I had one of my “Bah Humbug!” moments yesterday. At the cash register at Barnes & Noble in the Blackstone Mall in Millbury, the clerk asked me if I wanted to add to my already enormous tab by buying a book for a foster child. The appeal is emotionally compelling. I love books and feel bad for kids who are deprived.
Exploiting Charitable Impulses To Boost Sales
Some of my fondest childhood memories are of acquiring books, like the time one of the librarians, Mrs. Hinners I think, of the Fairview Free Public Library decided to retire the Franklin W. Dixon Ted Scott series and gave them to me. And I remember buying my first copy of Fellowship of the Ring at the original Barnes & Noble on Fifth Avenue just a few blocks from Xavier High School.
So what is my the source of my outrage at the Holiday Book Drive, one of the few ploys that I count worse than the game car rental companies play selling the same couple of gallons of gas over and over? Barnes & Nobleis charging full retail for the donated books. So Barnes & Noble is exploiting charitable impulses to boost their holiday sales without putting any of their own skin in the game. That’s the story I got from the manager anyway. I’m so mad that the next time I go to a Barnes & Noble to hang out, I might just use the free wi-fi and not buy a cup of coffee.
You Can’t Get Exempt Status To Do This Sort Of Thing
It’s good to know that the IRS also frowns on this type of nonsense as we can see in recently released Private Letter Ruling 201548021. Private Letter Rulings are redacted and I have not tried to penetrate the redaction on this one. I’m going to call the organization that was turned down for exempt status Feed The Hungry With Our Stuff (FHWOS). The President of FHWOS) is D in the ruling, so let’s call him Dwight . Dwight owns a company we will call Nuterium which makes Brand X.
FHWOS is a fundraising organization that teaches youth how to help their communities while earning money to support group and school activities. It runs two types of program. In one the kids go around selling Brand X, but not to people that want to eat the stuff themselves. They just decide which of ten hunger-fighting charities Brand X goes to. After the money is collected a percentage goes to the gymnastics club or whatever sort of group was running this thing and the balance goes to Nutrium to pay for the product.
In the other type of program, the group runs a Brand X supper or something like that and buys Brand X at wholesale and heats and serves it to sell at retail.
This is going to make communities grow stronger and teach students to give back to communities while helping other charitable organizations. That’s their story anyway. The IRS sees a different story – essentially more market share for Brand X.
You are not described in Section 1.501(c)(3)-1(c)(1) of the Regulations because more than an insubstantial part of your activities are devoted to non-exempt private purposes; for example, you are operating for the private purposes of N, because you are providing N a sales outlet to market and sell its products. In addition, participants pay the same amount for X as distributors nationwide. You are also operating for substantial commercial purpose because you are selling products to those who participate in your fundraising program for them to sell at a profit.
As described in section 1.501(c)(3)-1(c)(2) of the Regulations, you are not operated exclusively for exempt purposes because your net earnings inure to the benefit of private shareholders or individuals . This is evidenced by the fact that you were incorporated by N who sells X and is owned by D, your president. Although you have adopted a conflict of interest policy, this does not change the fact that D through N is profiting from this relationship.
You are not as defined in Section 1.501(c)(3)-1(d)(1)(ii) of the Income Tax Regulations, because you are operating for the private interests of N and D. Through your programs, N is able to grow its business and , enhance its visibility as well as increase its profits.
Other than that Mrs. Lincoln, how did you enjoy the play?
Other Coverage
Paul Streckfus of EO Tax Journal also covered the ruling.
As I understand the facts, N is selling its product X at wholesale prices. If this is the case, I do not see inurement as an issue. Similarly for private benefit. Increasing X’s market share does not seem to me to be a prohibited private benefit. What we appear to have is an organization selling its product X at wholesale prices, with a thin overlay of charitability. If so, the denial seems appropriate to me.