In another ruling decided in accordance with the commerciality doctrine, the IRS revoked charitable tax‐exempt status for an organization that provides medical equipment and supplies to patients in their homes.111.6 The organization leases or sells medical equipment including walkers, wheelchairs, and oxygen. The home medical equipment is designed to assist patients discharged from hospitals who need continuous care. Amounts charged for those services are subject to the patient's ability to pay. The organization's primary source of income is the sale and rental of durable medical equipment (DME) to the general public. It does not receive any grants or donations. The amounts charged to non‐charity patients for the DME are competitive market prices to keep the organization competitive with other DME providers. There are no price caps for retail products, and the organization does not provide items at or below cost. The IRS decided that exemption should be revoked because the organization has substantial non‐exempt activity and is operating in a commercial manner. The financial assistance provided to customers by the organization constituted a small amount of the organization's activities. The organization's major activity is the sale and rental of DME to the public at competitive commercial prices. The IRS concluded that providing healthcare services by selling and renting durable medical equipment at commercial prices is not a charitable activity.
NOTES
1 107.1 Priv. Ltr. Rul. 201710033.
2 107.2 Priv. Ltr. Rul. 201645017.
3 109.1 Priv. Ltr. Rul. 201743018.
4 111.1 Priv. Ltr. Rul. 201704018.
5 111.2 Priv. Ltr. Rul. 201814010.
6 111.3 Priv. Ltr. Rul. 201826015.
7 111.4 Priv. Ltr. Rul. 201835008.
8 111.5 Priv. Ltr. Rul. 201918019.
9 111.6 Priv. Ltr. Rul. 201925015.
CHAPTER FOUR Private Inurement, Private Benefit, and Excess Benefit Transactions
1 § 4.4 Private Inurement—Scope and Types *(j) Provision of Healthcare Services to One Individual or Family (k) Business Referral Operations (l) Still Other Forms of Inurement
2 § 4.6 Essence of Private Benefit
3 § 4.9 Excess Benefit Transactions *(a) General Rules
§ 4.4 PRIVATE INUREMENT—SCOPE AND TYPES
p. 104. Insert following carryover paragraph, before heading:
*(j) Provision of Healthcare Services to One Individual or Family
Organizations will be denied recognition of tax exemption as charitable entities, on the grounds of private inurement, if healthcare services are provided to only one individual or family. For example, an organization was denied exempt status because a substantial portion of its funds was to be used to pay for the medical and rehabilitative care of an individual who was related to each of the trustees of the organization.197.1 A nonprofit organization established to negotiate, receive funds, organize, and manage support for three special‐needs children of a family was denied recognition of exemption.197.2 A trust was held ineligible for exemption as a charitable entity because its function was to pay a family's medical expenses in the aftermath of an automobile accident.197.3 An organization formed to benefit children with special medical needs failed to qualify for exemption where it was operated for the benefit of one individual.197.4 An organization formed for the benefit of a specific child with autism, with the child's parents as its sole officers, failed to qualify for exemption.197.5 Another entity, raising funds for the benefit of orphaned children of one family, was denied recognition of exemption, even though they are needy and not related to the board members, because the recipients of the financial assistance are “preselected.”197.6
(k) Business Referral Operations
A nonprofit organization may seek recognition of exemption, usually as an educational entity, where, although it provides some educational benefits, its principal purpose is to serve as a means for generating business opportunities for its insiders. For example, an organization represented to the IRS that its educational activity was the conduct of workshops to provide first‐time homebuyers with information to help them achieve home ownership in an informed manner. In fact, the entity was operated by a team consisting of two real estate agents, a mortgage banker, an insurance agent, and a lawyer. Fees were not charged for the workshops; the operation was funded by the team members. Finding the organization to be a “medium to enrich the private businesses” of its insiders, the IRS found private inurement as the consequence of client referrals to the insiders' private business ventures.197.7
Likewise, an organization providing services for foreclosure mitigation was found by the IRS to be a “conduit” linking potential customers to its founders in the nature of a “consulting referral service.”197.8
(l) Still Other Forms of Inurement
Promotion of the career advancement of an individual (an insider) within a nonprofit entity was ruled by the IRS to be a form of private inurement; an entity seeking classification as a charitable and religious organization was supporting the candidacy of its pastor for the position of a bishop of a church and denied recognition of exemption on this basis.197.9
§ 4.6 ESSENCE OF PRIVATE BENEFIT
p. 108. Insert as fourth complete paragraph:
Recent IRS rulings illustrating application of the private benefit doctrine