August 3, 2010
Authored by: Nathan Boyce
My wife and I try to teach certain lessons to our kids. For example, my eight-year old son is good at math and science; this is true despite his father being in a profession that is notoriously chosen by people who are bad at both math and science. But, despite not inheriting my ineptitude for numbers and symbols, he did inherit my grade-school propensity to rush work and make silly mistakes. Signs of this have included adding instead of subtracting or failing to even attempt problems on the back of a page. So, we have encouraged him (and some mistakes on graded work have also encouraged him) to be more diligent in double-checking his work.
Another thing we have tried to teach our kids is to be honest–at school and otherwise. My favorite comedian, Brian Regan, has a humorous bit (available here, though I think it’s funnier to just listen and ignore the stick people (who give away the jokes)) concerning the pitfalls of using a lie to cover another lie. Dishonesty directed towards government agencies is a particularly bad idea.
The IRS recently revoked the exempt status of an organization that seems to have not learned one or both of these lessons. The 501(c)(3) organization in PLR 201029032 had loaned between 84% and 91% of its assets to a trustee of the organization who had contributed most of the organization’s assets in the first place. In general, loans to substantial contributors and other disqualified persons may or may not violate the inurement prohibition. The IRS Form 1023 asks for a detailed and thorough description of activities (Part IV) and specifically asks whether the organization does or will have any loans with trustees (Part V question 8a). In this case, not only were the terms of the loans so generous that the IRS concluded they constituted inurement to the trustee, the organization had never disclosed that it intended to make any loans–much less loans of most of its assets. Hence, the IRS revoked the organization’s 501(c)(3) status retroactive to its date of formation. (Retroactive revocation is appropriate where an organization “omitted or misstated a material fact or operated in a manner materially different from that originally represented.”)
Now I don’t know whether the organization was trying to deceive the IRS or if it just failed to appreciate the rules governing exempt organizations and hurried through its Form 1023. But it seems to me that when dealing with the IRS, organizations should be at least as careful as an eight-year-old and at least as honest as a stand-up comedian.