It has been a couple of months on the blog.
I have been helping a friend and fellow CPA, at least as much as I could.
He is approaching retirement. He sold his practice to a larger firm. I remember talking with him about it:
Him: What do you think?
CTG: I see the Federation and the Borg. What is your win condition here?
Him: Yes, but ….
A rationalization that begins with “yes, but” should be a sign that you are about to buy real estate in the dark.
It has gone poorly. Zero surprise. The Borg are like that.
It was a clash of cultures: entrepreneurial versus bureaucratic, advisory versus compliance, actual fee versus “valued added.”
He will survive. He may yet be able to retain several clients, reopen an office, and resume practice. He however will never be the same.
His story has given me pause.
It also reminds me of someone who recently applied for tax-exempt status with the IRS.
More specifically, 501(c)(4) status.
As we have discussed before, Section 501 is the master key - so to speak – to tax-exempt status. The gold standard is 501(c)(3), which is both tax-exempt and contributions to which are tax deductible. That is about as good as it gets. The (c)(4) is a different beast: it is tax-exempt but contributions are not tax deductible. Why the difference? A (c)(4) frequently has an active advocacy role: think AARP, for example. That advocacy can rise to the level that it equals – or exceeds – the nonprofit motivation behind the organization.
Someone had the idea to form a tax practice as a nonprofit.
The nonprofit employs tax professionals licensed as attorneys, CPAs, enrolled agents and tax preparers with years of experience practicing worldwide taxation.”
How will it generate revenues?
The Corporation is a full-time tax service company supported by memberships and donations.”
How does this thing work?
There is a three-tier membership-based structure.
The first tier includes US taxpayers having hardship. The organization will charge per hour for complicated cases but not charge for simple cases.
The second tier is membership-based. One pays X dollars and receives comprehensive tax services.
The third tier is gauzy “feet on the ground” personnel including support volunteers.
I am not seeing it. Tier one is fee-based except for some pro bono work. Tier two is a flat-out copy of a boutique medical practice. I do not even know what tier three is, other than some filler when completing the tax-exempt application.
Why would someone go through this effort?
One of the main reasons for you to apply for the tax-exempt status is to meet the requirements established by TAS (Taxpayer Advocate Service) to be eligible for LITC (Low Income Tax Clinic) grants.”
Ahhh!
Along with one of your Board members personal investment and professional involvements, you have already generated the interest of several high-net-worth prospective donors.”
Methinks we found the motivation here.
The IRS saw it too:
The benefits provided by you are primarily for your paying members and you operate in a manner like organizations operated for profit. Thus, you are not operated exclusively for the promotion of social welfare within the meaning of Section 501(c)(4).”
BTW this is referred to as an “adverse determination” by the IRS. If a practitioner is aware that the IRS will come in adverse, it is not uncommon to withdraw the application. It allows the opportunity to fight another day.
The taxpayer did not withdraw in this case, and the adverse determination was issued as final.
Does this mean that the taxpayer cannot operate an organization with the pro bono and boutique fees and whatever feet-on-the-ground? Of course not. It just means that it will have to file and pay taxes – just like any other profit-seeking business.
What it cannot do is pretend to be tax-exempt.
This time we discussed IRS TEGE Release Number 202539014 dtd 9.26.25.
