Skating on Thin Ice: IRS Does Not Identify Organization’s 501(c)( 3) Standing

Jan 12, 2021 by Zachary J. Montgomery

Various 501(c)( 3) organizations might go after charitable activities or operate to seek selfless functions. However, suppose such activities or objectives do not fall within the Internal Revenue Code’s needs for philanthropic companies? Besides jeopardizing the ability of contributor taxpayers to deduct contributions, the organizations might discover that they are taxed and also have particular declaring needs apart from annual Kind 990 filings. In a current Exclusive Letter Judgment, the Internal Earnings Service highlighted that “philanthropic” organizations, such as hockey organizations, that inevitably look after their very own participants may not be so philanthropic for tax purposes.

501(c)( 3) Organizations, Normally

Generally, philanthropic organizations need to meet particular requirements to be exempt for federal tax obligation purposes. [1] First, the organization must run for restricted purposes (e.g., religious, philanthropic, scientific, testing for public security, literary, or instructional functions). Second, individuals should not privately benefit from the web earnings of the organization. Lastly, the company should not involve in substantial publicity or lobbying tasks, and also the company should not take part in (or interfere in) any type of political project for or against a political prospect. [2]

Especially, Section 1.501(c)( 3 )-1(a) keeps in mind that an organization should meet the “company test” and “functional test” to be an exempt company under Section 501(c)( 3 ):

( 1) In order to be exempt as an organization explained in area 501(c)( 3 ), an organization must be both arranged and also operated specifically for one or even more of the objectives specified in such area. If an organization stops working to satisfy either the organizational test or the functional examination, it is not excluded.

( 2) The term exempt function or purposes, as made use of in this section, suggests any function or functions specified in section 501(c)( 3 ), as specified and also specified in paragraph (d) of this area. [3]

Section 1.501(c)( 3 )-1(b) specifies the “business examination,” and Area 1.501(c)( 3 )-1(c) defines the “operational test.” The “operational test” gives, in part:

(c) Functional test– (1)

Primary tasks. An organization will be considered operated solely for one or even more exempt purposes just if it involves largely in tasks which accomplish several of such excluded purposes defined in section 501(c)( 3 ). A company will certainly not be so regarded if greater than a poor part of its tasks is not in promotion of an exempt function.

( 2) Circulation of earnings. A company is not operated exclusively for several excluded functions if its web incomes inure in entire or in part to the advantage of private shareholders or individuals. For the definition of the words exclusive investor or individual, see paragraph (c) of § 1.501(a)-1. [4]

Further, Area 1.501(c)( 3 )-1(d)( 1 )(ii) specifically assigns the burden of proof to an applicant organization to show that it serves a public instead of an exclusive rate of interest and also specifically that it is not arranged or run for the advantage of exclusive passions, such as assigned individuals, the maker or his family members, investors of the organization, or individuals regulated, directly or indirectly, by such private passions.

In addition, previous earnings rulings have explicitly left out specific companies from being tax-exempt under Section 501(c)( 3) based upon their purposes as well as procedures. In Rev. Rul. 69-175, moms and dads of pupils participating in an independent school developed a not-for-profit organization to supply bus transportation for sure college children. The Internal Income Solution held that the organization was not tax-exempt under Area 501(c)( 3 )–” [w] chicken a group of individuals connect to supply a participating solution on their own, they are serving a personal interest.” [5] Additionally, in Rev. Rul. 61-170, a philanthropic company was established for the general objective of organizing private responsibility and also nurses for their common advantage (i.e., paying for higher job opportunity for its participants). The Internal Earnings Service held that the company did not meet the requirements of Area 501(c)( 3 ), as the company incorporated significant private factors to consider in its operation. [6]

Exclusive Letter Ruling 202101008

On January 8, 2021, the Internal Revenue Service issued a Personal Letter Judgment (“PLR”) pertaining to a taxpayer’s request for a judgment under Area 501(c)( 3 ). [7] The PLR states in part:

Said company is arranged … to link as well as arrange ice hockey authorities registered with F, to promote enrollment, training, and development of those officials for the total renovation of the quality of amateur ice hockey officiating. The Association will offer a forum for conversation and a medium for circulation of information on ice hockey rules and analyses to guarantee harmony of rules interpretation and also application; to establish much more reliable as well as efficient officials; to keep the highest requirements of officiating; and also to create a far better understanding in between officials, trainers and players.as not limited to such a situation.

Membership in you is restricted to persons who have (1) paid all costs, fees and also assessments as suggested by the Board of Supervisors (2) has fulfilled the F enrollment requirements as well as are presently signed up as an F on-ice authorities at any kind of degree or is an off-ice official signed up with F as an associated (non-skating) official … all your revenue is from organization settlements for officiating solutions … Almost all of your expenditures are for the compensation of members for their officiating solutions. [8]

Conclusion

Based on the taxpayer’s objective as well as procedures, the Internal Earnings Service established that the character of the company’s activities was basically commercial, not charitable. Fundamentally, the taxpayer resembled the registered nurses’ organization in Rev. Rul. 61-170 and also the school cooperative in Rev. Rul. 69-175. As necessary, the Internal Revenue Service held that the taxpayer did not get approved for exception under Area 501(c)( 3) for stopping working the operational examination under Area 1.501(c)( 3 )-1(c).

Charitable companies should take care that their purposes as well as tasks squarely satisfy the business and functional tests. In the immediate instance, exclusive inurement as well as serving the rate of interests of a small, private group of participants will certainly extra than likely endanger the 501(c)( 3) standing of an organization. Caring for a company’s members may typically seem philanthropic, however companies ought to check out whether their purposes and activities truly serve the general public.

[1] See I.R.C. § 501(c)( 3 ).

[2] Id.

[3] Treas. Reg. § 1.501(c)( 3 )-1(a).

[4] Treas. Reg. § 1.501(c)( 3 )-1(c)( 1 )-( 2 ).

[5] See Rev. Rul. 69-175, 1969-1 CB 149.

[6] See Rev. Rul. 61-170, 1961-2 CB 112.

[7] I.R.S. Priv. Ltr. Rul. 202101008 (Jan. 8, 2021).

[8] Id.

Published at Tue, 12 Jan 2021 13:33:48 +0000

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