Originally published on Forbes.com.
Sketchy things seem to have an attraction to one another. That might be one of the lessons in Private Letter Ruling 201734009 in which the IRS revoked the exempt status of an organization that focused on taking donations of timeshare internals. Private letter rulings are redacted, so I will call the organization in the ruling “Give Us Time Shares” or GUTS. The notion that you can come out ahead financially by giving something to charity is inherently sketchy, even though it can sometimes work out that way.
And then there is the timeshare industry. One way of getting insight into the dark side of American business culture is to watch the famous “Always Be Closing Speech” in Glengarry Glenn Ross. (Warning explicit language)
An Industry Based On Deceptive Sales Practices And Fueled By A Tax Incentive
Or you could just take advantage of one of those invitations you get for a cheap weekend somewhere in exchange for spending a couple of hours listening to a sales presentation. That will allow you to become acquainted with someone who lives and breathes the ABC philosophy. The critical thing you need to do to avoid being taken in is to look into what you can buy timeshares for on the secondary market.
You might take a look at the site Sell My Timeshare Now which will give you “5 Surprising Truths About Timeshare Resales”. Truth #2 is “You will not get back what you originally paid for your timeshares”
This is often the most difficult truth for a seller to hear. When you bought from the developer, you overpaid — it is that simple. The total cost of your ownership was marked up to cover sales presentations, incentives and giveaways. Chances are the sales person may have also told you that your timeshare would appreciate in value. This is simply not true, except in rare cases at high-end fractional properties. Resale timeshares often sell for only 50% of the original price — some for as little as 20-30%.
SMTN is trying to get you to list with them so it is possible the “as little as 20-30%” might be on the optimistic side. Regardless what I am reflecting on is that there is this entire industry that is based on deceptive sales practices. This is not capitalism and the free market at its best. And it is fueled by a tax incentive.
Section 453(l)(2)(B) allows sellers of timeshares to use the installment method unlike dealers in just about any other type of property you can think of. Section 453A(b)(4) exempts the sellers of timeshares from the rule that requires recognition of income when installment obligations are pledged. So a timeshare operator can create a tax-deferred cash flow while selling expenses are currently charged off. The price is a large and growing deferred tax liability putting the pressure on to sell more and more needing to run more quickly to stay in the same place.
Hard To Get Out Of One
If you google something like “get out of timeshare” you will find that there is this kind of bizarro timeshare industry designed to help people got out from under the recurring maintenance fees. When you combine something that once seemed quite valuable that is now undesirable, the notion of giving it to charity can seem irresistible. That’s what GUTS was all about.
The key guy in GUTS is referred to as Founder. He is the sole voting member and was signor on the bank accounts. His sister was the treasurer. Dumping timeshares is complicated stuff, so there were three other entities involved. CO-1 conducted marketing and closing services on all the timeshares and was listed as the client on all the appraisals prepared by CO-3. CO-2 was the broker. In one of those wild, inexplicable coincidences you find in the land of sketchy transactions, all three of the companies were owned by good old Founder.
The difficulty in timeshare sales led to a requirement that the donors pay upfront fees. There was an argument as to whether the fees were for services to the donor, since that would undercut the position that the fees were deductible charitable contributions. Overall things were pretty ugly.
In sum, deceptive business practices are evidence of a substantial nonexempt purpose. Sharp business practices, including deceptive contracts and untrue statements about the law or an organization’s business methods, are incompatible with the purpose of an organization claiming to be charitable.
And the bottom line was:
The organization’s soliciting and selling of timeshares is similar to a commercial real estate business and puts the organization in direct competition with other for-profit timeshare resale entities. ORG is not an organization described in section 501(c)(3) because its activities are mainly commercial in nature, and because its activities, as further described above, serve a substantial nonexempt purpose.
Reflections
It is a bit ironic given my conclusions about the industry, but I actually don’t regret the timeshare interval I bought at full price many years ago. It motivated us to plan vacations and the places we ended up staying were nicer than motel rooms. At the presentation, I had done the math in my head (A violation of Reilly’s Sixth Law of Tax Planning) and it seemed like a good deal. Actually, if you use it long enough it is an alright deal even at full sticker. Of course, given that you can buy them for a much, much lower price on the secondary market, the presentations are inherently deceptive.
The exempt organization people at the IRS have gotten the stuffing knocked out of them by the endless scandal narrative now on Day 1589 by TaxProf count. In the future scoundrels like Founder will be able to go on their merry way indefinitely particularly if they avoid states with Attorneys General that are paying attention.
And much as I like capitalism, things like the timeshare industry and multilevel marketing and a good-sized slice of the financial sector make me wonder whether capitalism gives too big an edge to sociopaths. I’ll leave it at that for now. I need to close this so I can have a cup of coffee.
Other Coverage
Paul Streckfus ran the ruling in full in EO Tax Journal 2017-168 with the comment:
Apparently there are a number of scam artists assisting people to get a charitable contribution deduction for their unwanted and often unsellable timeshares, similar to some of the vehicle donation programs.