The IRS continues to zero in on nonprofits who are engaged in activities more aligned to for-profit business plans.
In a recent Private Letter Ruling (201503016), the IRS denied a tech organization its tax exempt status because the nonprofit’s mission said that the organization’s primary purpose was the development and maintenance of an e-commerce site. The organization sited by the IRS ran a website where visitors could purchase items and then designate a nonprofit to receive an equivalent amount to the sales price of the purchase as a charitable donation. According to IRS guidelines, solely operating an e-commerce site is a commercial business and not an exempt activity.
To obtain an exemption from federal income tax, a charity must be organized and operated for charitable, religious, literary, educational and/or scientific purposes. In ensuring that a charity is organized and operated for such exempt purposes, the IRS often asks whether the charity engages in activities that place it in competition with for-profits. If the answer to this question is yes, it is unlikely that the charity is entitled to exemption, regardless of whether the charity’s commercial activities or other activities further its exempt purposes.
Reviewing the practices of nonprofits to ensure they can retain their tax exempt status is nothing new for the IRS. Many can remember headlines the federal agency received when it was revealed that a large number of “Tea Party” affiliated groups were being reviewed. A Justice Department review cleared the IRS of an specific wrong doing, but the agency continues to be hounded by activists and lawmakers about its review of charities.