Tech Accelerator in 501(c)(3) Timeout: Exemption Denied Over Private Interests
IRS Letter Rulings Weekly Digest, May 16, 2025
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202520001 [Link to Ruling]
Like-Kind Clarity: IRS Rules in Favor of Taxpayer’s Deferred Exchange
In this ruling, the IRS confirms that the taxpayer’s proposed deferred exchange complies with Section 1031 of the Internal Revenue Code and applicable safe harbor provisions. The transaction involves exchanging a fee interest in improved real estate for a long-term lease interest in land—with planned improvements produced under a Qualified Exchange Accommodation Agreement—which the IRS deems like-kind for nonrecognition of gain or loss. The ruling cites relevant IRS Regulations, including those governing the identification and receipt of replacement property (e.g., §§ 1.1031(a)-1(b), 1.1031(a)-1(c)(2)) and the deferred exchange framework under § 1.1031(k)-1. Safe harbor requirements under Rev. Proc. 2000-37 and its modification in Rev. Proc. 2004-51 are also acknowledged. The IRS concludes that, provided the improvements are completed timely and any boot is recognized as prescribed, no gain or loss recognition will occur at the time of exchange.
Citations
Internal Revenue Code:
IRC § 1031 (including § 1031(a)(1), 1031(f))
IRC § 856 (definition of REIT)
IRS Regulations:
26 CFR § 1.1031(a)-1(b)
26 CFR § 1.1031(a)-1(c)(2)
26 CFR § 1.1031(k)-1 (all relevant subparagraphs, including (a); (c)(2); (d)(1); (e)(1), (e)(2), (e)(3)(i), (e)(3)(iii); (f)(1), (f)(2); and (g)(2)–(g)(5))
Revenue Procedures:
Rev. Proc. 2000-37 (safe harbor for replacement property under a QEAA)
Rev. Proc. 2004-51 (modification regarding taxpayer-owned replacement property)
202520002
S Corp Slip-Up: Inadvertent IRA Mix-Up Draws IRS Relief
The IRS ruling addresses the inadvertent termination of X’s S corporation election when shares were transferred to an individual retirement account (IRA), rendering the IRA an ineligible shareholder under IRC §§ 1361(b)(1)(B) and 1361(c)(2)(A)(vi). Although the election terminated on Date 3, the IRS provides relief under IRC §1362(f) since the termination was unintentional and corrective steps were prompt. X has demonstrated that it maintained S corporation treatment from Date 2 until termination and that all necessary adjustments will be made consistently with S corporation treatment. The ruling also references Rev. Rul. 92-73, 1992-2 C.B. 224, affirming that when termination occurs inadvertently due to a prohibited shareholder, relief is available if remedial measures, including the timely amendment of returns and a specified payment, are completed. Thus, subject to these conditions, X will be treated as an S corporation effective Date 3 onward.
Citations
Internal Revenue Code:
IRC §1361(a)(1)
IRC §1361(b)(1)(B)
IRC §1361(c)(2)(A)(vi)
IRC §1362(d)(2)(A) and (B)
IRC §1362(f)
Federal Statute:
Federal Deposit Insurance Act, 12 U.S.C. §1813(w)(1)
Revenue Ruling:
Rev. Rul. 92-73, 1992-2 C.B. 224
202520003
Trust Issues? IRS Rescues S Corp Status Despite ESBT Election Oversight
The IRS ruling determines that X’s S corporation election terminated on Date 5 because the trustee of the Trust, which initially held stock transferred from A and B, failed to timely file an Electing Small Business Trust (ESBT) election under IRC § 1361(e)(3). The failure to make the ESBT election converted the Trust from a permitted shareholder to an ineligible shareholder, thereby triggering termination under IRC § 1362(d). However, as the lapse was inadvertent and not intended for tax avoidance, relief is granted under IRC § 1362(f). The ruling also highlights that, if corrective steps are taken—specifically, filing the ESBT election within 120 days and sending in all necessary amended tax returns—the S corporation status will be effective from Date 5. The decision is supported by the applicable provisions of the Internal Revenue Code and the related IRS Regulations, including the time frames stipulated in Reg. § 1.1361-1(m)(2)(iii).
