[Hpn] In IRS view, charity can't end at home; Re:Burlington, VT's Westward Ho

Morgan W. Brown norsehorse@hotmail.com
Wed, 24 Oct 2001 20:03:00 -0400


Below is a forward of a recent column concerning organizational entities 
seeking IRS charity tax-exempt status which are not really acting 
"charitable": Including a so-called organization in Burlington Vermont known 
as "Westward Ho."

Westward Ho was the solution certain business owners in Burlington Vermont, 
who suffered from extreme and possibly incurable cases of NIMBY-ism (Not In 
My Back Yard), came up with to (not)-deal with people who were homeless or 
income-less. Believe it or not, they went so far as to apply for tax-exempt 
charity status with the IRS. Go figure!

The IRS did not go for it however.

Hmmm. I guess that Westward Ho was really taxing the limits of what actually 
defines one as being charitable. :-) [smile]


Following the below forwarded column is a forward of an old article 
regarding the topic for those seeking additional information.

Morgan <norsehorse@hotmail.com>
Morgan W. Brown
Montpelier Vermont

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-------Forwarded column-------

Monday, October 22, 2001
Knoxville News-Sentinel <http://www.knoxnews.com>
[Tennessee]
Business section
Personal Finance
In IRS view, charity can't end at home
<http://www.knoxnews.com/kns/personal_finance/article/0,1406,KNS_327_856451,00.html>

By A.J. COOK

Who did you say gets that motorcycle?

A proposed charity called Westward Ho bought Michael Collelo, a homeless man 
who threw a poinsettia at a bartender, a one-way ticket from Vermont to 
Oregon.

A Westward Ho founder, Timothy Halvoroon, quoted in a Burlington newspaper, 
said he was all for social services, but there are some people who need to 
be "somewhere else."

Several businesses had started the organization to furnish one-way travel 
for "indigent and antisocial persons who may have a strong desire or need to 
leave the Burlington, Vt., area."

When the Internal Revenue Service received Westward Ho's application for 
charity status, it said the group had a commercial purpose: to rid the area 
of people who disrupted businesses.

That didn't strike the IRS as charitable. The principal purposes of Westward 
Ho, the agency said, were not to help the poor or educate the public.

To be approved for a successful designation as a charity, an organization 
would have had to included some of the following as primary considerations:

- Offer marital advice.

- Provide low-income people with financial counseling.

- Broadcast educational material on a non-profit radio station.

- Operate a day care center for children of low-income working parents.

- Give information on rights and responsibilities to tenants of public 
housing.

And, as you shall see, a second motor sports venture also fell short.

Bill Wildt, motorsports elder statesman, and Christine Shutz established a 
charitable organization in Chicago to educate the public and make their 
sport "part of the fabric of American life." It would bring drag racing to 
schools and the urban poor. They planned on barnstorming around the country 
with a "visually spectacular" program: Wildt, on his souped-up motorcycle, 
and Shutz, with volunteer showgirls in glittering costumes.

The IRS and the Tax Court stopped that charity before it left the starting 
line. The judge said the proposed charity promoted a particular industry's 
financial interest and served only to subsidize Wildt and his planned 
motorcycle: a drag bike with a 6,000 horsepower rocket engine.


( A.J. Cook, lawyer and accountant, is counsel with the Memphis law firm of 
Pietrangelo and Cook.)


October 22, 2001

---End of forwarded column---

---Forwarded article---

PUBLIC TRUST - - "PRIVATE BENEFIT"
<http://www.money-law.com/PublicTrustPrivateBenefit.Final.htm>

"501(c)(3) organizations are supposed to be operated for charitable 
purposes,

not for the benefit of private interests. How do you draw the line?"


by Edward Gonzalez, Esq.

Date: Fall, 1994


The Grantsmanship Center Magazine


Federal tax law requires that an organization must serve "a public rather 
than a private interest" in order to qualify for exemption as a charity. But 
even the most legitimate charitable endeavors will to some degree, directly 
or indirectly, benefit certain non-charitable interests. After all, a 
nonprofit organization's employees receive salaries, its landlord gets rent, 
and its vendors make a profit on what they sell to the organization. The 
question is not whether such benefits are permissible. The question is, what 
kinds are permissible and to what extent?


One relevant part of Section 501(c)(3) of the tax code recognizes 
organizations "operated exclusively" for exempt purposes. This is the 
so-called "operational test". By definition an, an organization is not 
"operated exclusively" for a permissible exempt purpose unless "it serves a 
public rather than a private purpose. In other words, if an organizations 
activity is shown to benefit a private interest, it will fail the 
operational test.

