DATELINE: June 16, 2009, Chicago
Jim Bunning may be a United States Senator, but that does not mean that he is above the law. Based on a report appearing in the Hill, the IRS should revoke the tax-exempt status of the Jim Bunning Foundation. Reid Wilson, Bunning Makes $20K From Baseball Signings (June 12, 2009). According to the article, Bunning is prohibited from selling his autograph because of Senate ethics rules. In an apparent attempt to steal home base, Bunning created a charitable foundation. Senate ethics rules reportedly permit the foundation to sell the baseballs that Bunning autographs and donates to the foundation. That’s a story by itself.
According to the 2008-Form 990-EZ filed by the foundation, Bunning was paid...
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$20,000. Part III of the Form 990-EZ suggests that the foundation’s sole activity was grantmaking. It made $18,200 in grants, meaning Bunning’s compensation from the foundation exceeded the grants. To the foundation’s and Bunning’s credit, the foundation listed the grants. The listing doesn’t suggest a focused grantmaking program. The grants were made to the types of organizations that most people donate money to—churches, cancer societies, schools, and children’s charities. In the two other years for which foundation tax returns are available, Bunning’s salary from the foundation exceeded the grants. The foundation claims that it is a public charity rather than a private foundation.
Although the Senate may be willing to accept spitballs, the tax law doesn’t. We suspect the foundation will find itself in a pickle if the IRS has the guts to audit the foundation’s tax returns.
Private Benefit. Treasury Regulation Section 1.501(c)(3)-1(d) sets out the private benefit doctrine. The regulation provides:
An organization is not organized or operated exclusively for one or more of the purposes specified in subdivision (i) of this subparagraph unless it serves a public rather than a private interest. Thus, to meet the requirement of this subdivision, it is necessary for an organization to establish that it is not organized or operated for the benefit of private interests such as designated individuals, the creator or his family, shareholders of the organization, or persons controlled, directly or indirectly, by such private interests.
In this case, the foundation’s founder has received more in salary in 2008, 2006, and 2005 than the foundation made in total grants in each of those years--GuideStar provides no return for 2007. On those facts, a good case can be made that the foundation benefits private interests more than it benefits charitable ones. That position is further supported by the fact that Bunning has a natural incentive to use the foundation because without it, he would not be able to engage in the activity of selling baseballs he has autographed without violating Senate ethics rules.
By analogy, Bunning is the equivalent of those who ran credit-counseling agencies using tax-exempt nonprofit organizations. In many of those cases, the founders would have preferred to operate as a for-profit business, but some states prohibited for-profit credit counseling agencies. The solution was to form a nonprofit, obtain tax-exempt status, and then drain the profits from the entity through fee and other arrangements put in place and used by the founders. The IRS went after those agencies with a vengeance and was quite successful in revoking tax-exempt status.
Intermediate Sanctions. Senator Grassley is quick to point out and criticize excessive compensation. He has hauled a number of charities before his committee (or at least shamed them into appearing) to discuss compensation. The Bunning Foundation indicates in its 2008 tax return that Jim Bunning worked on average one hour per week for the foundation. That works out to close to $400 an hour. If we are counting correctly, the foundation made 24 grants. That works out to $833 per grant in salary. The average grant was for $758. This strikes us as rather inefficient, particularly when many of the grants are to well-known organizations for relatively small amounts. Senator Grassley doesn’t like that sort of inefficiency. Will he commence an investigation of the Bunning Foundation?
The IRS also might want to determine whether Bunning has the benefit of the rebuttable presumption under the intermediate sanctions. This looks like a case ripe for those sanctions, which were enacted to curb excessive compensation. We wonder whether the foundation has compensation comparables.
Commensurate in Scope. As anybody who follows our work knows, we are not big fans of the commensurate-in-scope doctrine, but Senator Grassley is a big fan of that doctrine. So will Senator Grassley ask the IRS to apply the doctrine to the foundation?
UBIT. There has been a lot of debate over whether the exceptions and exemptions from the unrelated business income tax have swallowed the tax. The Bunning Foundation is another example that should keep the debate going. The foundation claims that it has no unrelated business income as a consequence of its activities. It presumably is relying on the exception in Section 513(a)(3) for sales of merchandise, substantially all of which has been received by the organization as gifts or contributions. Bunning apparently donates the baseballs to the foundation. Why isn’t Senator Grassley using the Bunning Foundation as an illustration of why UBIT reform is necessary?
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.
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