In mid-October, Allied Charities was afforded a meeting with representatives of the local Exempt Organizations Division Office to discuss changes in the interpretation of law affecting licensees' ability to claim exception from the Form 730 and I I -C taxes. As many of you know from following ACM's prior efforts with the Excise Tax Unit of the IRS, these taxes apply to revenues generated through the lawful conduct (under Minnesota Chapter 349) of non-bingo/non-paddlewheel gaming activities (we'll call these "pull-tab operations" for the rest of this article) UNLESS the licensee earning such revenue is:
     1. both tax-exempt (under one of the 501 (c) subseptions) and
     2. able to demonstrate that no part of the gaming proceeds captured by the licensee inures to the benefit of any
         private individual (i.e.., that there is no "private inurement").

In 1994 and 1995 ACM worked with the IRS' St. Paul Excise Tax Unit to establish an understanding, on principle, of the factors that would be used by the IRS to determine how any part of a licensee's pull-tab operations would be considered as "inuring to the benefit" of private parties. This was really only an issue for the entities who were membership-benefit organizations. Then, as well as today, the IRS did agree that §501(c)(3) groups (who by law are not entitled to be  "membership-benefit" groups) did not have private inurement result from their pull-tab operations (although a §501(c)(3) group operating in violation of the §501(c)(3) rules might). As a result, §501(c)(3) groups found themselves excepted from the Form 730 and 11-C taxes. Additionally, "membership-benefit" groups who do not own facilities were also unlikely (unless operating improperly under Gambling Control Board rules) to have private inurement occur from their conduct of pull-tab operations. Thus, it was also agreed then, as well as today, that veterans organizations, as well as Lions and Jaycees and most fraternals, conducting pull-tab operations solely outside of their own facilities were also excepted from the Form 730 and 11-C taxes.

But for the "membership-benefit" groups operating gaming at their own facilities, or paying for improvement of facilities under the old "grand-fathered-in" rules, further work by ACM on all but the strictly closed-door fraternal organizations was undertaken to establish to the IRS the working factors which might be considered as yielding impermissible private inurement. What resulted was an "informal" understanding between ACM and the Excise Tax Unit of what mathematical parameters would be used to see if disqualifying private inurement existed (if so, the licensee would then be subject to the e-xcise taxes). These parameters compared the magnitude of "self-pays" (typically measured from Schedule D along with amounts paid from gaming for property taxes on facilities-used-in-gaming) to the licensee's overall net (of prizes) profit from pull-tabs.

Now, in 1998, as part of the IRS' prior-scheduled reorganization (there will be further changes under Congress' reorganization of the IRS -- however, how these apply to tax-exempt taxpayers is yet to be revealed), the jurisdiction over assessment of excise taxes payable by tax-exempt organizations has been moved out of the Excise Tax Section of the IRS, and over to the Exempt Organization Division. The latter Division is home to the same people who have audit examination rights for this sector, and it is now the local (St. Paul) Exempt Organization (EO) agents who will be making determinations as to whether a tax-exempt organization who conducts Chapter 349 gaming should be paying Form 730 and 11-C tax. lt. will thus be their business( not the Excise Tax personnel that licensees prior dealt with) to oversee determinations of what is private inurement and when it exists! The Exempt Organization Division personnel we met with informed us that they are not happy with the "interpretation of law" which resulted from their predecessors' application of the mathematical parameters we have been operating under. The EO position, which ACM grudgingly admits has merit, is that since the law only allows exception from these taxes in the absence of private inurement (the statute specifically states "no part of the gaming proceeds ". . . "inures to the benefit " of any private individual, any real private inurement will defeat a licensee's exception argument. They thus dispute what had been the practical result achieved from ACM's earlier involvement with the Excise Tax Unit which allowed some minor level private inurement (which we labeled "de minims") to still be "okay".

