A Brief Primer on Economic Development Corporations
Colin Walsh, J.D., and Jordan Kohl, J.D., LL.M., Chicago point us in the right direction, and shed a little light on the private benefit doctrine, in their helpful newsletter on Economic Development Corporations that assist private businesses to achieve a public benefit. Here is a part of what they conclude:
In Rev. Rul. 74-587, the organization qualified for a tax exemption because it provided below-market loans to minority-owned businesses in blighted areas. Similarly, in Rev. Rul. 76-419, the organization qualified for a tax exemption because it purchased land in blighted areas, converted the land into an industrial park, and induced businesses to relocate to the park and hire local unemployed residents.
In Rev. Rul. 77-111, however, the tax exemption was denied because the organization provided assistance to businesses that were not owned by disadvantaged groups and did not experience difficulties as a result of their location in a blighted area. The organization’s purpose was to increase business patronage in a deteriorated area predominantly inhabited by minorities. The organization used television and radio advertisements to encourage shopping in the area, created a speaker’s bureau of local businesspeople to discuss the shopping environment with different groups, operated a telephone service providing transportation and accommodations information to prospective shoppers, and informed the news media of the area’s problems and potential. The IRS determined that while the organization’s activities served some charitable purposes under Sec. 501(c)(3), the organization’s activities’ “overall thrust [wa]s to promote business rather than to accomplish exclusively 501(c)(3) objectives.” The organization provided assistance to businesses that were not minority-owned and that were not experiencing difficulty due to being located in a deteriorated section of the community. The IRS therefore ruled that the organization did not qualify as tax-exempt under Sec. 501(c)(3).
Rev. Rul. 77-111 suggests that the IRS does not believe organizations that promote gentrification should qualify as EDCs. Instead, the IRS’s position appears to be that EDCs must provide assistance directly to disadvantaged groups.
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