There are, of course, special-purpose non-profits -- such as trade 
associations -— that are exempt from paying federal income tax, but they are 
not eligible to receive tax-deductible charitable contributions.) Private 
benefit can arise in a number of ways, but one of the most obvious occurs 
when the benefited persons or groups are in a position to control the 
organization. Consider the case of Westward Ho, an organization created by 
three restaurant owners in Burlington, Vermont. Westward Ho attempted to 
facilitate the movement of homeless persons off the streets of Burlington by 
offering them one-way air-

Fares -- anywhere. The articles of association described the organization's 
purpose as follows: "Providing travel grants or loans to certain indigent 
and antisocial persons who may have a strong desire to need to leave the 
Burlington, Vermont area, but who lack the means to pay for transportation 
to their destination of choice."

Westward Ho's only beneficiary accepted a one-way ticket to Portland, 
Oregon. This individual had a history of harassing the customers and 
employees of a downtown restaurant. On one occasion, he even threw a planter 
filed with poinsettias at a bartender.

The tax court held against a tax exemption for Westward Ho on private 
benefit grounds. The court found that the organization's founders were more 
concerned with financial loss than with helping the homeless.

An Exception: "Incidental" Private Benefit

Clearly, there are many situations in which an exempt organization will 
provide some degree of private benefit to specific groups and individuals in 
the course of conducting a charitable program. The law provides that where 
the serving of private interests is "incidental" to the accomplishment of 
charitable purposes, and does not represent a substantial non-exempt 
purpose, exemption will not be jeopardized. To qualify, the private benefit 
must be incidental both "qualitatively" and "quantitatively".

The classic illustration of "qualitatively incidental" private benefit is 
found in Revenue Ruling 70-186. That case concerns an organization, which 
was formed to preserve a lake as a public recreational facility and improve 
the condition of the water. Although the organization benefited the public 
at large, there was also significant benefit to the private individuals who 
owned lakefront property.

The IRS determined that such benefit was "incidental", stating "Any private 
benefits derived by the lakefront property owners does not lessen the public 
benefits flowing from the organization's operation. In fact, it would be 
impossible for the organization to accomplish its purposes without providing 
benefits to the lakefront property owners."

Determining whether a particular activity is "quantitatively incidental" 
involves balancing the benefits bestowed on private individuals against the 
benefits to the public. For example in Revenue Ruling 74-146, the IRS held 
that an organization of educational institutions was exempt, even though 
some of its members were for-profit schools. According to the filing, the 
organizations accrediting program provided a significant incentive for 
maintaining high-quality education. The benefit according to the few 
for-profit members was "incidental" to the greater public benefit.

Examples of Private Benefit

These are some common transactions that can cause problems involving private 
benefit when conducted with persons or groups that the law might consider 
"private interests":

• Free or below-market rent for space

• Below-market charges for services

• Loans at below-market rates, on favorable terms, and/or that are 
inadequately secured

• Outright cash payments

• Purchase of property or services at an excessive price

One of the most complicated issues concerning private benefit has to do with 
compensation. "Unreasonable" compensation--payment that exceeds the 
fair-market value of the services provided—can jeopardize an organization's 
exempt status. Such overpayments confer an unjustifiable benefit on an 
individual or entity. (Because the benefit is economic in nature and the 
parties benefited are frequently "insiders", unreasonable compensation is 
often challenged as a violation of the prohibition against "private 
inurement", not just on "private benefit" grounds.)

In determining what constitutes unreasonable compensation, a number of 
factors are taken into account, including:

Factors relating to the employee:

• Arms-length relationship to the organization

• Control of organization by family or founder related to the employee

• Availability of comparable services from a third party

• Employees salary history

Factors relating to the organization:

• Salary scale of similar organizations

• Size of the organization

• Salary scale for employees generally

• Amount of organization's income devoted to compensation

Factors relating to the compensation itself:

• Criteria for compensation

• Abrupt increases in compensation

• Salary fixed many years in advance

• Substantiation of duties performed and salary paid

Recent scandals involving high-profile charities like the United Way have 
put all exempt organizations under increasingly greater scrutiny. Even 
small, community-based non-profits can run afoul of the IRS if they don’t 
pay sufficient attention to private benefit issues, as the Westward Ho case 
makes clear. Regardless of their size, exempt organizations build the 
public's trust and support by conducting programs that meet not just the 
letter of the law, but its spirit as well— by demonstrating clear and 
consistent public benefit.

END

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**In accordance with Title 17 U.S.C. section 107, this
material is distributed without charge or profit to
those who have expressed a prior interest in receiving
this type of information for non-profit research and
educational purposes only.**

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-------End of forward-------

Morgan <norsehorse@hotmail.com>
Morgan W. Brown
Montpelier Vermont USA




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