Tax-Exempt Bonds for Federal Unemployment Insurance Repayments

March 28, 2012


See for a basic overview of the federal unemployment insurance system.

See for a National Employment Law Project briefing paper entitled “Bond Financing For Insolvent State Unemployment Insurance Trust Funds” of January 2004 discussing the impact of funding insolvent UI funds with bond proceeds.

Tax Matters

See this entry for more information on certain working capital matters relevant to funding federal unemployment accounts.

Private Letter Ruling 200446006

Private Letter Ruling 200846018

Allocation and Accounting Regulations (Treas. Reg. 1.141-6)

March 24, 2012

General Overview

On October 25, 2015, the Treasury Department released finalized regulations in T.D. 9741 to address allocation and accounting rules, including rules relating to undivided portion allocation, treatment of partnerships and certain remedial action matters, including anticipatory remedial actions. Click the following link (2015-27328 Allocation and Accounting Rules) to download the final regulations.


PLR 200441025 (Jun. 14, 2004): Parking ramp example with adjacent retail structure and a roof deck for future private business use.  Facilities are split into discrete portions.  For purposes of the roof deck, the discrete portion includes the additional costs needed for supporting future private business use construction.  Allocation of proceeds and equity using these discrete portions. Discussion of simultaneous governmental and private business use of parking deck and allocation of proceeds based on percentage of parking spaces used for private business use leases. Allocation of private payments to sources in the same percentage as parking spaces used for the good and bad purposes.  Allocation of private payments “to the extent that those expenses are directly attributable to the operation and maintenance of the parking ramp related to the use under the parking agreements.”

Charitable Organizations (I.R.C. 501(c)(3))

March 16, 2012

General Exempt Organization Matters

Click here for a chart identifying types of tax-exempt organizations, including 501(c)(3) charitable organizations. The chart is dated but may be helpful for initial research. (Click here for the source.)

LLCs as Charitable Organizations

Assume qualified 501(c)(3) bonds are issued to finance a facility.  If the facility is to be owned by an LLC, is the ownership requirement of Section 145(a)(1) of the Code satisfied?  Can an LLC be considered a 501(c)(3) organization?  Yes, an LLC may either be “deemed” a 501(c)(3) organization by virtue of its disregarded status or be an actual 501(c)(3) organization subject to receipt of a determination letter.

1.  Disregarded Entity Status:  Announcement 99-102, 1999-43 I.R.B. 545 establishes that an LLC wholly owned by a single owner (such as an exempt organization (exempt under Section 501(a) of the Code)) may be disregarded as an entity separate from its owner so long as (1) the owner treats the operations and finances of the LLC as its own for tax and information reporting purposes and (2) no election is made to treat the LLC as an association.  Deemed 501(c)(3) status does not apply if the LLC has more than one member.  Also, the LLC’s organizing documents should be drafted carefully to avoid any conflicts with the sole member’s operations that are critical to maintaining 501(c)(3) status.  See also Form 990 concerning disregarded entities.

2.  Regarded Entity Status:  Alternatively, the LLC can apply for its own exemption determination.  By default, if there is more than one member of the LLC, the check-the-box regulations will treat the LLC as a partnership.  The longstanding IRS position is that a partnership cannot qualify under Section 501(c)(3).  However, if the LLC elects to be treated as an association, 501(c)(3) status may be granted upon proper application and so long as twelve special conditions are met that are designed to ensure that the organization is organized and will be operated exclusively for exempt purposes and to preclude inurement of net earnings to private shareholders or individuals.  The twelve conditions are described in this publication of the IRS (be sure to check for updated information).

The October 2015 final regulations concerning allocation and accounting matters (Treas. Reg. 1.141-6) provide guidance regarding private business use and ownership (for purposes of I.R.C. 145(a)) matters involving partnerships.  For additional background, see the September 2014 NABL submission regarding joint ventures.

