Articles Posted in Tax

Both the IRS excess benefit statute and the private inurement doctrine DO NOT apply to tax-exempt cooperatives. 26 U.S.C. § 4958(c) defines an excess benefit transaction as “any transaction in which an economic benefit is provided by an applicable tax-exempt organization directly or indirectly to or for the use of any disqualified person.” For the purposes of this statute, an applicable tax-exempt corporation includes “any organization which…would be described in 501(3),(4), or (29)…” See 26 U.S.C. § 4958(e). As far as private inurement goes, the general rule is that no one private individual may benefit (i.e. receive earnings) from a charitable organization. (See Treas. Reg. Section 1.501(c)(3)-1(c)(2)). Allowing such inurement would run contrary to notion that many charitable organizations are set up for the benefit of the public, not individuals. However, coops are the exception to this doctrine. Indeed, tax-exempt organizations under 501(c)(12) do not share the same purpose as 501(c)(3)-(4) corporations. Unlike charitable corporations est. via 501(c)(3), coops organized under 501(c)(12) are set up precisely to benefit their members, who are almost always private individuals. Thus, application of the private inurement doctrine to tax-exempt cooperatives does not seem consistent with their established purpose.


James A. L. Buddenbaum has practiced law for more than 25 years with Parr Richey representing municipalities and businesses in utility, healthcare and general business sectors in both regulatory and transactional matters. Jim also has extensive experience in representing businesses in making large property damage and similar insurance claims.

The statements contained here are matters of opinion for general information purposes only and should not be considered by anyone as forming an attorney client relationship or advice for any particular legal matter of the reader. All readers should obtain legal advice for any specific legal matters.

The Indiana Tax Court recently ruled in Zimmer, Inc. v. Indiana Department of Revenue that Zimmer, Inc.’s Indiana activities regarding exhibition booth components constituted a taxable use and thus owed tax for some of the exhibition booth components.  Zimmer is in the business of designing, manufacturing and distributing a wide variety of medical device products.  In its activities, it participates in many out-of-state trade shows and conventions and has an elaborate system for construction storage, repair, refurbishment and modification of exhibit booth components, all of which are stored in its Indiana warehouse for use out-of-state.  The Indiana Department of Revenue argued, on four bases, that the exhibition booth components are subject to Indiana Use Tax for which the Indiana Tax Court disagreed as to three but agreed as to one basis.

First, the Indiana Department of Revenue argued that the revolving storage, out-of-state use, re-storage and reuse rendered the exhibition booth components taxable.  The Indiana Tax Court disagreed citing that the scheme is consistent with the statutory exclusion under Indiana statute allowing storage in Indiana “for subsequent use outside of the state”.

Second, the Department argued that Zimmer exercised other rights of ownership of the exhibition components while located in Indiana which constituted a taxable use.  In particular, it was argued that the selection of components for a particular convention, etc., were those ownership rights.  The Tax Court disagreed with the Department’s assertion that Zimmer’s act of decision-making in Indiana made those components taxable when none of those decisions were associated with physical actions in Indiana.

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