April 23, 1998 | Read Time: 2 minutes
The I.R.S. has ruled that a charity has put its tax exemption in jeopardy because it gave an affiliated, non-profit labor union too sweet of a financial deal through the loans it made. The revenue service also ruled that the charity owes taxes for conducting improper political activities.
The organization under review — a charity that had been set up to provide college and vocational-school scholarships, among other activities — undertook several acts that the I.R.S. found troubling. As is its policy, the revenue service did not identify the organizations involved.
First, the charity made a loan to an affiliated labor union at what the revenue service found to be an overly generous interest rate.
The charity also made an interest-free college loan to an employee of the labor group. In a third loan, the charity gave money to an affiliated taxable organization.
The taxable group, in turn, made payments to political candidates. The I.R.S. said that the charity was subject to taxes on the money it loaned the taxable group because it did not take “reasonable steps” to insure that the dollars were not used for political purposes. Under federal law, charities are prohibited from participating in a political campaign in behalf of, or in opposition to, a candidate for public office.
The I.R.S. ruled that because the charity did not take preventive steps, the loan must be treated as if it were a direct contribution to a political organization.
What’s more, the revenue service said all three loans demonstrated the “closeness” of the organizations and showed that transactions were not being made “at an arm’s length basis.”
The service ruled that “the evidences of private benefit” to the affiliated labor union were sufficient to jeopardize the charity’s tax-exempt status (Technical Advice Memorandum 9812001).
