Thursday, July 5, 2012

Sixth Circuit: Organization Aiding Agribusiness Firms not a Tax-Exempt Charity

As reported in Tax Notes Today (electronic citation: 2012 TNT 129-7), in the unpublished opinion of Asmark Inst. Inc. v. Comm’r (No. 11-1553), the United States Court of Appeals for the Sixth Circuit has affirmed a Tax Court decision upholding denial of federal income tax exemption to an organization ostensibly formed to help agribusiness firms comply with regulatory requirements.  The following excerpt from the opinion summarizes the grounds for denying exemption:

[T]he Commissioner was entirely correct to highlight the fact that Appellant is the successor to a for-profit entity, because such a fact "weighs heavily against exemption." See B.S.W. Group, Inc., 70 T.C. at 358-59. Appellant's largely fee-based business plan and its competition within a for-profit market are also "strong evidence of the predominance of [Appellant's] nonexempt commercial purposes." Id. While Appellant is correct that fee-based, nonexempt activities, even those rising "somewhat beyond a de minimus level," do not preclude a finding of tax-exempt status, see Living Faith, Inc. v. Comm'r, 950 F.2d 365, 370 (7th Cir. 1991) (citing Treas. Reg. section 1.501(c)(3)-1(c)(1)) (other citations omitted), Appellant nevertheless bears the burden of proving that its primary purpose is a truly exempt one, as opposed to a "commercial venture[] organized for profit." B.S.W. Group, Inc., 70 T.C. at 358. Likewise, the burden rests on Appellant to prove that the profits derived from its fee-based services do not inure to the benefit of private individuals or shareholders. See Nationalist Movement, 37 F.3d at 220. Appellant has done neither.


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