Over the past year, GKG Law has witnessed successful results for clients that are good reminders that non-profit organizations and associations should continually re-evaluate their tax positions and be cognizant of potential errors by the IRS.

Successfully Challenging Outdated UBI Determinations

In June 2018, a non-profit association (the “Association”) received a refund of nearly $2 million in taxes paid on revenue that the IRS improperly deemed to be Unrelated Business Income (“UBI”).  This turn of events occurred after the Association initially questioned whether the amount of its UBI was substantial enough to jeopardize its tax-exempt status.  In analyzing this issue, the Association’s legal counsel determined that an earlier IRS determination regarding the Association’s income was incorrect and that the organization was entitled to a large refund.

Over 30 years ago, the Association was examined by the IRS and received a determination that the income derived from administering certain purchasing programs for its members was taxable as UBI.  In the decades since that examination, the Association paid annual taxes on all revenue derived from those programs never questioning the IRS position.

Upon seeking guidance about its exempt status, the Association was surprised to learn that the prior IRS determination was incorrect and that the income was not UBI.  On the advice of counsel, the Association filed amended returns seeking refunds for all taxes paid in each open year.  Once filed, the IRS examined the Association’s returns before approving a refund of all taxes paid in prior years.  In addition to the $2 million refund, the IRS now recognizes that these programs are related to the Association’s exempt mission, negating the erroneous determination and saving the Association hundreds of thousands in taxes each year going forward.

Successfully Challenging Inconsistent UBI Determinations

GKG Law also oversaw the reversal of a proposed adverse IRS determination which reflected regional inconsistencies with respect to the ruling.  On the advice of Counsel, the association requested a technical advice memorandum from the IRS national office which provided an official and binding IRS position regarding the law in respect to this tax issue.  This resulted in saving the association almost $400,000 in proposed taxes and penalties while avoiding the risk and expense associated with litigation.

What Could These Results Mean for You?

These successful results are a reminder to all associations that adverse IRS determinations relating to programs and activities deemed to be unrelated, should be reevaluated over time.  Circumstances and IRS positions change, and those activities may no longer be the type of activities characterized as unrelated trade or business activities.  This is especially true in circumstances where the IRS is issuing uneven determinations to similar organizations.

For more information on these tax issues and how they might apply to your association, please contact GKG Law’s Matt Journy at mjourny@gkglaw.com. Further information on this topic can also be found here https://www.gkglaw.com/publications/503-recent-successes-challenging-irs-ubi-determinations-showcase-importance-of.

Don’t forget to join Association TRENDS at this year’s Nonprofit Finance Accounting Summit taking place on September 12-13 in Washington D.C. Finance professionals must be in the know about new regulations and industry best practices, or else risk fraud, embezzlement, legal prosecution or fines, loss of your tax-exempt status, declining membership, or even bankruptcy. Now you can learn it all at this two-day finance and accounting intensive with leading experts in the nonprofit finance community. Register today!