In Uncategorized on 08/26/2013 at 19:42

Two 501(c)(3)s today, August 26, both Section 7428 declaratory judgments, as Tax Court releases a bushelbasketful of opinions.

First up, Partners in Charity, Inc., (“PIC”) 141 T. C. 2, filed 8/26/13. IRS revoked PIC’s exempt status retroactive to day one.

PIC was the brainchild of Chicago real estater Charlie Konkus. He claimed PIC was going to raise money to provide poor would-be homeowners with downpayments, if they could get mortgages.

What Charlie did was to get the sellers to front the downpayments, by paying Charlie the downpayments plus a little on the side, whereupon Charlie would use PIC to give the downpayment money (directly into escrow) for the buyers, and then funnel it back to the seller through the escrow at closing, thus permitting sellers to give the purchasers the downpayment, something prohibited by FHA regulations. And let the sellers charge more for their houses (as Charlie pointed out in his promotional materials). But FHA regulations allow charities to fund downpayments for the poor.

Of course, Charlie did not restrict his pseudo-largesse to the poor: anyone, rich or poor or in-between, could avail themselves; and, since Charlie had no controls to make sure his beneficence would only aid the poor, they did. Charlie hired his wife’s company to promote the business, and in two years racked up $3 million in profit.

Judge Gustafson, usually so obliging, is not amused: “Indiscriminately giving money away to anyone who will take it is not a charitable purpose, even if some of the recipients are poor people. Section 501(c)(3) requires more; it requires that the money be given away in such a way that it furthers a purpose of reducing poverty, promoting education, science, or religion, or promoting another public good. We conclude that… PIC’s DPA program did not operate for a charitable purpose.” 141 T. C. 2, at pp. 28-29.

It’s what you do, not what you say you will do.

PIC was a broker, not a charity. And IRS has discretion to revoke a 501(c)(3) exemption retroactive to day one, and here that discretion was not abused.

Next up, Judge Gustafson examines the gymnastics of Capital Gymnastics Booster Club, Inc., in 2013 T. C. Memo. 193, filed 8/26/13. Here the question is did the exempt income inure to the private benefit of insiders, and Judge Gustafson finds that it did.

The Capitalists, a 501(c)(3) athletic outfit, required member-parents to front the money for their children’s competitive efforts, in training and in competitions. Alternatively, the parents could “fund-raise”, that is solicit contributions to the Capitalists, receiving  a formulaic credit against the not-inconsequential annual membership dues and assessments for concomitant expenses connected with their offsprings’ handsprings.

“Capital Gymnastics computed the assessment at the beginning of each season by consulting with meet sponsors. Capital Gymnastics did not allow athletes to compete unless their assessment was paid in full, including any late fees. The record shows no conferring of ‘scholarships’ nor any other relaxation of this requirement.” 2013 T. C. Memo. 193, at p. 6.

But there was an out; fund-raisers and other special friends of the Capitalists didn’t pay the full freight. “For the families that chose to fundraise, Capital Gymnastics awarded points in proportion to the fundraising profit that each family generated. Each point was worth $10. The chairperson of each fundraiser also received a small number of points as an incentive to manage the fundraisers. Parents could earn additional points by filling certain board positions on Capital Gymnastics. Capital Gymnastics’ financial manager periodically tallied the points for each family and reduced the family’s unpaid assessment in dollars, according to the number of points that the family had earned.” 2013 T. C. Memo. 193, at p. 8.

The fundraisers got big discounts, the non-fundraisers (described by the Capitalists as “moochers” or “freeloaders”) got nothing.

Now fostering amateur sport competitions is a valid Section 501(c)(3) purpose, so the Capitalists’ aims are legit. What sinks them is the benefits to the fundraisers.

Exempts can’t benefit insiders or private parties. The Capitalists argue that the kids are the beneficiaries. IRS says no, it’s the fundraising parents, who are members, who are getting the benefit.

Judge Gustafson: “Applying the law to Capital Gymnastics’ facts and circumstances, we find that, in violation of section 501(c)(3), Capital Gymnastics allowed substantial private inurement to the parent-member-insiders who fundraised (by providing to those insiders relief from an economic burden in the form of ‘points’ applied to their assessments) and thereby conferred an impermissible substantial private benefit on the child-athletes of those parents only (as opposed to its child-athletes generally). Capital Gymnastics authorized parent-members to raise funds for their own benefit but under the name of Capital Gymnastics and trading on its tax-exemption ruling. Capital Gymnastics rigorously assured that its fundraising did not generally benefit all the child-athletes in its programs but rather benefited only the children of parents who did the fundraising.” 2013 T. C. Memo. 193, at pp. 19-20.

And Judge Gustafson makes clear the contrast between the occasional fundraiser (bake sale, car wash) and the Capitalists’ all-out drive. “…this is not a circumstance (like, say, a school band’s sale of candy or a church youth group’s carwash for a once-a-year event) in which the fundraising is a tiny fraction of the organization’s overall function; here, the fundraising is, instead, the admitted ‘primary function’ of the organization. This is not a circumstance in which the individual’s contribution of his share of the cost is optional or where scholarships are made available for those who cannot afford the cost. Nor is this a circumstance in which every member is required to perform fundraising and no one can buy his way out; rather, the fundraising was an option chosen by those who wanted to earn their assessments. The assessments at issue were not arguably de minimis charges that might be covered by a child’s paper route or babysitting, but rather were serious parental obligations….” 2013 T. C. Memo. 193, at p. 20.

In short, the money wasn’t spread around. No exemption.


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