May 29, 2008 | Read Time: 3 minutes
In a ruling that could have implications for many charities, the Internal Revenue Service has denied a tax exemption to an organization in part because the group did not spend enough of its money on charitable programs.
This is the first public sign that the revenue service is using a controversial approach the government recently decided to apply to measure how much charities spend.
The IRS said the organization did not carry on a charitable program “commensurate in scope” with its financial resources.
As is its policy, the IRS did not name the group. But the organization appears to be the National Foundation of America, in Franklin, Tenn., according to the Web site of a state-government receiver in Tennessee who has been winding down the organization’s operations.
The IRS ruling was released at a time when the tax agency has been signaling that it plans to be more aggressive in making sure the nation’s nonprofit organizations do not hoard or waste money.
Steven T. Miller, commissioner of the IRS’s tax-exempt and government-entities division, said in a speech last month that the agency would apply a standard it had briefly embraced years ago but then set aside — a so-called commensurate test — to help determine whether charities were spending money efficiently and effectively (The Chronicle, May 15).
‘Evangelistic Campaigns’
In its private-letter ruling, the IRS said the organization had stated in its application for tax-exempt status that it planned “to coordinate and conduct, through its staff, evangelistic campaigns in a number of countries wherein the people are receptive to the Gospel of Jesus Christ.” The group’s initial two-person board of directors was a husband and wife.
But the revenue service said the organization’s primary focus, described on the organization’s Web site, was helping families create a “financial legacy” through “asset-exchange programs.” The programs allowed people to exchange annuities, real estate, securities, bonds, and cash for a “tax-deductible installment plan” with a guaranteed payout for a period of time.
The IRS said records that the organization filed with a state government showed that money the organization received and counted as contributions over a year was “primarily from the sale of annuity plans.”
These state records also showed that the money the organization reported spending on its charitable program during the year was less than half of 1 percent of its total revenue and about 3 percent of its total expenses.
Last year, the Tennessee Department of Commerce and Insurance said that the National Foundation of America had been running an insurance business without a license.
State authorities said the organization promised consumers that its annuity product would entitle purchasers to significant tax benefits because of its federal status as a charity, even though it had not been recognized as a charity by the IRS.
Five other states issued cease-and-desist orders to prohibit the group from conducting business, the IRS noted.
In its ruling, the IRS concluded that the organization did not qualify as a charity because it was organized and operated for the primary purpose of running a business. “You do not carry on a charitable program that is commensurate in scope with your financial resources,” the IRS said.
The IRS said that state authorities who were liquidating the organization wanted the tax agency to make a formal ruling about whether the group would have qualified as a charity.
Some nonprofit officials and legal experts worry that the IRS’s use of a commensurate test could force organizations to prove they spend enough money on their programs or lose their tax exemptions.
Other officials say the application of such a standard is a legitimate tool for the government to use to decide if an organization actually does charitable work.
The IRS’s private-letter ruling is available on the tax agency’s Web site.
