Originally published on Forbes.com Sept 3rd, 2014
You would think with all the pressure that it puts on people to file and pay electronically that the IRS would have a forward looking view and a preference for cyberspace. It does not seem to be that way in the tax exempt division, where meatspace seems to be much preferred.
The IRS And Technology
One of the things that has come out of the current phase of the IRS scandal is how old the IRS computers are. Even more, there have been comments about how antiquated its IT systems and procedures are. According to this story:
The IRS is not the only federal agency to lose e-mails over the past few years. In fact, despite efforts at many agencies to standardize and improve e-mail by moving to services like Google Apps for Government and Microsoft Office 365 Government, many agencies still run their e-mail like it’s 1999,” Gallagher wrote. “It’s not just a technology issue — it’s an IT policy issue, a staffing issue, and a cultural issue within government, one that the federal government shares with many private corporations.”
The above observation does not, of course, say one thing or another about the current phase of the scandal. Lois Lerner or one of her fellow minions in a vast conspiracy may have exploited that environment to suppress the damning e-mail in which Ms. Lerner confessed to strangling the last passenger pigeon. Nonetheless, it may account for seemingly outdated thinking, particularly in the section of the IRS that Ms. Lerner dedicated to bringing down all that is right (or maybe Right) with the world.
The Sorority
PLR 201434022 concerns an application for exemption under 501(c)(7) – “Clubs organized for pleasure, recreation, and other nonprofitable purposes…”. I’m going to call the group Omega Lambda Sigma (OLS) for on-line sorority, which was exactly what it was. The sorority recruits its members from students of a particular on-line university.
…..activities performed over telephone or the Internet include: (1) recruiting new members through your national Internet-based social networking group; (2) attracting new members Internet-based social networking discussion groups and conference calls; (3) emailing membership application forms; (4) processing of application online and via telephone; (5) providing new member training, which is “a strategic set of activities that are held in the comfort of the candidates’ home and computer”; (6) initiating new members via national telephone call;(7) holding regional monthly and bi-monthly meetings (per the individual leaders’ discretion) online or by telephone; and (8) providing classes and support groups by Internet-based telephone service, webinar, or conference call.
The IRS turned OLS down for a pretty quaint reason.
Commingling is a necessary and material part in the life of an organization exempt under § 501(c)(7) and is deemed present if such things as meetings, gatherings, and regular facilities are evident. See, Rev. Rul. 70-32, supra, and Rev. Rul. 74-30, supra. Face-to-face interaction is important for members of a social club. Organizations that do not afford opportunities for this personal contact among members are not entitled to exemption under § 501(c)(7), even though they may be organized not for profit with no part of their earnings inuring to the benefit of shareholders. See, Rev Rul. 55-716, supra.
The IRS cites a ruling from 1955 that turned down an organization that provided TV antenna service to its members.
The only activity of the instant organization is the operation and maintenance of a television antenna system providing television services to its members in their homes. Furthermore, fellowship does not constitute a material part of the life of the organization, since the services do not afford an opportunity for personal contacts and fellowship among members receiving such services.
You can really see how getting better TV reception was probably the antithesis of a social group in 1955, but the internet is not the same as television. It allows people to create social groups that transcend meatspace, which seems to be where IRS thinking is stuck.
Chuck Rubin also wrote about this ruling titling his piece “IRS Applies 20th Century Analysis To 21st Century Social Organization“, which pretty well says it all.
Water In The Desert
The other ruling, PLR 201434023 , which might have some merit, but is still disturbing, was a denial of 501(c)(3) status to an organization that is providing free wi-fi service.
Your primary activity appears to be Project, which your advertising materials describe as “a wireless network project developed to help increase business visibility along the Road corridor. The goal of Project is to promote a community friendly hotspot environment in an effort to bring business back to Road. By providing free Wi-Fi connectivity to patrons, customers and residents, businesses will see increased traffic, resulting in increased sales.” You will charge $250 to businesses wishing to participate in Project, plus $250 for each additional outdoor Wi-Fi unit and $150 for each additional indoor Wi-Fi unit. Participating businesses will be designated
One ground for denial was that the organization served private interests, namely the businesses that it was selling services to. I can buy that. The other was that there was nothing charitable going on. Well, what are they talking about? Free wi-fi ! What could be more charitable than that? Well I supposes feeding the hungry and giving drink to the thirsty are more charitable, but still nothing is so welcoming as free wi-fi, unless you are one of those people permanently stuck in meatspace.
Something tells me that this organization probably could make itself work on a for-profit basis and the exempt status might just have been window dressing, but I still find the IRS thinking troubling.