PLR 9929041 (July 23, 1999), stating that the only two 501(c)(3) members of an LLC will each be treated as an owner of an undivided interest in the bond-financed hospital facilities, and so the bond-financed hospital facilities will be owned by charitable organizations.  Includes a good discussion of aggregate treatment and separate entity treatment of partnerships.  “We conclude that the purposes of I.R.C. § 145 are furthered if [the LLC] is treated as an aggregate instead of as a separate entity.”

PLR 9839016 (June 25, 1998): Two 501(c)(3) organizations create an LLC partnership to manage certain network matters.  The facilities are still operated by each exempt organization, but certain powers are delegated to the LLC.  Each organization shares in the costs of the partnership based on its ratio of contribution.  “In this case, the purposes of Section 145 are furthered if, with respect to Corporation A’s and B’s bond-financed facilities, the Network is treated as an aggregate instead of a separate entity using the bond-financed facilities.  With limited exceptions, Section 145 confines the applicability of Section 103(a) to financing arrangements that exclusively benefit 501(c)(3) organizations engaging in activities related to their charitable purposes or governmental units.  Implementation of the Network Agreement will neither transfer nor have the potential of transferring the benefits of tax-exempt financing of the bond financed facilities to the partnership created by the Network Agreement.  The Network Agreement creates an integrated regional health care delivery system to improve patient care, to increase efficiency, to combine certain activities, eliminating duplicate services and to otherwise further the Network’s goals under the Network Agreement.”

Rev. Rul. 98-15 and Rev. Rul. 2004-51:  In these revenue rulings, the Internal Revenue Service applies the aggregate approach in connection with public-private partnerships to determine exempt organization status, including whether the activities of the public-private partnership constitute an unrelated trade or business of the exempt organization, and states that the activities of the partnership must be considered to be the activities of the partners.

IRS Fact Sheet FS-2011-11 (Oct. 20, 2011):  In connection with the Affordable Care Act, the Internal Revenue Service has concluded that activities of partners in an accountable care organization are to be attributed to the organization’s partners on an aggregate basis.

See also PLR 201603032, referenced here.

Group Exemption

There are two basic requirements for including a subordinate entity in a group exemption (Sections 4.02 and 4.03 of Rev. Proc. 80-27): (1) the characteristics requirement; and (2) the listing requirement.

Under the first requirement, the parent must recognize that the subordinate has certain required characteristics (it must be affiliated with the parent, be subject to the control of the parent, be exempt under the same paragraph in 501(c) of the Code, not be a private foundation, etc.).

Under the second requirement, the parent must include the subordinate in the parent’s next annual report to the Internal Revenue Service.  The inference in the Revenue Procedure (and reflected in the group exemption information leaflet from the IRS) is that the entity can be considered a subordinate once the characteristics requirement is met, but that failure to list the entity in the next report means that the entity loses its status as a subordinate – and therefore loses the ability to be exempt under the group exemption letter.

Organizations that Change Subsection

If the organization forms a different entity (e.g., if it was previously an unincorporated association that has incorporated, or if it was a corporation in one state and has reincorporated in a new state), then it must apply for a new EIN before it applies for exemption for the new entity unless the reorganization qualifies under IRC section 368(a)(1)(F) [i.e., conducting the same activities in the new state with the same assets], in which case it must still apply for exemption but is not required to get a new EIN. See this Internal Revenue Manual entry for more information.

Obtaining Revised Determination Letters

A new exemption application on Form 1023 or 1024 must be submitted in the event a new entity is created.  There is currently no guidance regarding how to obtain a revised determination without filing such forms where there is a mere change in the form or state of incorporation, including situations where the change is accomplished by a process of domestication.  See Rev. Rul. 67-390.

Private Letter Rulings

PLR 201423028 (June 6, 2014):  Rulings requested and received that (1) performing loan services on direct student loans originated by the DOE under the HCERA will not adversely affect the organization’s exempt status under I.R.C. 501(c)(3) and (2) revenue generated from performing these loan services will not constitute unrelated business taxable income under I.R.C. 512 and 513.

