The Tax Lawyer
Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.

Right Answer, Wrong Questions: Rethinking Private Letter Ruling 2008-22-041 and Its Implications for Supporting Organizations Seeking Excess Business Holdings Exemptions

Mhairi Collins

I. Introduction
In Private Letter Ruling 2008-22-041 (PLR), the Service applied for the first time the exception releasing certain type III not functionally integrated supporting organizations (type III NFI SOs) from excess business holdings excise tax liability. This form of liability was introduced by the Pension Protection Act of 2006 (PPA) to curb the abuse of supporting organizations (SOs), a broad class of organizations that are organized and operated in support of certain other charitable entities. At the same time, however, the drafters of the PPA sought to ensure the continuation of nonabusive charitable giving. Unfortunately, while the Service appropriately exempted the trust at issue in the PLR, it based its decision on a set of factors that are not narrowly tailored to exempt nonabusive uses of business holdings by SOs in the future. The Service’s current approach to the excess business holdings tax exemption strikes an improper balance between the goals of limiting SO abuse and encouraging charitable giving.

This Note will analyze the PLR in terms of both its result in that case and its implications for future cases. Part II introduces the relevant law, including the basic requirements of supporting organizations, their uses and abuses, and the excess business holdings rules. Part III describes the facts and opinion in the PLR, including the factors listed by the Service as determining whether an exception should be granted. Part IV analyzes the opinion and these factors. First, it explains why the result of the PLR was correct given that case’s particular facts and the PPA’s intent to increase accountability and curb abuse. Second, looking forward, it signals how the factors weighed in the Service’s analysis are not narrowly tailored either to the text of the exception or the purported intent of the PPA. The final section of Part IV will suggest some specific questions and problems that should be addressed in future guidance.

Published by
Section of Taxation,
American Bar Association
in Collaboration with the
Georgetown University Law Center

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