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a “time banking community network,” which facilitated the exchange of volunteer services among its members, that was ruled to be serving the private interests of its membership;^219.1 an entity involved in research, manufacture, and retailing of pharmaceuticals in conjunction with a for‐profit corporation owned by its founder;^219.2 and a softball umpires' association that failed to qualify for exemption because it operated primarily to certify umpires and aided its members in their employment.^219.3

       p. 109. Insert following first paragraph:

A nonprofit corporation was formed to provide healthcare to an underserved population in a rural area. This organization was formed by the owners of a for‐profit medical practice, which plans to lease space in the nonprofit entity's facilities. Tenants will be for‐profit businesses, including the medical practice. These owners of the practice and related parties are on the nonprofit organization's governing board, constituting a majority. This organization represented to the IRS that it anticipates that the monthly rental payments from the for‐profit businesses could be reduced “considerably” because of receipt of contributions and grants. But, ruled the IRS, that type of rent structure will result in private benefit to the businesses and, in the case of the medical practice, private inurement.^222.1 The organization tried again, noting that this rural area is a Health Professional Shortage Area. It advised the IRS that its goal is to incentivize businesses in the healthcare industry to provide care for those in need. It proposed that it rent space and provide services in an amount “high enough to not only cover costs but to produce a profit.” But that cannot be done either, the IRS ruled, because then the organization is operating in a commercial manner.^222.2

       p. 109, second paragraph. Insert as fourth and fifth sentences:

The IRS ruled that a public charity may restore a tax‐exempt social club's historic building, where the public will be given substantial access to the facility, with the resulting private benefit to the club and its members being incidental.^225.1 In what appears to be its most generous interpretation of incidental private benefit, the IRS ruled that a public charity may provide its research results to a major for‐profit global media corporation for fees, format the information specifically for the company, license rights to derivative works to the company, allow the company to use the charity's information for its internal business purposes, agree not to deliver information to the company's competitors, and agree that the company may have a perpetual license to use the information, with this package of private benefit considered incidental.^225.2

§ 4.9 EXCESS BENEFIT TRANSACTIONS

      (a) General Rules

       p. 128. Insert as fourth paragraph:

In one instance, the IRS's chief counsel's office concluded that the first‐tier excise tax due under these rules, in connection with an automatic excess benefit transaction,^360.1 should not be abated, because the disqualified person (a limited liability company) did not exercise ordinary business care and prudence when it relied on the oral advice of a public charity's legal counsel.^360.2 The IRS stated that the disqualified person failed to offer any evidence showing that its reliance on the advice of legal counsel was reasonable. There was no information about the lawyer's expertise, there was no evidence that the LLC provided necessary and accurate information to a lawyer, the LLC itself did not seek legal advice, there was no information indicating that the LLC considered legal advice when pursuing the transaction (a loan), and the LLC did not provide any facts indicating the circumstances that would tend to support a finding of reasonable cause.

       *p. 134, note 391. Insert following existing text:

Similarly, the IRS concluded that a charitable organization engaging in multiple excess benefit transactions should have its tax exemption revoked; the size of the transactions was held to be significant, and the IRS noted that there were no efforts at correction or implementation of any safeguards to prevent future diversions.^360.3

In another case, the IRS considered a request for a determination that a high‐performing physician was not a disqualified person, and that if he was, efforts made at correcting potentially excess benefit transactions were sufficient to avoid a loss of charitable tax‐exempt status. The physician had been among the highest paid individuals at the hospital since his recruitment. He provided a high volume of services, effectively doing the work of three specialists in medicine, and accounting for approximately 6.6 percent of gross revenues and 4.3 percent of total patient service revenues. But those services resulted in a combined net loss for the hospital and its parent.

The IRS noted that the physician's principal duty was to provide medical services, his work was subject to review and approval, his on‐call coverage duties were limited, and his employer provided all necessary managerial and administrative services. Neither the physician nor any of his family members were members of the board of the hospital, he did not serve as department head of any affiliated organizations and did not have any business relationships with current or former officers or board members of affiliated organizations. His services, while generating substantial revenues, resulted in net losses. By these measures, the IRS determined that the physician was not in a position to exercise substantial influence over the affairs of an applicable tax‐exempt organization and was therefore not a disqualified person. Accordingly, the request regarding the effectiveness of corrections to the physician's compensation was rendered moot.^360.4

NOTES

      1 197.1 Wendy L. Parker Rehabilitation Found., Inc. v. Commissioner, 52 T.C.M. 51 (1986). Likewise, Priv. Ltr. Rul. 201911008.

      2 197.2 Priv. Ltr. Rul. 201205011.

      3 197.3 Priv. Ltr. Rul. 201428026.

      4 197.4 Priv. Ltr. Rul. 201505029.

      5 197.5 Priv. Ltr. Rul. 201511026. An organization that confined its scholarship grants to members of one family was ruled ineligible for tax exemption on the ground of private inurement (Educational Assistance Foundation for the Descendants of Hungarian Immigrants in the Performing Arts v. United States, 111 F. Supp. 3d 34 (D.D.C. 2015)).

      6 197.6 Priv. Ltr. Rul. 201923026. In some of these instances, the private benefit doctrine (see § 4.6) is applied (e.g., Priv. Ltr. Rul. 201843013), although use of the private inurement doctrine seems preferable. In one instance, an organization was denied recognition of exemption as a charitable organization, by application of the private benefit doctrine, because it operated a home for special‐needs children, where the couple operating the entity (in their home) adopted all the children (Priv. Ltr. Rul. 201907014).

      7 197.7

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