In light of their now having jurisdiction on these matters, the local Exempt Organization Division Office has asked us to communicate what their posture will be when they find ANY payment for facility expense -- especially toward a licensee's property tax burden -- coming from an organization's gaming account (remember, this is for licensees who are
"membership-benefit" groups, such as a veterans organization, and will also apply to fraternals not following a strict
'closed door' policy). The EO position we have been advised of is that the payment of such property tax (or Schedule D payments for certain property improvements) constitutes private inurement since members' dues do not have to be increased in order for the organization to meet its property tax (or construction) obligations on a facility which members gel the benefit of in whole or in part. NOTE WhAT RESULTS FROM THIS CURRENT POSITION OF THE IRS: WHEN
A LICENSEE MAKES A LAWFUL PURPOSE EXPENDITURE FOR PROPERTY TAXES DUE AND PAYABLE
UPON THE LICENSEE'S OWN FACILITY (OR MAKES ANY OTHER PAYMENT THAT INURES TO THE MEMBERS' BENEFIT) THAT LICENSEE WILL NOT BE EXCEPTED FROM HAVING TO PAY FORM 730 AND
11-C TAXES. The point of printing this article is to ensure that ACM members know that they are now under the jurisdiction of the Exempt Organization Division regarding liability for the wagering excise taxes, and that Division is (at present) operating from the presumption that any dollars for self-paid property taxes by the groups enumerated above will be considered by them to be private inurement.

The preceding paragraph thus represents a CHANGE from the position on the law that we enjoyed in the past. Like it or not, many licensees who have been paying property taxes (or Schedule D payments which bring private inurement to the members) from gaming -- even if their refund claims for Form 730 taxes have been honored in the past -- will now be hearing from the Exempt Organizations Division that they ARE subject to these taxes. Such "communication" can be expected when liability for these taxes, or eligibility for refund of prior-paid taxes, is placed in question with the IRS' Excise Tax Servicecenter in Cincinnati, Ohio. Additionally, local EO agents will be making their own determination of liability for these taxes when licensees come under routine audit by Exempt Organizations personnel. We have been told that their position in all of these cases will be to see if payments of property taxes are being made from the gaming account - if so, that fact will he considered to he impermissible private inurement, and the result will be they inform the Servicecenter that Form 730's liability exist. In plain English, this means that the EO Division feels that those of you who have not been filing Form 730's under the old de minims math test should do so in the future if property taxes (or other "inuring" payments) are being paid from gambling. For taxpayers who find this issue "coming back" through EO Division present audit of prior years' Forms 990/990-T, there are no guarantees that back years' Form 730 filings won't be mandated. But the officials we met with were attuned to the problem of "unfairness" to a taxpayer now under examination who might be liable for back period excise taxes. Although they balked at our request for amnesty to date for those licensees who declared exception from these taxes on the basis of the prior de minims tests (thus leaving open the possibility that some licensees will have to reopen back months' filings for which either no filings or filings with $-O- wagers collected were shown) on the grounds that "the law is the law, even if the IRS' official interpretation of it has changed", we did hear more than one suggestion on their part that the "kindler-gentler" IRS would be loath to impose retroactive taxation unless the level of private inurement was perceived to be "egregious" or "extraordinarily material". Thus, a licensee "unlucky" enough to be required to negotiate an audit examination result regarding back periods' excise tax liability is well-advised to seek appropriate tax/legal counsel.

To summarize again, all licensees (particularly those who don't get notification from the IRS that they are subject to audit examination) need be aware of what the IRS has told us:
LICENSEES WHO ARE NON-CLOSED DOOR MEMBERSHIP-BENEFIT GROUPS, AND WHO PAY PROPERTY TAXES (OR WRITE OTHER "INUREMENT"-BEARING CHECKS) FROM THEIR GAMING ACCOUNTS, WILL BE TOLD BY THE IRS THAT THEY SHOULD BE PAYING FORM 730 AND 11-C TAX FROM THIS POINT FORWARD.

As always, ACM will be working on the industry's behalf to narrow the amount of excise taxes Chapter 349 licensees bear.  We are aware of some open audits of veterans organizations where the issue of private inurement from property taxes impacts Form 730 liability and calculations, and you can trust that we are working hard to limit the damage from the Exempt Organizations' revision to its current interpretation of law. Stay tuned.