Court Slaps Private Foundation: Private Inurement

A recent decision of a district court in the District of Columbia agreed with the Revenooers, who actually revoked the tax exempt status of a foundation because some of its activities resulted in extraordinary benefits (“private inurement,” to use the vernacular of the bureaucrats) to the entity’s founder’s family.

Seems a decedent’s estate gave about $2.5 million to a foundation which had previously been put in place.  The estate, of course, took a charitable deduction for estate tax purposes, resulting in zero, zip, nada being paid in estate taxes.

Unfortunately, the foundation later awarded scholarships to two students, who were direct descendants of the decedent!

“No way,” shouted the Revenooers upon later audit – the foundation was found not to have qualified for exempt status in the first instance, because it failed two of three basic requirements.  An organization is exempt from federal income taxation if:

  • It is organized and operated exclusively for an exempt purpose;
  • Its net earnings do not inure to the benefit of any private individual; and
  • Its activities do not attempt to influence legislation.

IRS had no trouble in concluding that the first two tests were failed.  An organization is not operated exclusively for an exempt purpose unless it serves a public purpose, as opposed to a private interest.  In this case, not only were the scholarship recipients the estate’s beneficiaries, but also the foundation was apparently not operating as stated in its original tax exemption application filed with the IRS.

Private foundation rules are numerous and tricky – traps for the unwary abound.

And here comes a proposed freebie from the Revenooers – via a recent announcement, they are proposing that the value of identity protection services provided to consumers after possible breach of data security is not includible in the service recipient’s gross income for tax purposes!

It’s become common, especially recently, for businesses, government agencies and other organizations whose data systems have been breached, or “hacked” to provide credit reporting and monitoring services, identity theft insurance policies, identity restoration services, or other similar services (collectively, “identity protection services”) to customers or employees or other folk whose personal information may have been compromised – and at no charge.

If this proposal sticks, IRS will not assert that the value of these services be included in the recipient’s gross income – unless cash is received in lieu of these identity protection services.

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He may be reached at 831-7288, and welcomes comments at jquinn@ashleyquinncpas.com.

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