Jul
31
2012

Charitable Marijuana

In PLR 201224036, the organization at issue was dedicated to providing education about using “cannabis as medical therapy” and to providing “safe, legal access to cannabis.” The law of the state apparently allowed such use when prescribed by a doctor. The organization also provided:  

  • information about how to ingest cannabis
  • recipes that include cannabis
  • instructions to grow your own cannabis
  • grading services for homegrown cannabis

In order to pay for the cannabis, members pay a “suggested donation price” in cash or in exchange for (more…)

Jun
04
2012

When 4% is greater than 100%

Section 502 of the Code provides that an organization with the “primary purpose of carrying on a trade or business for profit” is not exempt under Section 501 “on the grounds that profits are payable” to exempt organizations.  This section was enacted in 1950 and revoked the destination-of-income test that previously had permitted commercial organizations to be exempt on the grounds that they donated their profits to other charities.  Of course, a trade or business may otherwise constitute an exempt activity (such as the educational activities of an exempt school or the health care activities of an exempt hospital).  But Section 502 makes it clear that if the activity is not by itself exempt (more…)

May
01
2012

How Would You React?

How would your board of directors react if it discovered potential wrong doing?  The answer to this question is critical.  Recently, Robert Carlson, the Missouri Assistant Attorney General who oversees charity enforcement in Missouri, indicated that a board’s quick action to address an issue, such as a potential breach of fiduciary duty or misuse of charity assets, may keep the board of directors and/or charity from being sued by the Attorney General’s office.  Such a reaction includes a proper investigation of warning signs.  The IRS has similarly provided that a board’s reaction will be a key factor in determining whether the IRS will seek revocation of exempt status in instances involving private inurement, including whether the board has corrected the current situation (which may include firing and suing the offending party) and put safeguards in place to prevent future problems before the IRS gets involved.   See Treas. Reg. 1.501(c)(3)-1(f).  While it is not possible to prevent all acts of wrongdoing, the manner in which a board reacts when potential wrong-doing is discovered is critical to (i)demonstrate that the board has satisfied its fiduciary duties, (ii) protect the charity and board from potential lawsuit, and (iii) maintain tax-exempt status.

Mar
12
2012

Call Me Ishmael

I have heard it said by boat owners that the second best day in your life is the day you buy your boat.  The best day is the day you sell your boat.  Having never owned a boat, my boat experience consists of falling when trying to ski, falling when trying to wakeboard and reading Moby Dick. I asked my wife what she thought about boats and I (literally) got these responses:

(1) Sailor hats look dorky.
(2) Why can’t they just say ”right” and “left”?

(more…)

Dec
26
2011

Garage Sale Christmas

As a consumer and parent, I love garage sale-ing–you never knew what you will find. Garage sales are especially helpful for Christmas shopping for young children. In my opinion, there is no reason to buy a new present for anyone under the age of 5. And for anyone under the age of 18 months, there is no reason to get any presents at all. (In my experience, no matter what you wrap up, (more…)

Aug
25
2011

School Fundraising – Resist the Urge to Earmark

There are numerous charities established to raise funds to support the extra-curricular activities or tuition of students.   In most cases, parents and students help raise funds by volunteering their time (e.g., working at concession stands, selling coupon books or candy, ect).   In order to be fair to those who volunteer, there is often an urge to earmark the funds raised to those students who volunteered (or whose parents volunteered) to be available by those students to pay for their extra-curricular activities or tuition.   However, as the charity discovered in PLR 201130012, such earmarking results in an improper private benefit that resulted in revocation of tax-exempt status.  Therefore, charities formed to raise funds for students must resist the urge to earmark funds for particular students and instead are used to benefit a broad class of students.

Aug
18
2011

Never Pay Taxes Again

Imagine you are talking to a friend of a friend at a party, who says that you can avoid ever paying income taxes by taking six simple steps:

(1) form a corporation with the word “church” in the title;
(2) appoint yourself president/minister of the church;
(3) transfer your home, car, weekly income and other assets to the church;
(4) transfer your debt (mortage), car loans, etc. to the church;
(5) continue to spend your time and money as you did before;
(6) have the church pay you for your services as president/minister and pay your expenses (home, car, credit cards, kid’s tuition, etc.)

What would you do? (more…)

Jul
07
2011

The Private Benefit of Social Networking

The so-called “private benefit doctrine” prohibits 501(c)(3) organizations from providing a “substantial” benefit to private parties. Much has been said and written about what constitutes a substantial benefit; for purposes of this blog, I will simply provide an example to illustrate the point. An organization that presents musical performances, for example, may generally qualify under 501(c)(3). But if it (i) pays its performers twice fair market value, (ii) arranges for all performers to sign a subsequent contract with a for-profit arts company or (iii) if it only performs for one wealthy family, then it would violate the private benefit doctrine by providing a prohibited substantial benefit to (i) the actors, (ii) the for-profit company or (iii) the wealthy family.

In PLR 201125045, the organization’s mission was to “foster intercultural understanding to the world through cultural exchange” and it sought 501(c)(3) status on the basis that it furthers an educational purpose through its promotion of cultural exchange. The organization operated a website that enabled a “global community of members to establish personal profiles”, create friendships online and meet individuals willing to offer free accommodations during personal travel. Unfortunately for the organization, the IRS determined that the the organization did not qualify for 501(c)(3) status because its primary purpose was providing free accommodations to its members during personal travel, which violated the private benefit doctrine. This is similar to circumstance (ii) above; it behooves a 501(c)(3) organization to examine its activities and transactions through the lens of the private benefit doctrine.

Feb
03
2011

No More Horsing Around

In PLR 201104066, the IRS revoked the tax-exempt status of an organization formed to guard the purity of a certain breed of horses, promote interest therein, and help fund research on the genetics of the breed.  The organization also maintained a website that contained links to private sellers of such horses.  The IRS concluded that the website links caused the organization’s assets to inure to the benefit of private individuals.  The breeders earn a profit, and private benefit, by being able to sell horses and/or stud services to interested persons, and the organization facilitated these sales.  One lesson for other charities is to use caution when linking to for-profit websites.

Jan
18
2011

Seller “Gifts” and Down Payment Assistance Crackdown

The IRS continues to crackdown on down payment assistance programs that involve “gifts” by the selling party.  Under these programs, the organization offers down payment assistance to buyers who cannot afford the 3% down payment necessary to qualify for a federally insured (HUD) loan.  In order to raise the funds, the organization requires participating sellers to agree to donate the 3% down payment to the organization.  Despite the fact that the “donation” by the seller matches the buyer’s 3% down payment (which is transferred to the seller as part of the purchase price), these organizations maintain that the down payment assistance is funded with other donations.  However, these organizations rarely demonstrate funds from any other sources.  In Private Letter Ruling 201102064, released today, the IRS denied tax-exempt status to another organization structured in this manner on the basis that the organization operates with a substantial non-exempt purpose and for the benefit of private interests (including the sellers, and in many cases, real estate brokers).  This is not a new development but merely another ruling in a long line of recent letter rulings scrutinizing down payment assistance programs that operate in this manner.

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