See also “Tax Exempt Organizations with For-Profit Subsidiaries,” Paul J. Dostart and Olivia A. Olsen Hansen, Dostart Clapp, LLP.

TAM 201438034 (Released Sept. 19. 2014):  Taxpayer wasn’t engaged in a charitable activity because it was engaged in the business of leasing space to charter schools instead of operating a private school.  TAM discusses certain of the limits of treating leasing as an exempt activity, activities that support exempt organizations as well as what it means to be a political subdivision.

PLR 201441017 (Oct. 10, 2014):  Based on the facts of the examination, the organization does not qualify for exemption since the operation of its art shows and shop confers a private benefit to its members. Although the purpose in operating the art shows and shops may arguably benefit the public in the education of art, the display and sale of these items created by its active members clearly benefit their private interest.

Rev. Rul. 66-178, 1966-1 C.B. 1781:  Service recognized an organization that sponsored an annual public art exhibit that displayed the works of unknown and promising artists to be exempt under section 501(c)(3) of the Code.  Although the organization charged a nominal admission fee to the exhibit and sold a catalogue describing the exhibit, the organization did not sell or offer the displayed works for sale.

Rev. Rul. 71-395, 1971-2 C.B. 228:  A cooperative art gallery was formed by a group of artists to exhibit and sell their works. Additional artists were admitted to membership only on approval of existing members. All works displayed at the gallery could be purchased by the public and many could also be rented. The gallery retained a commission from the sales and rentals to cover its cost of operation. In concluding that the art gallery was not entitled to recognition of exempt status, the ruling emphasized that the gallery was a vehicle for advancing the careers of its members and for promoting the sale of their work. As such, it “serves the private purposes of its members, even though the exhibition and sale of paintings may be an educational activity in other respects.”

Rev. Rul. 76-152, 1976-1 C.B. 151:  A group of art patrons formed an organization to promote community understanding of modern art trends. Its sole activity was the selection of modern art works of local artists for exhibition and for possible sale at its gallery, which was open to the public. A modern art work of any local artist was eligible for consideration for exhibition and, if selected, the artist’s work was displayed on a consignment basis with the artist setting the selling price. The artists had no control over the organization or its selection process. The organization kept a ten percent commission on sales. On these facts, the Service ruled, as in Rev. Rul. 71- 395, that the artists were being directly benefited by the exhibition and sale of their works with the result that a major activity of the organization was serving the private interests of those artists whose works were displayed.

Goldsboro Art League, Inc. v. Commissioner, 75 T.C. 337 (1980):  A section 501(c)(3) organization operated two commercial-type art galleries in connection with an art center which furnished various educational and charitable services to the community. The art galleries sold works of arts created by various artists on a consignment basis.  The organization would set the sales price of each work of art and advertise the sale of the art works to the general public.  Under the informal arrangement with the artists, the organization would turn over approximately 80 percent of the proceeds to the artists while retaining the remainder to cover expenses.  The Tax Court held that the organization qualified for exemption under section 501(c)(3) because the primary purpose of the two galleries was to foster community awareness and appreciation of contemporary artists and to provide a constant flow of visual art for students to study techniques.  In making its decision, the Tax Court considered the following factors to be critical to its determination: (1) there were no other museums or galleries in the area, thus, the exhibition of art works showed a purpose primarily to educate rather than to sell and the selling activity served merely as an incentive to attract artists to exhibit their work; (2) works were selected for their representation of modern trends rather than salability; (3) the organization’s convincing record of dedication to teach the public, through a variety of means, to appreciate art indicated that its sales activities were “secondary and incidental” to furthering its exempt purposes; and (4) of the more than 100 works of arts exhibited in the two galleries, only the art of works of 2 members of the organization were exhibited in the galleries.

