IRS Issues

An important message about the HCCA and the IRS
by Richard Cutler
Updated December 9, 2013 (at the top)

Posted December 9, 2013:

     The following was placed in the November/December Gazette as a summary of everything that has happened regarding the HCCA and the IRS. Since these pieces are written well in advance of the publication, sometimes news will lag. In this case very little has changed with the exception that the HCCA is now cleaning up its standing with the California tax board. Other than these housekeeping issues and waiting for the IRS to approve the HCCA application to return to a "club" status, we are cautiously optimistic that we are done with this issue. The Horse Carriage Gazette article follows:

     The Internal Revenue Service (IRS) and the Horseless Carriage Club of America (HCCA)
By: Richard Cutler, 2011 President

     In 2011 the Horseless Carriage Club of America (HCCA) Board received official notice from the IRS that the 501(c)3 not-for-profit status of the Club was being withdrawn. Since I was President at the time, the responsibility of a response fell to me. The issue continued after my term, but in order to maintain some HCCA representation consistency I agreed to continue in the role as the liaison along with the elected President. Mike Yeakle was President in 2012 and Bill Ottemann is President for 2013. The negotiation team also included Boyd Hudson as our legal counsel and Lynda Armenta our CPA.

     The following is a summary of events that led up to where we are today. Much of the detail has been posted on the HCCA web page with updates as milestones were reached. While many of the details are not included here, it is important that the official publication for the Club records the most significant aspects of this issue between the IRS and the HCCA.

     Prior to 2006 the HCCA had the equivalent of a 501(c)7 designation. Basically a not-for-profit "Club" status. Donations could be made but they were not tax deductible. In 2006 the HCCA Board of Directors applied for a 501(c)3 not-for-profit status that would allow tax-deductible donations to be made to the HCCA. In 2007 the IRS granted that status. Tax-deductible organizations are given that privilege because they are providing a benefit to the general public as its primary function . The HCCA argued in its application that education through the "traveling museum" of the horseless carriages we drive on tours and rallies was the qualifier.

     Subsequently the HCCA switched Executive Secretary services twice. During these transitions between offices records were lost. Later during a routine audit by the IRS these lost records caused the IRS to look more closely at the HCCA and the agent started questioning our not-for-profit status. Just prior to the audit the Board realized it needed to do more to meet the intent of the 50(c)3 status and had initiated a multipart education program, but it had not been implemented. In addition the HCCA argued that individuals and regional groups were doing education as laid out in the original 501(c)3 application, but that also failed to impress the IRS agent because 'if it isn't documented, it didn't happen'. Our status as a not-for-profit was rescinded.

     When this occurs an organization either dissolves or becomes a for-profit business. It does not go back to the 501(c)7 status and donated assets are required to be given to an approved 501(c)3 organization with a similar mission as the original organization giving up the assets.

     The HCCA Board was not about to roll over and give up. We laid out a multi faceted plan including implementation deadlines following the general principle of "Hope for the best, plan for the worst":
1. We would continue to operate the HCCA as we always had until we were told we couldn't.
2. We would appeal the IRS decision and use this time to position ourselves against a worst-case scenario.
3. We would create a new 501(c)3 organization in case we needed to transfer funds.
4. We would create a new 501(c)7 (Club) organization to keep the Club going just in case we needed it.
5. We would do everything possible to make whatever transition was required appear seamless to the general membership while keeping them informed as milestones were identified.

     All of this created a great deal more work than anyone not involved might realize. The result, however, is a new 501(c)3 organization to focus only on education called the Horseless Carriage Education Institute (HCEI); and the new 501(c)7 organization called the Horseless Carriage Club Association maintaining the HCCA initials . (We wanted to keep "HCCA" but to keep it straight we've come to call it the "new HCCA".)

     The new HCCA was intended to be a transitional organization if it became necessary. As it turns out it appears we won't need it.

