Monday, April 28, 2014
One of the most vexing doctrines in charitable tax exemption under Section 501(c)(3) of the Code is the "private benefit" doctrine. Both Darryll Jones and I have written extensively about private benefit, but I still struggle to explain it to my students in my Exempt Organizations class. The best I've been able to come up with is that "private benefit" refers to a situation in which a charity intentionally provides a benefit, usually (but not always) an economic benefit, to someone outside the charitable class under the guise of serving the charitable class, when in fact the service to the charitable class is secondary to the private benefit. For example, an art gallery that acts as a sales agent for artists might argue that displaying art is for the educational benefit of the viewing public (the charitable class) when in reality it is all about selling the displayed art on behalf of participating artists (the "private benefit.")
I had not seen the private benefit doctrine used much (if any) in state property tax exemption cases - until now. A recent decision by the Lane County (Oregon) Board of Commissioners to deny tax exemption to a gun club appears to invoke something very close to private benefit doctrine. This story in The Register-Guard summarizes the case which involved a gun club that claimed exemption as a property “exclusively occupied or used as a public park or for public recreation,” under Oregon law. The County Board, however, found that private members of the club received substantial benefits not available to the public, and that the club required its members also to be members of the NRA. According to the Board's legal counsel, “The result is that the NRA receives an indirect benefit that is derived from (the club’s) Lane County tax-exempt status.” That statement is very close to the court's conclusion in the famous American Campaign Academy case, 92 T.C. 1053 (1989), where the court held that the "indirect" benefits to the Republican Party of forming a nonprofit school to train political operatives violated the private benefit doctrine, despite the fact that the school was open to all and graduates did not have to work on Republican campaigns (and at least some apparently did not do so).
I've never been a fan of American Campaign Academy, nor am I a fan of the amorphous balancing test that currently seems to be the rule for the federal private benefit doctrine. Seeing it spread to the states in property tax exemption cases does not exactly fill me with joy, but perhaps the states will do better in defining the doctrine than the IRS has.