A nonprofit organization was formed as a supporting organization with respect to a tax-exempt business league (an IRC § 501(c)(6) entity). In its application for recognition of exemption, the organization stated that it will support the league by engaging in charitable, educational, and scientific activities related to the association’s profession (that is, patent, trademark, copyright, unfair competition, and other intellectual property law) by offering educational seminars and conferences, and potentially by publishing continuing education materials and funding research grants and scholarships.
As it happens, however, the sole purpose of this organization is to fund an annual event. This event is a dinner, primarily for the benefit of federal judges. Members of the association also attend, along with certain nonmembers. The IRS characterized this event as being operated for a “select crowd,” noting that members of the public are not invited.
The IRS ruled that this “Judges' dinner” does not serve a charitable purpose. Inasmuch as this organization has not been undertaking any of the activities stated in its application for recognition of exemption and has not been engaging in any other exempt functions, the IRS revoked this organization’s exempt status retroactive to the date of its formation (Priv. Ltr. Rul. 201338059). [12.3(c), 26.3]
Commentary: This is a peculiar, even disturbing, ruling. There is no mention in it of the statutory law that expressly authorizes supporting organizations for business leagues (IRC § 509(a), last sentence). Rather, the ruling states that the “sole purpose” of the organization is to support the business league, observing that exempt business leagues “serve the private interest of [their] members and not the general public.” This suggests that a supporting organization supporting a business league cannot be tax-exempt as a charitable entity because of inherently unwarranted private benefit, which clearly is not the law.
The facts are skimpy in this ruling; not much is said about the event. It may be that this dinner for judges is not a charitable undertaking, although supporting organizations usually have more latitude in this regard than stand-alone charities. Certainly there is no requirement that a charitable organization’s programs be available to the public. For example, a supporting organization can operate a law library for the sole benefit of members of a bar association. Maintenance of a library is more charitable than feeding members of the judiciary, but this ruling sends signals that a supporting organization cannot support a business league because it causes private benefit to flow to the league’s members, which is not the case.
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