     Not unexpected, the IRS turned down our appeal. We expected there would be instructions on how to proceed, but the IRS seems to only tell you when you do something wrong. The Board with advice from our consultants has taken a common sense approach and this is where we are today three years later with the "old" HCCA:

A. The Club has filled tax returns back to 2008. (This is not a lot of money thanks to the detailed work of our CPA)
B. The Board is transferring approximately $26,000 to the HCEI. This is the amount of money the HCCA raised when it asked for donations.
C. A 1024 IRS form has been filed with the IRS to convert the "old" HCCA back to a 501(c)7 to reestablish the HCCA to a not-for-profit club status.

     The HCEI has a small, self-perpetuating Board with no general membership. We hope they will prosper but also expect the HCEI will be "granting" funds to the HCCA to implement education programs through the regional groups. This time it will be documented!

     We believe our other funds that are invested are safe. Last year the Board took advantage of actuarial skills of one of its members to determine what funds should be maintained to provide services to life-time members. That sum closely matches the funds the HCCA has invested and those funds will be retained by the HCCA. Should the IRS question this, our position is that these funds were accumulated prior to the HCCA receiving the 501(c)3 status and were not tax deductible and therefore should be retained by the HCCA.

     A couple of final comments:

1. The HCCA should never have applied for the 501(c)3 status in the first place without having a solid documentable program in place. But it did with the best of intentions by the Board in place at the time.
2. The IRS should never have issued the 501(c)3 status, but they did!
3. With the changes in the HCCA status, the Horseless Carriage Gazette (this publication) may not have the current not-for-profit/for-profit status listed inside the cover because of publishing deadlines. That will catch up.
4. The IRS has been good at providing little in the way of follow-up to questions as they relate to "what's next?" With the lack of these specifics, we are moving forward with what we believe to be correct. Our goal is to show good intentions reducing the possibility of any further action by the IRS towards our organization. We will take silence as a positive sign.
5. Lynda Armenta has been right on top of the issues from day one. The Club owes her a huge debt (as a small token of my appreciation, she was awarded a President's Choice pendant in 2011).
6. For more detail on how the HCCA has worked through this issue, follow the sequence of postings on the HCCA web page.
7. The HCCA has in recent years not had a surplus in the budget. So while many hundreds of volunteer labor hours has gone into addressing the IRS issue, there are still costs that will need to be covered. How this will be addressed is a subject for the future.
8. We are not 100% done cleaning things up, but it appears we are very close!
9. It has been suggested by some that we continue to fight the ruling. All evidence indicates that this will only result in more expense with no change in status. It is time get this behind us and move on.
10. We are still in business and have not let this major distraction keep us from being the special organization we are. As they say, "what doesn't kill you, will make you stronger." We will learn from this experience and be better for it.

Below are all the previous updates in chronological order.

Previously posted 2011:

      As has been touched upon in the Horseless Carriage Gazette and meetings, the HCCA is having difficulties with the IRS. Since changes in the status are happening quickly, the web site seems to be the best way to keep you up to date. There is much detail. I can only give a brief summary here.
In 2006 the Horseless Carriage Club applied for a 501(c)(3) not for profit status that would allow donations to the HCCA to be tax deductable. Prior to that the HCCA had the potential of at least two major gifts that went elsewhere because we did not have the tax deductable status. In 2007 the IRS granted us that status.
In 2010, the IRS decided to perform an audit on the HCCA. During the process, the IRS agent determined that the HCCA wasn't living up to the definition of "charity" for the public benefit. In our case that is education.
While the HCCA has been doing everything it said it would do in the original application, the agent disagreed. Frank Hurley, our president in 2010, and his team put together as much proof as possible that we are living up to our educational mission to the public and not just within the confines of HCCA membership. This was not enough.
In May of 2011, we received notification that our 501(c)(3) status was being revoked. We had 30 days to submit an appeal, which we have done. We understand that this appeal process will take some time. Time we are using to organize a multi-pronged defense.

     When an organization with a 501(c)(3) status goes out of business, ALL assets must be turned over to another 501(c)(3) organization that has a similarly approved mission.
With the revocation of the 501(c)(3), the HCCA is essentially put out of business. This is obviously completely unacceptable.

