Originally published on Forbes.com Nov 28th, 2012

Educational Assistance Foundation for The Descendants of Hungarian Immigrants in The Performing Arts, Inc. (EAFDHIPA ?)  A couple of times I have made up the names of not-for profits.  There is for example Southern Baptists Against Clergy Tax Abuse, a total figment of my imagination, although I did decide that a real person the Reverend William Thornton would be its President.  EAFDHIPA – I could not have made up.  Of course I did not have to. EAFDHIPA is real.  It is currently in District Court fighting the IRS denial of its exempt status.

EAFDHIPA filed Form 990 for the years 2005 and 2006.  It took in over two million dollars in contributions and handed out a little over $200,000 in scholarships.  Not just anybody can get a scholarship from the Foundation.  In order to qualify you have to be a junior or senior in college.  You must also have an ancestor who emigrated from the “Hungarian area of Eastern Europe”, as defined in the bylaws.  The ancestor must have been involved in the performing arts.  This is almost certainly the organization described in PLR 201130118, which I wrote about over a year ago.

If you study the 990 a bit it is not too hard to see why the IRS might have thought the group was a little sketchy.  One of the two scholarships granted in 2006 was to a student who has the same last name and same address as the president of the organization.  There was an explanation for that in the responses to the IRS inquiries:

You inquire as to whether potential scholarship applicants will be related to members of the organization’s board of directors, and if so, can such applicants apply for assistance. It is quite normal, logical, and sensible that the people who will involved in the organization, through its fund-raising and governance, will be those who care about honoring and recognizing immigrants. Generally, they will be descendants of immigrants themselves. However, the organization is determined both not to exclude eligible students from aid simply because a family member is involved with the organization yet not to provide any biased assistance to a student because of family involvements.

It’s funny.  Generally the board members will be descendants of immigrants themselves.  That is so uncommon, that of course some of their kids will end up being among the beneficiaries.  It would be better to have a board made up of descendants of the indigenous peoples or those taken in captivity from Africa to insure neutrality, but they probably just wouldn’t appreciate how tough it is being descended from immigrants.  The explanation of how the organization was originally conceived is even more interesting,

The scholarship program and the entire mission of the organization came about from good, old Eastern European guilt. While visiting the United States Smithsonian’s Holocaust Memorial Museum with an elderly client, the undersigned was struck by the immense culture and heritage of communities in pre-WWI and WWII Country (both Jewish and non-Jewish). While many residents of Country were forced to work each day to survive, some ignored the challenges of every day life to maintain and sustain the performing arts. The same individuals came to the United States seeking a better life, endeavoring to fulfill the dream of life, liberty, and happiness.

I really hope that they are not making this up, but I just don’t get it.  How do you come out of the Holocaust Museum inspired to do something to help the descendants of 19th Century immigrants ?  History is complicated and the connections we make might not be grasped by everyone, so I suppose I shouldn’t judge.  Maybe somebody will explain it.

The IRS view of the whole operation is somewhat jaundiced and cynical:

IRS subsequently commenced an audit of the Foundation’s 2005 tax return in order to investigate whether the organization was operating consistently with its stated purpose, ultimately concluding that the Foundation was created in order to avoid paying estate and generation-skipping taxes on the estate of one individual, Julius Schaller, and to finance the education of Mr. Schaller’s relatives.

Mr. Schaller’s estate has a case in Tax Court pending on the outcome of the Foundation’s appeal of its exempt status.  The IRS is trying to tag the estate with a fraud penalty and the Estate’s lawyers were arguing that what the Foundation did was not relevant.  The Tax Court thought otherwise.

The Disrtict Court decision this month is not the final word in this case.  The Foundation was asking to be allowed to introduce more evidence that it had not already provided to IRS.  The District Court, within limits, agreed that it could:

In accordance with the reasoning set forth above, the Court holds that the applicable standard of review in this proceeding is de novo and that the scope of the Court’s review is not confined to the administrative record. The parties may therefore submit evidence to this Court that was not considered by the IRS. In accordance with the Foundation’s representation that it does not desire to have the Court consider any argument that was not presented by the Foundation during the administrative process, any evidence that is presented to this Court must be in support of an argument made before the IRS.

I’m hoping for some high entertainment value in the final decision, but we will have to wait.  I’m suspending  judgment on who I am rooting for in the meantime.

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