IRS Should Not Be Worrying About Do Not Call Registry


The Tax Court opinion of Judge Daniel Guy in the case of Giving Hearts, Inc. illustrates a waste of IRS resources and focus that is the result of our choice to have the wrong agency regulate not-for-profit organizations. If bad acting by an exempt organization is facilitating significant federal tax avoidance, having the IRS on the case makes a lot of sense.  Other abuses of not for profit status should be dealt with by the agency whose business it is to deal with that particular abuse.  That’s my takeaway. Here is the story.

So You Want To Be A 501(c)(3)

501(c)(3) status is the gold standard of tax-exempt status.  The organization, with some exceptions, is not taxed on its income and gifts to it are deductible by the donors (within limitations, of course).  The only thing better is to be a church.  Churches are 501(c)(3) without the required transparency and administrative hassle.  Don’t get me started.

Given how good the tax deal is, you might find it surprising that many, possibly most, organizations go after 501(c)(3) status for reasons unrelated to federal taxation.  State laws may allow charities to serve liquor or run a gambling operation.  They may be going after grants  And, most absurd, is the entirely underserved dose of credibility that exempt status can give an organization.

Giving Hearts is a new one.  According to the Tax Court decision, the purpose of starting Giving Hearts was to circumvent the national Do Not Call Registry.

Windows Plus 

Windows Plus sold windows and other home improvements.  Windows Plus got a good chunk of business from telemarketing.  The institution of the registry put a significant crimp in that business.  But they had a great idea.  Start a charity that Windows Plus could sponsor.

Charities are exempt from the Do Not Call Registry.  That has to be one of the dumber exceptions to a rule, I have ever heard of, but it is what it is.  Ronald Carrier, founder of Windows Plus, and two other family members formed Giving Hearts along with their CPA Henry Lock, who of course got that enviable treasure slot.

Giving Hearts established a

……… “corporate sponsorship program” with the aim of providing telemarketing opportunities for businesses “to help generate leads” and “give back to a charity”. Mr. Carrier believed that Window Plus and similar businesses would find petitioner’s corporate sponsorship program to be a worthwhile endeavor.

Windows Plus was, of course, the first sponsor.  Giving Hearts telemarketers had a script that started

Hello * * * this is _______________ calling on behalf of Giving Hearts. We are a non-profit organization helping to fund local children’s charities. We have sponsored the Window Plus company for the purpose of fund raising. For every home owner that accepts a product demonstration and free estimate our charity [Giving Heart] will receive a donation from Window Plus.


I suppose that it is not surprising that some people who took the trouble to put themselves on the Do Not Call Registry got annoyed when they were nonetheless called.

… December 2011 the attorney general for the State of Michigan sent a memorandum to the IRS stating that a number of individuals had filed complaints alleging that petitioner was operating as “a front for a window sales operation.” In April 2012 the IRS notified petitioner that it was opening an examination regarding its exempt status.

The Decision

Although Giving Hearts did have a charitable purpose, it was not operated exclusively for charitable purposes, which caused the  Tax Court to sustain the IRS revocation of its exempt status.

Considering all of the facts and circumstances, the Court concludes that petitioner was primarily engaged in generating sales leads (and ultimately revenues) to advance a commercial enterprise, with charitable donations arising only as a function of the businesses’ success in securing in-home product demonstrations and presenting project estimates to potential customers. Generating sales leads in support of a for-profit enterprise is not an exempt purpose within the meaning of section 501(c)(3), nor is it substantially related to such an exempt purpose.

Paul Steckfus in the EO Tax Journal 2019-150 (Sorry, it’s behind a paywall) wrote:

Why did Petitioner think it had more than a snowball’s chance in hell of winning this case? This charade of a case actually went to trial and briefs were filed. What an incredible waste of time and money.

Bruce Hopkins responded indicating that there could be a problem with the decision.

Perhaps the opinion would make sense if the court were writing in a vacuum. It is not, however, as charitable sales promotions, commercial co-ventures, and corporate sponsorship programs (the latter codified) attest. In a charitable sale promotion/commercial co-venture, it is always the case that the for-profit company involved is not obligated to contribute to the charity involved until there is a purchase from the company — the court made a major point about this, as if the practice is wrong (it’s not). Is it conceivable that, in connection with these programs and corporate sponsorship programs under the federal tax law, there is an element of “business promotion”? Indeed, fundraising itself is rarely an exempt function. It appears the court did not think through the vast adverse implications of its opinion.

Well that’s the experts.  I have another take.

Go Fight Crime Someplace Else

I spoke with Henry Lock, who had served as treasurer and whose firm handled the filing for Giving Hearts. What he found troubling about the whole matter was that he thought that Giving Hearts was run in a very clean manner and that the Carriers are very straight people. He was puzzled why the IRS would come after them given the shenanigans that go on in many other not for profits.

And if you look at the 990s what you see is a few thousand dollars coming in and most of it going out to other charities after some administrative expenses.  Nobody is getting away with anything when it comes to federal income tax, which is what the job of the IRS is.

Remember who put the IRS on this?  It was the Michigan AG concerned about people getting phone calls.  So I wonder why the IRS could not have just told the Michigan AG that there were obviously no federal tax shenanigans. Let the Michigan AG deal with the phone call problem.

If somebody at IRS had told Lois Lerner that she wasn’t working at the FEC anymore, we might have avoided that interminable scandal.  Just saying.

Other Coverage

Lew Taishoff had The Front-Redivivus.  The Latin part of the title means “reborn” or something like that.  If you went into tax work by a conventional path that did not give you a strong liberal arts education, you can fix a lot of that by following Mr. Taishoff.

Ed Zollars has something on Current Federal Tax Developments.  

Generating sales leads for a for profit company is not an exempt purpose and it is not substantially related to any exempt purpose per the Court

Nonprofit Blogger gave the decision the award for the wost EO case of the year.

Giving Hearts, Inc. v. Commissioner, a TCM opinion issued Monday wins the award for the worst exempt organizations case of the year, if not the decade.  Not because it was wrongly decided or the opinion is muddled or something like that.  But because it really makes you wonder whether some people just have extra time and money to burn!  The petitioner’s position is so obviously ridiculous that it never should have been litigated!  I mean, does the Tax Court have authority to sanction extremely stupid positions?

I really think NB should hold off on that award.  There are still five months to go.

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