Citations
Internal Revenue Code:
IRC § 1361(a)(1)
IRC § 1361(b)(1)
IRC § 1361(c)(2)(A)(i)
IRC § 1361(c)(2)(A)(ii)
IRC § 1361(c)(2)(A)(v)
IRC § 1361(e)(1)(A)
IRC § 1361(e)(3)
IRC § 1362(a)
IRC § 1362(d)(2)
IRC § 1362(f)
IRS Regulations:
Reg. § 1.1361-1(m)(2)(iii)
202520004, 202520005, 202520006
No GST Exemption? IRS Grants a 120-Day Breathing Room for Election Out
In similar rulings, the IRS has granted the taxpayer a 120-day extension under IRC §2642(g) and Regulation §26.2642-7 to elect out of the automatic allocation of GST exemption for a prior-year transfer to Trust 1. In this case, the taxpayer established a grantor retained annuity trust (GRAT) with Trust 1, which was later divided into Trust 1A and Trust 1B for the benefit of the taxpayer’s descendants. Although the taxpayer did not intend for GST exemption to be automatically allocated to these trusts under the rules of IRC §2632(c)(1), an oversight by the tax advisors prevented the timely election under §2632(c)(5)(A)(i) from being made on the Year Form 709. Based on the submitted facts and representations—demonstrating reasonable reliance on professional advice and good faith—the IRS ruled that the automatic allocation may be undone by filing an amended Form 709 with an explicit election out statement. This relief, subject to the prescribed filing requirements, preserves the intended GST planning.
Citations
Internal Revenue Code:
IRC §2601
IRC §2611(a)
IRC §2602
IRC §2641(a)
IRC §2631(a) and (b)
IRC §2632(a)(1) and (2)
IRC §2632(c)(1)
IRC §2632(c)(3)(A) and (B)
IRC §2632(c)(5)(A)(i)
IRC §2632(c)(5)(B)(ii)
IRC §2642(b)(1)(A)
IRC §2642(g)
IRS Regulations:
Reg. §26.2632-1(b)(2)(i)
Reg. §26.2632-1(b)(2)(iii)(A), (B), and (C)
Reg. §26.2642-7
202520007
GST Gaffe? IRS Grants 120-Day Extension to Rescue Trust Election
The IRS has granted the taxpayer a 120-day extension under IRC §2642(g) and Regulation §26.2642-7 to elect to treat the trust as a GST trust, effective as of Date 2. In this matter, the taxpayer created and funded the trust on Date 1 and made an additional transfer on Date 2 in Year 1. Although the taxpayer intended to allocate GST exemption to all transfers to the trust—including the Date 2 transfer—the qualified tax professional failed to make the proper election on Form 709. As a result, no GST exemption was allocated to that transfer. Recognizing the taxpayer’s reasonable reliance on professional advice and good faith, the IRS has determined that the statutory and regulatory requirements for an extension are met. The taxpayer must file an amended Form 709 with an election-out statement within the extended period to avoid the automatic allocation of GST exemption.
Citations
Internal Revenue Code:
IRC §§ 2601, 2611(a), 2602, 2641(a), 2631(a), 2631(b), 2632(a)(1), 2632(a)(2), 2632(c)(1), 2632(c)(3)(A), 2632(c)(3)(B), 2632(c)(5)(A)(i), 2632(c)(5)(B)(ii), 2642(b)(1)(A), 2642(g)
IRS Regulations:
Reg. §26.2642-7 (including subsections (d)(1) and (d)(2))
202520008
Building Bridges: IRS Extends Deadline to Unify Your Blocks
The IRS has granted Taxpayer a 120-day extension under § 301.9100-1 and § 301.9100-3 of the Procedure and Administration Regulations, allowing Taxpayer to elect, via amended Forms 8609, to treat all N buildings in the Project as a single multiple-building project under § 42(g)(3)(D) of the Internal Revenue Code. Taxpayer intended the Project to comprise all buildings identified by BINs, but inadvertently failed to make the required regulatory election on the original Forms 8609, which are used for Low-Income Housing Credit Allocation and Certification. Under § 42(g)(3)(D), a project is regarded as a single building unless all components are properly identified prior to the end of the first calendar year of the project period. The extension is granted based upon evidence that Taxpayer acted reasonably and in good faith, ensuring that the correction will not prejudice government interests. The taxpayer must file the amended Forms 8609 with the appropriate informational statements within the prescribed period.