PLR 201507023 (November 21, 2014):  Operation for a substantial private purpose.  Failure to prove that income does not inure to the benefit of private individuals and shareholders.   Not organized exclusively for charitable purposes.  Organization held to be operated primarily for the benefit of its own members.  The organization was an athletic booster club for children.  Fundraising was a main activity.  Moneys from the fundraising benefitted members.  No scholarships were given to others.

Rev. Rul. 69-175, 1969-1 C.B. 149, describes an organization created to provide bus transportation for school children to a tax-exempt private school. The organization was formed by the parents of pupils attending the school. The organization provided transportation to and from the school for those children whose parents belonged to the organization. Parents were required to pay an initial family fee and an additional annual charge for each child. The IRS determined that “when a group of individuals associate to provide a cooperative service for themselves, they are serving a private interest.”

Rev. Rul. 71-395, 1971-2 C.B. 228, holds that a cooperative art gallery formed and operated by a group of artists for the purpose of exhibiting and selling their works does not qualify for exemption under I.R.C. 501(c)(3).  The IRS concluded that the cooperative gallery served the private purposes of its members, even though the exhibition and sales of paintings were also educational in some respects.

In Ginsberg v. Commissioner, 46 T.C. 47 (1966), the court considered a collective organization created to dredge waterways.  The majority of the funds for this activity came from owners of property adjacent to the waterways.  The court found that the primary beneficiaries were the adjacent property owners.  Any benefit to the general public because these dredged waterways would be a safe harbor for boats during a storm was secondary.  Therefore, the organization was not exempt because of the significant private benefit provided.

In Aid to Artisans, Inc. v. Commissioner, 71 T.C. 202 (1978), the court held an organization that marketed handicrafts made by disadvantaged artisans through museums and other non-profit organizations and shops was operated for exclusively charitable purposes within the meaning of § 501(c)(3).  The organization, in cooperation with national craft agencies, selected the handicrafts it would market from craft cooperatives in disadvantaged communities.  The organization marketed only handicrafts it purchased in bulk from a community of craftsmen.  The court concluded that the overall purpose of the activity was to benefit disadvantaged communities.  The method it used to achieve its purpose did not cause it to serve primarily private interests because the disadvantaged artisans constituted a charitable class and the organization showed no selectivity with regard to benefiting specific artisans.

Rev. Proc. 96-32:  Creates safe harbor for organizations that provide low income housing.  Such organizations will be considered charitable organizations because they relieve the poor and distressed.  See PLR 201544029 regarding a student housing operator that did not meet the safe harbor burdens and was found to have private benefit.

PLR 201426028 (Apr. 1, 2014):  Ruling that you are not required to submit a new Application for Exemption under I.R.C. 508(a).  Organization is a 501(c)(3) and is classified as a public charity within the meaning of I.R.C. 509(a)(2).  Formed by act of the State legislature.  Organization’s purpose is to administer the FFELP (Federal Family Education Loan Program).  Organization reviews applications of students to determine eligibility for student loans, guarantee loans made to students and perform various other administrative functions.  State requires organization to make changes to corporate status, but those changes do not alter the purposes or corporate form of the organization.  Question: Is a new corporation (for purposes of I.R.C. 508(a)) formed when there are structural changes in corporate matters?  Recites Rev. Rul. 67-390 and Rev. Rul. 77-469.  Recites American New Covenant Church v. Commissioner, 74 T.C. 293 (T.C. 1980).

