On May 1, 2018, GKG Law’s non-profit organization client (the “Organization”) received notification from the Internal Revenue Service (“IRS”) that, after a four-month long examination, they would be refunded nearly $2 million in taxes paid on income that the IRS improperly deemed to be Unrelated Business Income (“UBI”). This result comes after the Organization initially questioned whether this income was coming close to jeopardizing their exempt status and sought legal counsel on this matter. GKG Law’s expertise in tax law unearthed the possibility that an earlier determination by the IRS on the Organization’s income was incorrect and that they may be entitled to a large refund.
Issue Background
Over 30 years ago, the Organization was examined by the IRS and received a determination that income derived from administering certain purchasing programs for its members was UBI and thus was subject to federal income tax. In the years since that IRS examination, this Organization has paid annual tax on all its net revenue derived from the purchasing programs, which regularly exceeded $1 million. In recent years, the Organization became concerned that this revenue might begin to jeopardize their exempt status and in turn sought legal advice on how to deal with the issue and protect the Organization’s status. The Organization was referred to GKG Law’s Association Practice and under our guidance, the Organization file amended returns seeking refunds for taxes paid in all open years. Once filed, the IRS opened an examination on the Organization which resulted in the approval of the full amount of the refund request for each tax year.
Beyond the nearly $2 million refund, the IRS examination records now demonstrate that the IRS has recognized that these programs are related to the Organization’s exempt mission, which effectively negates the IRS’s determination from the prior examination. As such, these activities no longer pose a threat to the Organization’s exempt status and the Organization will save hundreds of thousands in taxes each year going forward.
Larger Context of this Result
This result is a good reminder that organizations should occasionally reevaluate their programs and activities previously deemed to be unrelated, even those that the IRS has determined to be unrelated. Circumstances and IRS positions change, and those activities may no longer be the type of activities characterized as unrelated trades or business activities.
