[Hpn] In IRS view, charity can't end at home; Re:Burlington, VT's Westward Ho
Morgan W. Brown
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 W. Brown
Monday, October 22, 2001
Knoxville News-Sentinel <http://www.knoxnews.com>
In IRS view, charity can't end at home
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
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
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---
PUBLIC TRUST - - "PRIVATE BENEFIT"
"501(c)(3) organizations are supposed to be operated for charitable
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
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
Free or below-market rent for space
Below-market charges for services
Loans at below-market rates, on favorable terms, and/or that are
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 providedcan 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 dont
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.
**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.**
-------End of forward-------
Morgan W. Brown
Montpelier Vermont USA
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