This post was originally published on Forbes Jul 16, 2015
If you were planning to make a tax-deductible charitable contribution to the Educational Assistance Foundation For The Descendants Of Hungarian Immigrant In The Performing Arts, it is probably too late. The DC District Court has approved the IRS revocation of its exempt status retroactive to its founding. I love this case as it brings me back to my earliest days on forbes.com. I wrote about the original ruling that disallowed the exempt status PLR 201130018. Due to the redaction, I didn't know they were talking about Hungary, so I referred to it as the "old country", which is one of my favorite TV tropes.
The return represents an aggressive decision by us and our accountants to try to minimize our damages due to poor drafting. We formed a 501(c)(3) scholarship fund, post mortem, with the hope that the IRS will ignore the specific provisions of the will and let us do what should have done originally. Consequently, we deducted the monies transferred to the scholarship fund, thus minimizing our taxes.
... according to Board Meeting minutes, dated December 27, 2004, and December 27, 2005, the selection process in actuality consisted of input from Frances Odza and Barrett Weinberger, the only two in attendance at the meetings, making motions on behalf of the Foundation to “look favorably upon the grant requests” for each of the Schaller scholarship recipients.
The Foundation operated in a manner that inured to the benefit of one family, precluding it from having tax-exempt status. Therefore, the IRS's decision to revoke the Foundation's tax-exempt status retroactively is supported by the Administrative Record and was not an abuse of its discretion. Accordingly, the Court must grant the defendant's motion for summary judgment.
To keep more of their estate away from the IRS, the rich can donate art or classic cars to their own private museums or set up special trusts that send income to relatives tax-free. What they can’t do, according to Walton’s ruling, is give relatives scholarship money and call it charity.
One of the “rules of thumb” for tax planning is that “smell counts” in any tax situation. If the result just “looks bad” there’s a good chance that the courts will simply not allow it to stand. This is doubly true with regard to §501(c)(3) charitable organizations that, while technically operated under principles that serve the public good, in reality always seem to benefit a very distinct, not so public, private group—like a single family.