PLR 201601014 (Oct. 7, 2015):  The organization does not meet the test under section 501(c)(3) of the Code.  The organization’s purposes included, without limitation: (1) strengthening the natural products economy by developing model processes, practices, and procedures to contribute to the sustainability and development of markets that make fresh and healthy foods available to all people; (2) contributing to healthy and sustainable lifestyles for all by promoting products and programs from regional farmers, businesses, and artisans; (3) pursuing programs and partnerships that have environmental, social and economic integrity; (4) supporting the efforts of other charitable organizations by making the market space available for their promotion and outreach.  The organization provides the surrounding community with a market place where farmers, businesses and artisans sell their goods directly to the public one day per week.  The organization also provides special events where local craft vendors can sell their products, cooking demonstrations and other educational programs for adults and monthly educational events for children one day per month and space at the market for local non-profits to promote their activities.  The facts show that the organization is not operated exclusively for section 501(c)(3) purposes but for the purpose of facilitating sales for the benefit of vendors at the farmers’ market.  The organization engages in substantial non-exempt activity similar to a commercial enterprise.  Any consumer education provided is incidental to the sale of the vendors’ products.

See PLR 201603032, referenced here, relating to charitable purposes of relieving the poor and distressed.

PLR 201603035 (Sept. 17, 2015): Organization with the primary purpose and mission to provide childcare to working parents.  Found not to qualify for exemption under I.R.C. 501(c)(3), mainly for failure to maintain adequate records under I.R.C. 6001 and Treas. Reg. 1.6001-1(c).  Refers to Rev. Rul. 68-166: Rev. Rul. 68-166, 1968-1 C.B. 255, provides that a nonprofit organization formed to operate a day care center for young children of needy working parents, who have no means to provide care for their children during the day, qualifies for exemption under IRC 501(c)(3). The organization charged a nominal fee and was largely dependent on contributions for support.

PLR 201603036 (Sept. 30, 2015):  Revocation of 501(c)(3) status for failure to operate as a charitable organization.  The organization was formed as an educational organization focused on drug and alcohol prevention.  The mission statement was to develop other programs to address areas of need.  Since a certain year, no activities for exempt purposes were performed.

PLR 201603037 (Oct. 16, 2015):  Organization’s purpose was to facilitate the recovery, processing and distribution of human organs and/or tissue and for any other lawful purpose.  Organization ceased to operate and made no filings.  Organization failed to comply with I.R.C. 6001 and 6033.

PLR 201603038 (Oct. 16, 2015): Organization failed the operational test. The organization’s mission was to educate children from kindergarten through Grade 8.  The organization closed.  IRS revokes exempt status because facts indicate that the organization is no longer functional, even though organization did not complete its termination process and officially dissolve.

PLR 201603039 (Oct. 23, 2015):  Applies Rev. Rul. 64-182 and the ruling’s “commensurate test.”  Bingo and gaming commission.

PLR 201603040 (Oct. 9, 2015):  Organization not operated for a charitable, religious, educational or other exempt purpose and failed to keep adequate books and records required by I.R.C. 6001 , 6033(a)(1) and Rev. Rul. 59-95.  The organization has been inactive and there have been no operations or financial activities conducted or planned.  The organization provided supplemental educational services to low achieving students in grades 6 – 12.  These services included English Language Development, special education a services and instruction in all academic subjects.

PLR 201603041 (Oct. 9, 2015):  Organization failed to operate exclusively for an exempt purpose.  Organization failed to respond to information requests from the IRS.  The organization’s goal was to address the problem of hunger and food insecurity in communities by soliciting and distributing surplus food and non-food items.

PLR 201603042 (Sept. 28, 2015):  Organization failed to operate for any charitable, religious, educational or exempt purpose.  Organization failed to keep adequate records.  The purposes of the organization were to provide affordable and safe housing and family life for men and women needing and desiring residential living quarters for short term periods of time, encouraging and supporting responsible independent and small group living skills, providing for physical, spiritual and emotional growth and stability of tenants, and maintaining, encouraging and supporting an atmosphere of recovery for all residents.

PLR 201722029 (Jun. 5, 2017):  A Code Sec. 501(c)(3) organization’s tax-exempt status was revoked. The organization’s primary activity was the operation of a gaming hall for noncharitable purposes, but its substantial activity was for the private benefit of the gaming hall’s landlords through the payment of above-market rent. Therefore, the organization did not operate exclusively for one or more exempt purposes.

