February 26, 1998 | Read Time: 2 minutes
The U.S. Tax Court has ruled that the I.R.S. was right to revoke the tax exemption of an Ohio charity because a member and other people close to the organization improperly benefited from some of its earnings — a legal concept known as private inurement.
But Judge Herbert L. Chabot said the I.R.S. was wrong to brand as inurement the theft of proceeds from the charity’s bingo operation by the group’s treasurer and one of its members.
The case involved an organization called Variety Club Tent No. 6 Charities, which raised much of its money through bingo games to support various causes, including Ohio Boys Town.
In 1986, the Variety Club got into trouble because of the way its bingo games were handled by its treasurer and one of its members. According to the Tax Court, the two men “worked together to skim part of the proceeds of the bingo games” and to hide the skimming from the charity’s board of trustees by falsifying records.
The charity eventually pleaded guilty to a misdemeanor charge of falsification. The member pleaded guilty to a felony charge of conducting an illegal bingo game. In 1990, the I.R.S. revoked the club’s tax exemption because it said the group’s earnings had improperly benefited people close to it.
In his ruling, Judge Chabot agreed with the I.R.S. that inurement occurred when the charity paid some legal fees and rent on a building owned by the treasurer and others. But the theft of bingo proceeds by the Variety Club treasurer and member did not meet the legal definition of inurement, which involves the “intentional conferring of benefits,” not stealing, the judge said.
When Congress wrote the inurement law, Judge Chabot added, it never intended “that a charity must lose its exempt status merely because a president or a treasurer or an executive director of a charity has skimmed or embezzled or otherwise stolen from the charity, at least where the charity has a real-world existence apart from the thieving official.” (Variety Club Tent No. 6 Charities v. Commissioner of Internal Revenue, T.C. Memo. 1997-575.)
