A nonprofit organization was formed for the purpose of supporting “wildlife and habitat preservation initiatives.” The principal way this entity achieves its purpose is, in the language of its application for recognition of exemption, by “promoting and delivering exceptional [hunting] excursions that will support ranchers who are struggling in this economy to maintain their businesses.” These excursions are operated in the same manner as undertaken by a for-profit company founded by the same individuals who created this nonprofit entity.
In a clarification, the organization stated that its hunting excursions will be undertaken for the “primary purpose of teaching participants about safe hunting practices, firearms safety, and the ecological reasons which motivate hunting.” Part of its efforts is to teach about hunting “as a means of population control without which ecosystems would be burdened by starvation and depletion of natural resources.” The organization’s educational efforts are “confined” to video clips posted on its website.
The sole means of fundraising by this organization is the conduct of online raffles. The prizes are the excursions and various hunting and fishing gear. The tickets are priced at more than $100 per ticket. The IRS observed that the organization has “no means of determining who can enter these raffles.” Also, winners are selected randomly. The organization projected gross revenue “in the millions” from the conduct of raffles.
About 20 percent of the organization’s expenditures is projected for scholarships for individuals who are pursuing a course of study in wildlife management, ranch management, marine biology, agribusiness, or a comparable field.
The IRS concluded that the nonscholarship expenditures of this organization will be devoted to payment of salaries to its officers for operating the raffles and conducting the excursions, and paying for the prizes. The raffles and excursions were held to be nonexempt, commercial activities (Priv. Ltr. Rul. 201410035). Specifically, the information associated with the excursions was ruled to not be educational in nature; the IRS noted that there will not be any “one-on-one” education in the context of the excursions.
As to application of the commerciality doctrine, the IRS focused much more on the online raffles. The agency found fault in the pricing of the raffle tickets, noting that the raffles “are not priced in order to allow the most people to afford the tickets.” The IRS also stated, in finding commerciality, that the ticket prices are “set” in a commercial manner, the organization does not receive contributions and does not use volunteers, and uses “commercial-type promotion” of the raffles and excursions. The organization was said to be in “indirect competition” with organizations that offer raffles for prizes or hunting excursions for a fee. [4.10, 7.13A]
Commentary: The law is clear that an organization can engage solely in fundraising and be a tax-exempt charity, as long as the commensurate test is satisfied. While this body of law focuses on organizations that solicit contributions and make grants, there is no reason why it cannot also apply where the grant revenue is generated by other means, such as raffles—unless the IRS is trying to establish a different policy in the case of gaming.
This idea that the raffle tickets should be lower priced to enable more individuals to participate in the raffles is rather ridiculous. That is akin to imposition of a requirement that charities can only hire fundraising consultants who have below-market fees. Or, suppose a charity adopted a policy that it will only accept gifts above a certain threshold, say, $100 or $5,000. Would that make the charity any less charitable? Answer: No.
The IRS is in error here in holding that the raffle activities are nonexempt functions. (If the agency is attempting to carve out a special rule in instances of gaming it should say so.) The IRS has confused the requirement that programs of a charity must be charitable with an ostensible rule that fundraising activities (which are not programs) must be charitable.
The application of certain elements of the commerciality doctrine continues to be equally ridiculous—and wrong. This ruling denied tax exemption in part because the organization does not receive contributions, does not use volunteers, and engages in promotional efforts. It is common for public charities to be in these positions. It is true that there are two court opinions that hold that these are valid indicia of commerciality; these opinions are mistaken on the points. (They may have been valid if written about 100 years ago.) The IRS should know better than to insist these are bases for finding commerciality and thus ineligibility for exemption.
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