When a non-profit loses its tax-exempt status under the Internal Revenue Code, it is frequently the end of the organization.
Sometimes the problem is easily resolved; an exempt organization that has its status revoked because it failed to file its annual returns on Form 990 can be reinstated retroactively if it acts promptly. See Rev. Proc. 2014-11, 2014-3 I.R.B. 411; see also Rev. Proc. 2017-5, 2017-1 I.R.B. 230. But in most other cases, the loss of the exemption is a disaster:
- First, the organization will be liable for income taxes that were not part of its budget.
- Second, its sources of funding will likely disappear, as donors will no longer receive a tax deduction, and governmental grants may be conditioned upon tax-exempt status.
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The litigation over Wells Fargo’s STARS transaction took another interesting turn last week, as the district court had to rule on the legal implications of the jury’s verdict. Wells Fargo & Co. v. United States, No. 09-CV-2764 (PJS/TNL), 2017 U.S. Dist. LEXIS 80401 (D. Minn. May 24, 2017). The litigation focused on whether STARS was a sham transaction that should not be respected for tax purposes because it lacked economic substance.
STARS, an acronym for Structured Trust Advantaged Repackaged Securities, was a transaction promoted to U.S. banks by a British financial-services company. Under this arrangement, Wells Fargo placed assets in a trust managed by a trustee based in the United Kingdom, making the assets subject to U.K.… Read More