Citations
Internal Revenue Code:
IRC § 42(g)(3)(D)
IRC § 42(l)(1)
IRS Regulations:
Reg. § 1.42-1(h)
Regs. §§ 301.9100-1 through 301.9100-3 (including § 301.9100-1(b), § 301.9100-1(c), and §§ 301.9100-2 & 301.9100-3)
202520009
Opportunity Rescued: IRS Extends Lifeline for Tardy QOF Certification
The IRS has granted Taxpayer an extension under §§ 301.9100-1 and 301.9100-3 to elect the regulatory election necessary to self-certify as a Qualified Opportunity Fund (QOF) under IRC § 1400Z-2 and Treasury Reg. § 1.1400Z2(d)-1(a)(2)(i), effective as of Date 2. Taxpayer, organized as an LLC and treated as a partnership, intended to invest in qualified opportunity zone properties via its QOF. However, due to reliance on professional advice and an erroneous belief that a Year 2 Form 1065 was not required, the timely filing of Form 8996 for Year 2 did not occur. After investments were received in Year 2 and the failure identified, Taxpayer sought relief. The IRS, finding that Taxpayer acted reasonably and in good faith, and that granting the extension will not prejudice government interests, ruled that the Form 8996 filed in Month 2 of Year 3 is timely effective, thereby enabling Taxpayer’s QOF election.
Citations
Internal Revenue Code:
IRC § 1400Z-2
IRC § 1.1400Z2(d)-1(a)(2)(i)
IRS Regulations:
Treas. Regs. §§ 301.9100-1 through 301.9100-3
202520010
REIT Relief: IRS Clears the Air on Tenant Services, Section 481(a), and TRS Rents
The IRS ruling addresses three distinct issues for Taxpayer, a publicly traded REIT, regarding its qualification under IRC §856. First, it concludes that income derived from providing tempering, temperature reduction, Rapid Services, and handling services will qualify as rents from real property under IRC §856(c)(2) and (3) and will not be treated as impermissible tenant service income under IRC §856(d)(7)(A), provided these services are furnished in connection with rental activities. Second, using the authority of IRC §856(c)(5)(J), the ruling holds that a Section 481(a) Adjustment arising from a change in the depreciation method does not constitute gross income for REIT qualification. Third, the payments received by Taxpayer from its Tenant-Related Service (TRS) are treated as rents from real property, provided that they meet the limited rental exception requirements under IRC §856(d)(8)(A). No court cases were cited.
Citations
Internal Revenue Code:
IRC § 856(c)(2)
IRC § 856(c)(3)
IRC § 856(c)(5)(J)
IRC § 856(d)(7)(A)
IRC § 856(d)(8)(A)
IRC § 481(a)
IRS Regulations:
Treas. Reg. § 1.856-4(a)
Treas. Reg. § 1.856-4(b)(1)
Treas. Reg. § 1.481-1(d)
202520011
Tech Accelerator in 501(c)(3) Timeout: Exemption Denied Over Private Interests
The IRS has issued a final adverse determination that the applicant does not qualify for tax exemption under IRC §501(c)(3). The determination finds that the organization fails both the organizational and operational tests required for exemption. Although the articles of incorporation promise asset distribution to a tax-exempt body upon dissolution, they do not sufficiently restrict the organization’s purposes exclusively to charitable, educational, or similar exempt purposes as mandated by Treas. Reg. §§1.501(c)(3)-1(b)(1)(i) and 1.501(c)(3)-1(b)(4). Moreover, the organization’s primary activities—supporting sustainable, high-growth, next-generation technology businesses—primarily advance the private interests of its members rather than the public interest. This conclusion aligns with longstanding precedents such as Revenue Ruling 72-369, Rev. Rul. 74-587, Rev. Rul. 76-419, and the Supreme Court’s decision in Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945). Consequently, donations to the organization are not tax deductible.
Citations
Internal Revenue Code:
IRC §501(c)(3)
Treasury Regulations:
Treas. Reg. §1.501(c)(3)-1(a)(1)
Treas. Reg. §1.501(c)(3)-1(b)(1)(i)
Treas. Reg. §1.501(c)(3)-1(b)(4)
Treas. Reg. §1.501(c)(3)-1(c)(1)
Treas. Reg. §1.501(c)(3)-1(d)(1)(ii)
Case Law / Revenue Rulings:
Rev. Rul. 72-369, 1972-2 C.B. 245
Rev. Rul. 74-587, 1974-2 C.B. 162
Rev. Rul. 76-419, 1976-2 C.B. 146
Better Business Bureau of Washington, D.C., Inc. v. United States, 326 U.S. 279 (1945)
202520012
Charity Checkmate: IRS Revokes Exemption Over Record-Keeping and Private Benefit Blunders
The IRS has issued a final determination revoking the organization's tax-exempt status under IRC §501(c)(3) after finding that it fails to meet the organizational and operational tests. The organization did not operate exclusively for exempt purposes but instead conducted activities that primarily benefited private individuals, including its principal officer. Moreover, the organization failed to maintain adequate books and records and did not respond to repeated information requests necessary to assess its compliance. In addition, certain bank transactions inured to the benefit of a private officer, further demonstrating that no part of its net earnings was dedicated solely to charitable purposes. These findings violate the rules outlined in Treasury Regulations—especially Treas. Reg. §§1.501(c)(3)-1(a)(1), 1.501(c)(3)-1(b)(1)(i), 1.501(c)(3)-1(b)(4), and 1.501(c)(3)-1(d)(1)(ii)—as well as IRC §6033(a) and the guidelines set in Revenue Ruling 59-95, 1959-1 CB 627.
