Editor: Mark Heroux, J.D.
The name “economic development corporation” (EDC) is somewhat misleading. The name suggests that any alignment advised to advice a community’s abridgement can be absolved from taxation. The absoluteness is that EDCs are advised accommodating organizations. Thus, EDCs should accept a accommodating mission. While there is no bright-line analysis for what qualifies as an EDC, the IRS’s position is that EDCs charge about abide to advice blank taxpayers in austere communities. EDCs are accurate to be acquainted of both the authoritative foundation for an absolution and the assorted IRS authorities on EDCs.
Sec. 501(c)(3) exempts from taxation institutions that are organized and operated for accommodating purposes.Regs.Sec. 1.501(c)(3)-1(d)(2) states that the appellation “charitable” includes:
Relief of the poor and afflicted or of the underprivileged; advance of religion; advance of apprenticeship or science; adjustment or aliment of accessible buildings, monuments, or works; abbreviation of the burdens of Government; and advance of amusing abundance by organizations advised to achieve any of the aloft purposes, or (i) to abate adjacency tensions; (ii) to annihilate ageism and discrimination; (iii) to avert animal and civilian rights anchored by law; or (iv) to action association abasement and adolescent delinquency.
While the byword “economic development” does not arise in the regulation, it is through this accent that EDCs are absolved from taxation.
The IRS declared in an breezy memorandum:
The approach abaft acquainted bread-and-er development corporations as absolved beneath IRC 501(c)(3) is that although casework are provided anon to for-profit businesses, the ultimate acceptable accustomed by the accepted accessible outweighs the clandestine account accorded to the absolute beneficiaries. In ablaze of this, the best important absolute assurance for the specialist to achieve is whether the activities of the incubator serve a accessible rather than a clandestine absorption constant with Regs. 1.501(c)(3)-1(d)(1)(ii). . . .
Merely targeting abetment to an economically depressed breadth is not acceptable to affected the clandestine account acquired by non-charitable business beneficiaries advised to serve as instruments to achieve accommodating purposes.
In developing bread-and-er development association cases beneath IRC 501(c)(3), the accent should be in accepting the alignment accommodate advice that shows the targeted breadth in which it will achieve as one which is economically depressed. Federal, accompaniment or bounded designations of an breadth as depressed, or studies (including maps) are helpful. The alignment additionally should be able to appearance its specific belief acclimated in free whether businesses are acceptable for its abetment and how such belief chronicle to furthering accessible rather than clandestine interests. [IRS Absolved Alignment CPE Text, “Economic Development Corporations: Charity Through the Back Door” (1990), accessible at tinyurl.com/y967zwrg]
The IRS’s breezy announcement additionally listed three factors for evaluating whether an EDC primarily accomplishes accommodating purposes admitting the aspect of clandestine benefit: (1) whether the action aids economically austere or depressed areas; (2) whether the account is conveyed aloft a disadvantaged group, e.g., unemployed or boyhood groups; and (3) whether the action is all-important to ensure that a business charcoal in or locates to the economically austere area.
It should be acclaimed that the IRS’s breezy announcement is not bounden authority. It does, however, accommodate acumen into how the IRS angle EDCs. EDCs should be alert of this accepted back drafting business abstracts and descriptions of activities on a website. EDCs should additionally accede this accepted back advancing action descriptions on Form 1023, Application for Recognition of Exemption, and Form 990, Return of Alignment Absolved From Income Tax. These represent some of the abstracts that would acceptable be advised in an IRS examination.
The IRS’s breezy announcement relied heavily on three acquirement rulings accompanying to bread-and-er development corporations. In Rev. Rul. 74-587, the alignment able for a tax absolution because it provided below-market loans to minority-owned businesses in austere areas. Similarly, in Rev. Rul. 76-419, the alignment able for a tax absolution because it purchased acreage in austere areas, adapted the acreage into an automated park, and induced businesses to backpack to the esplanade and appoint bounded unemployed residents.
In Rev. Rul. 77-111, however, the tax absolution was denied because the alignment provided abetment to businesses that were not endemic by disadvantaged groups and did not acquaintance difficulties as a aftereffect of their breadth in a austere area. The organization’s purpose was to access business advocacy in a attenuated breadth predominantly inhabited by minorities. The alignment acclimated television and radio advertisements to animate arcade in the area, created a speaker’s agency of bounded businesspeople to altercate the arcade ambiance with altered groups, operated a blast account accouterment busline and apartment advice to -to-be shoppers, and a the account media of the area’s problems and potential. The IRS bent that while the organization’s activities served some accommodating purposes beneath Sec. 501(c)(3), the organization’s activities’ “overall advance [wa]s to advance business rather than to achieve alone 501(c)(3) objectives.” The alignment provided abetment to businesses that were not minority-owned and that were not experiencing adversity due to actuality amid in a attenuated area of the community. The IRS accordingly disqualified that the alignment did not authorize as tax-exempt beneath Sec. 501(c)(3).
Rev. Rul. 77-111 suggests that the IRS does not accept organizations that advance gentrification should authorize as EDCs. Instead, the IRS’s position appears to be that EDCs charge accommodate abetment anon to disadvantaged groups.
Charitable action additionally includes action advised to abate the burdens of government (Regs. Sec. 1.501(c)(3)-1(d)(2)). To actuate whether a government considerately considers an organization’s activities to abate its burden, the IRS considers (1) whether the authoritative assemblage considers the organization’s activities to be its accountability and (2) whether these activities absolutely abate the accountability of the authoritative assemblage (Rev. Rul. 85-1). Neither the actuality that the government approves of an organization’s activities nor the actuality that the alignment was created by statute are dispositive (Rev. Rul. 85-2; IRS Accepted Counsel Announcement 39,347 (March 15, 1985)).
General Counsel Announcement 39,852 (July 1, 1991) complex a county’s development corporation, which was created beneath accompaniment law and accountable to the county’s control. The development association answer and developed commercial, industrial, and accomplishment enterprises aimed at accretion bounded employment. The development association was congenital beneath a accompaniment statute accouterment for the costs of automated projects via the arising of acquirement bonds. The development corporation’s lath of admiral was accountable to a political subdivision, which was accustomed to affair bonds to accounts development corporations. Because the development association was created by and accountable to the ascendancy of a bounded government, the alignment was absolved beneath Sec. 501(c)(3).
As is generally the case in the tax-exempt world, there is a accepted abridgement of advice apropos EDCs. While the IRS announcement is not bounden on taxpayers, it does action admired acumen into how the IRS would appraise an EDC in an examination. EDCs should certificate how they advice disadvantaged groups specifically. EDCs should additionally certificate why the communities in which they achieve are in charge of assistance. Failure to do so could aftereffect in an EDC’s accident its tax exemption.
Mark Heroux, J.D., is a arch with the National Tax Casework Accumulation at Baker Tilly Virchow Krause LLP in Chicago.
For added advice about these items, acquaintance Mr. Heroux at 312-729-8005 or [email protected]
Unless contrarily noted, contributors are associates of or associated with Baker Tilly Virchow Krause LLP.
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