantmaking before receiving

this IRS approval; it sought abatement of initial (IRC §

4945) taxes. The IRS granted the abatement request, on

the grounds that no grant funds have been diverted to

nonexempt purposes and the adopted grantmaking pro-

cedures meet the advance approval requirements (Reg. §

53.4945-1(d)(3)) (Priv. Ltr. Rul. 201940013). (This ruling

was issued in response to a private foundation’s request

in 2004. In Bloomberg Law’s Daily Tax Report, October 4,

it is noted that the IRS’s release of the ruling was “spear-

headed” by a Bloomberg Tax & Accounting customer’s

Freedom of Information Act request.) [12.4(e)]

◆A nonprofit corporation provides education, quality

goods and services, and a program to promote healthier

living for residents of a city. It has entered into agree-

ments with apartment complexes to provide, for a fee,

wellness events for the tenants. This entity is a “collabo-

ration” of local for-profit businesses, each of which are

represented on the board of this nonprofit organization.

The IRS applied the commerciality doctrine in denying

recognition of exemption as a charitable entity, although

it appears this is predominantly a private benefit doc-

trine case (Priv. Ltr. Rul. 201941029). The principal basis

underlying this ruling is that the nonprofit organization’s

activities promote the business interests of its board

members. [4.9(g), 20.13(a)] ◆

TIGTA ISSUES 2020 AUDIT

PLAN

The Office of Audit Services fiscal year 2020 Annual

Audit Plan reflects the Treasury Inspector General for Tax

Administration’s current IRS audit priorities. This plan,

released on October 7, includes 156 new and in-process

audits. Here are the planned audits in the tax-exempt

organizations context:

• Determine whether the IRS processes are sufficient to

detect potentially noncompliant activities by exempt

organizations.

• Assess the overall effectiveness of the TE/GE Divi-

sion’s Compliance, Planning, and Classification

Unit Exempt Organizations examination selection

processes.

• Review the TE/GE Division’s efforts to identify and

examine exempt organizations with unreported or

underreported unrelated business income tax.

• Assess the IRS’s efforts to ensure that exempt organi-

zations with highly compensated employees comply

with excise tax reporting requirements.

• Evaluate the IRS’s processing controls and guidance

related to excise taxes on the net investment income

of certain private colleges and universities.

• Assess the implementation of the laws that impose

additional exemption requirements on hospital

organizations. ◆

OTHER DEVELOPMENTS

◆As well it should, the government, on October 4, filed

an appeal of the Mayo Clinic decision (summarized in

the October 2019 issue) with the US Court of Appeals

for the Eighth Circuit. Technically, the issue in this case

is whether the clinic qualifies as an educational institu-

tion as that term is used in IRC § 514(c)(9)(C)(i)). The

true issue, however, is whether the primary purpose test

applies with respect to each category of public charity

listed in IRC § 170(b)(1)(A). [4.4, 8.3(a), 12.3(a)]

◆The Treasury-IRS Priority Guidance Plan for 2019–

2020, dated October 8, contains 203 projects. The

projects we are used to seeing remain on the list, includ-

ing those triggered by enactment of the Tax Cuts and