Thursday, May 13, 2021
Failure to Prove Ownership or Exhibition of African Art Collection Results in Disqualification Under 501(c)(3)
In Tikar, Inc. v. Commissioner, the U.S. Tax Court upheld the IRS' revocation of recognition of tax-exempt status under Internal Revenue Code section 501(c)(3). The court found that the Texas nonprofit corporation failed to demonstrate that it operated exclusively for one or more exempt purposes set forth in section 501(c)(3) for two reasons. While it is reassuring to see there is some IRS audit activity still happening, it is also disconcerting to realize it took more than 15 years for the IRS to reexamine the initial recognition of exemption.
The court's first reason for upholding the revocation was the court found the nonprofit failed to establish that it actually owned the collection of Tikar artifacts at issue. (As the court explained, "Tikar was one of the tribes in Cameroon when it was controlled by Belgium in the 19th and 20th centuries.") This lack of ownership meant that the nonprofit's activities relating to the collection provided a private benefit to the actual owner of the collection and a foreign entity that he controlled.
Sec0nd, the court found that even if it assumed the nonprofit had an ownership interest in the collection or other African artifacts, the nonprofit failed to establish that it actually had displayed any of the items or engaged in other activities relating to them that furthered an exempt purpose for many years. Its failure to do meant it was not operated exclusively to further an exempt purpose.
Based on the court's detailed findings regarding the failure of the nonprofit to provide evidence supporting its assertions regarding its activities, the court's conclusion is not surprising. It is also is somewhat reassuring to know the IRS is engaging in some audit activity - here specifically the audit that began in 2015 of the 2012 Form 990-PF filed by the nonprofit - which is what led to the revocation. But given that the nonprofit had received its favorable determination letter in 1999 and appears to have both failed to transfer the collection and to engage in required activities since then, it is a bit concerning that it took the IRS more than 15 years to select the nonprofit's return for audit. While there is no indication in the opinion regarding what triggered the audit, it may be that a 2007 lawsuit relating to the collection drew the IRS' attention. If that was the case, who knows if and when the IRS would have audited one of the nonprofit's returns absent that litigation.