Citations
Internal Revenue Code:
IRC §501(c)(3)
IRC §6033(a)
Treasury Regulations:
Treas. Reg. §1.501(c)(3)-1(a)(1)
Treas. Reg. §1.501(c)(3)-1(b)(1)(i)
Treas. Reg. §1.501(c)(3)-1(b)(4)
Treas. Reg. §1.501(c)(3)-1(c)(1)
Treas. Reg. §1.501(c)(3)-1(d)(1)(ii)
Treas. Reg. §1.6033-1(h)(2)
Case Law / Revenue Rulings:
Revenue Ruling 59-95, 1959-1 CB 627
202520013
Charity in Question: IRS Revokes Exemption Amid Record-Keeping Lapses and Private Benefit Concerns
The IRS has finalized the revocation of the organization’s tax-exempt status as a 501(c)(3) because it failed to meet the strict organizational and operational tests required for exemption. The determination hinges on the organization’s inability to demonstrate that it operates exclusively for exempt purposes, as its financial records reveal substantial transactions that benefited insiders—including significant withdrawals that inured to a private officer. Moreover, the organization did not maintain adequate books and records, nor did it respond to repeated requests for information, compounding its failure to file the required annual returns under IRC §6033. The absence of substantiation regarding its purported charitable activities further undermined its claim. This result is backed by Treasury Regulations that demand a specific focus on purpose—especially Treas. Reg. §§1.501(c)(3)-1(c)(2) and 1.501(c)(3)-1(d)(1)(ii)—and aligns with previous court decisions, like Better Business Bureau v. United States.
Citations
Internal Revenue Code:
IRC §501(c)(3)
IRC §6033(a); IRC §6033(j)(1)(B)
Treasury Regulations:
Treas. Reg. §1.501(c)(3)-1(c)(2)
Treas. Reg. §1.501(c)(3)-1(d)(1)(ii)
Treas. Reg. §1.6033-1(h)(2)
Case Law:
Better Business Bureau v. United States, 316 U.S. 279 (1945)
Texas Trade School v. Commissioner, 30 T.C. 642, 272 F.2d 168 (5th Cir. 1959)
Association for Honest Attorneys v. Commissioner, T.C. Memo 2018-41
John Marshall University v. United States, No. 28-78 (Fed Cl. June 24, 1981)
202520014
Rethinking Roth: IRS Grants 60-Day Window to Recharacterize Misfiled Contributions
The IRS has granted Taxpayer A a 60-day extension to recharacterize pre-2018 contributions and rollovers made to Roth IRA X as traditional IRA contributions. The request arose after an inadvertent mislabeling occurred when Financial Institution B, upon a name change request, removed "Roth" from the account title while preserving the Roth coding. Although Taxpayer A timely filed returns for the affected years (2010, 2012, and 2014), she only discovered the error in 2021. Relying on her reasonable good faith and prompt action—as required under section 301.9100-3(b)(1)(ii) of the Regulations—the Service determined that granting relief will not prejudice the government's interests per section 301.9100-3(c)(1)(i). This ruling permits the recharacterization per section 1.408A-5 of the I.T. Regulations, provided that all applicable requirements, including the transfer of net income, are satisfied.
Citations
Internal Revenue Code:
IRC §408A(d)(6)(A), (B)(i), (7)
IRS Regulations:
Treas. Reg. §1.408A-5 (Q&A-1, Q&A-2, Q&A-6)
Treas. Reg. §§301.9100-1, 301.9100-2, 301.9100-3 (including §301.9100-3(b)(1)(ii) and §301.9100-3(c)(1)(i))