- published in the August 2008 issue of the Charity Rating Guide & Watchdog Report

The Internal Revenue Service may start revoking the charitable status of poorly performing charities. Steven T. Miller, commissioner of the IRS Tax Exempt and Government Entities Division said at a conference last April that he intends to “re-energize” the rarely used commensurate test to determine if nonprofits are spending enough of their resources on charitable activities, according to CCH News. The IRS recently released a private letter ruling that took away a charity’s privilege to give donors tax deductions on contributions for not devoting enough of its resources to charitable purposes. (Note: IRS policy does not allow it to disclose the name of charities that it has taken action against.)

When the nonprofit applied for nonprofit status with the IRS it stated that it planned to conduct evangelical campaigns in a number of countries and that it might fund orphanages that would teach children the gospel, distribute bibles and install fresh water wells in the developing world. Apparently the group did not do much of any of this. The IRS private letter ruling said that the nonprofit had spent less than one-half of 1% of total revenues on charitable programs and only 3% of total expenses were used for charity during a one-year period.

According to the IRS the nonprofit’s primary focus was on its “Asset Exchange Programs” rather than charitable programs. The asset exchange program allows people to exchange real estate, securities and annuities for the “Tax Deductible Installment Plan” product that offers a variety of tax benefits. The IRS concluded that the nonprofit’s charitable programs were not commensurate in scope with its business of selling annuities.

AIP applauds this ruling and strongly believes that the IRS should start more actively utilizing the commensurate test to pull the tax exempt status of many other charities that are doing very little good in relation to the tax deductible contributions that they receive. American donors and taxpayers should not be subsidizing businesses dressed up as charities.