PLR 201729023 (Apr. 25, 2017):  Organization denied 501(c)(3) exemption because organization did not provide copy of updated bylaws showing that assets, upon dissolution, go to 501(c)(3) organizations.

PLR 201731012 (Aug. 7, 2017):  The organization operated a marketplace for the sale of goods, however, the activity did not constitute an educational or charitable activity because it was not limited to a charitable class.  The organization failed to meet the organizational test of 501(c)(3).

PLR 201731016 (May 10, 2017):  The organization was an unincorporated association hosting events for military members for morale purposes. The entity did not qualify for an exemption under 501(c)(3) because it operated for substantial nonexempt, social and recreational purposes, with minimal benefit to the general public. It failed to meet both the organizational and operational tests.

PLR 201731019 (May 9, 2017):  The organization exhibited products in museums and other organizations.  The IRS revoked the tax exempt status holding that the organization could not prove that it was organized and operated exclusively for exempt purposes.

PLR 201737012 (Apr. 14, 2017): Organization with existing exemption lost exemption because of failure to maintain complete records to establish exemption.

PLR 201737013 (Jun. 20, 2017):  Organization (C) was created primarily to support another organization (D) that was exempt under Section 501(c)(6).  D is a group of business professionals appointed by the Secretary of Commerce to assist U.S. businesses to export their products by connecting people and by providing educational programs and other information services.  All members of D are also members of C and are from the private sector.  C was established for the specific purpose of assisting D with some conference or one-time event.  After that event, C stated it would look for other opportunities to assist D such as awarding scholarships to students in international business programs.  IRS determined the organization was not organized for an exempt purpose and failed the operational test.




Qualified 501(c)(3) Bonds (I.R.C. 145)

March 7, 2012

General Matters

For matters relating to I.R.C. § 145, see also the Tax Exempt Organizations posting for related matters.

Ownership Requirement.  Under Section 145(a)(1) of the Code, property provided by the net proceeds of the issue of qualified 501(c)(3) bonds must be owned by a 501(c)(3) organization or by a governmental unit.  Is this requirement satisfied if the property is held by a limited liability company that is treated as a partnership, the members of which are, e.g., two 501(c)(3) organizations and one public housing authority (which is a governmental unit)?

See Announcement 2015-02 regarding a closing program providing relief from violation of the qualified ownership (and use) requirements for qualified 501(c)(3) bonds.

Rule for Costs of Issuance.  Treas. Reg. 1.145-2(c)(2) states that Section 1.141-3(g)(6) does not apply to Section 145(a)(2) to the extent that it provides that costs of issuance are allocated ratably among the other purposes for which the proceeds are used.  For purposes of Section 145(a)(2), costs of issuance are treated as private business use, which means they take away from the 5% limit.

Governmental Entities with 501(c)(3) Status.  See PLR 9340034 (Jul. 7, 1993), quoting the Conference Report relating to the Tax Reform Act of 1986:

The conferees further are aware that certain State or local governmental universities and hospitals (including certain public benefit corporations) also have received determination letters regarding their tax-exempt status under Code section 501(c)(3).  The committee intends that, to the extent that such an entity is a governmental unit or an agency or instrumentality of a governmental unit (determined as under present law), bonds for the entity will be treated as governmental bonds rather than as qualified 501(c)(3) bonds.

Opinion Matters.  See Torielli, Gina M (2004) “Opining on the 501(c)(3) Tax-Free Bond Transaction: Avoiding Common Borrower’s Counsel Misconceptions,” William Mitchell Law Review: Vol. 31: Iss. 1, Article 4, available at: 

Student Housing

See this article from Eichner & Norris regarding background matters to tax-exempt student housing bonds issued as qualified 501(c)(3) bonds.  Some bond counsel believe that student housing is not residential rental housing, in part based on an older private letter ruling to this effect.  In addition, most student housing facilities do not include complete living units (frequently there are no kitchens), which means student dorms don’t meet the definition of residential rental housing.