DATELINE: February 6, 2008, Chicago
As our regular readers know, we think there are far too many charities and other exempt organizations. Unfortunately, the IRS cannot take a position on the issue. As an administrative agency charged with administering the law, the IRS has to take 'em as they come, but it can deny or revoke exemption when an organization does not satisfy the statutory requirements.
This past week, the Tax Court upheld the IRS's conclusion that one organization...
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did not qualify as a Section 501(c)(3) organization. In Solutions Plus, T.C. Memo 2008-21, the Tax Court upheld the IRS's decision to deny Section 501(c)(3) status to an organization offering debt management plans. Although the organization purported to offer educational programs, the Tax Court found that these were insubstantial. The court further concluded that primarily providing services for a fee ordinarily does not further charitable purposes. In the end, the Tax Court concluded that the organization failed the operational test, stating:
Petitioner has not begun to actually operate. However, its plans make clear: (a) Petitioner's primary activity would be to provide DMPs to the general public for a fee that it hopes to collect from its customers and from its customers' creditors; (b) petitioner would conduct this activity in a self-promotional and profit-maximizing manner; (c) petitioner would not limit its DMP services to low income individuals; and (d) petitioner has not established that its proposed DMP fee structure is reasonable. Thus, the administrative record establishes that petitioner does not, or, more accurately, would not, operate exclusively for charitable purposes.
The court also questioned whether the organization served a defined charitable class in a "nonselect manner." The organization's services were not limited to low-income individuals, which troubled the Tax Court. Moreover, the Tax Court was concerned that potential clients would be turned away unless they met the criteria of participating creditors, which apparently raised the possibility that the organization was operated for the benefits of private interests rather than a discrete charitable class.
In the end, the Tax Court looked at the substance behind the organization, concluding that,
Mr. Dennis formed petitioner to be a family-controlled business that he personally would run for financial gain, using his past professional experience marketing DMPs and managing a DMP call center.
The outcome was hardly surprising, but the case does serve as a reminder that the IRS and the courts are monitoring tax-exempt status.
Internal Revenue Service - Circular 230 Disclosure: As provided for in Treasury regulations, any advice (but none is intended) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.
THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NONPROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL. If you liked this post, please visit http://www.charitygovernance.com for a description of our training and consulting services. You will also want to acquire a copy of Jack Siegel's book, A Desktop Guide for Nonprofit Directors, Officers, and Advisors: Avoiding Trouble While Doing Good."
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