     I will keep you up to date as there is "breaking news", and there will be some additional explanation in the Horseless Carriage Gazette. In the mean time, I feel we have a good game plan and with the assistance of our attorneys we will be developing a detailed approach to a hopefully satisfactory negotiated settlement. Your HCCA Board is not sitting back. This issue is foremost in everyone's mind.

Posted July 18, 2011:

      We have not heard from the IRS as to who the appeal agent will be assigned to our case. Our current thinking is that we might have a hearing this coming December, but we simply don't know. In the mean time, the HCCA will continue to function with no changes to our operation or in our longer-range plans. We are not out of business. Tours are being scheduled, the 2012 budget is being prepared, the 2012 annual meeting and convention is scheduled for February and our very special 75th birthday party will be held in Colorado Springs over the 4th of July.

Posted September 29, 2011

      We still do not know who the appeal agent is or the schedule. In a letter of response to the HCCA appeal letter from the original agent, there is a strong hint that we are still seen as a 501(c)(7) not for profit "social" club. Of course we think we are as well. Not waiting for our appeal to be heard and then scrambling, we are moving forward on two fronts. One is to set up a new 501(c)(3) organization to deal with education exclusively and a "new club". This is a little complicated.

     Think of the HCCA as being made to go away by the IRS. So we reinvent ourselves in the mean time. As a place-holder we're seeing if "Horseless Carriage Club International" is a name we can use. If we can, we're going to file all the papers we need to set that up with the same rules, by-laws etc. as the current HCCA. This gives us an option if the negotiations with the IRS don't go well.

     Eventually we could maintain the new name or go back and see if the HCCA name is available (which it should be!) and then change our name back. There are options being considered as well, but are not at all developed. If your head is spinning, welcome to this new aspect of the club.

As said before, we're still in business and we're doing all we can to keep the HCCA interesting and growing.

March 2012:

     The HCCA Board was reorganized at the February annual meeting and convention. During the reorganization, we decided it was best not to change the HCCA IRS negotiating team at this time so I will continue in that role of behalf of the HCCA. The other members of the negotiating team are also unchanged with our attorney and CPA staying involved.

     There is no new earth shattering news on the IRS front as of right now. There have been a couple of informal discussions between our attorney and the IRS appeals agent in anticipation of a more meaningful conference call. We hope to have that soon.

     As said previously, your Board has been planning for the worst while hoping for the best. It is probably time to be little more specific. One of the things we have done is establish a new organization called the Horseless Carriage Educational Institute (HCEI). This will be a new 501.c.3 organization dedicated to education exclusively. Their first Board meeting was held in February. So why would we do this?

     There are a couple of reasons. First, if the HCCA is, in fact, forced to go out of business (absolute worst case scenario), we will have a new friendly, though arms length away, organization identified where we could send our assets. Of course, we recognize there are other options as well. Secondly, in the long run, the HCEI could focus on education and the HCCA can focus on what it does best, touring.

     Next, the HCCA is setting up a new organization on paper called the Horseless Carriage Club Association (or as we've been calling it the "new HCCA"). This would be a holding organization with our old 501.c.7 designation so we can continue as a group with hopefully little noticeable change to our membership. Notice I said "holding". If the old HCCA goes away, the new HCCA can apply for the old name as it would then be available.

     If all this sounds like a bunch of BS, you might be correct and hopefully we'll not have to jump through any more ridiculous hoops to get to where we want to go. But it is better to have things in place in case we need them and not use them instead of wishing we had options and didn't have them. (Hope for the best, plan for the worst)

     This has all been a lot work over the past year. And while it has been a lot of work, your Board continues to hope that it will prove unnecessary. Wish us good luck!

Posted May 29, 2012

     Another Board meeting has come and gone and we are still waiting for an official letter from the IRS appeals agent. Unofficially, it looks like the current HCCA will have to dissolve. However, I prefer to say "'evolve" into the "NEW" HCCA". If that is the case, there will be many questions that we'll need to have answered by the IRS as the devil is in the details. That official letter will be critical!

     If the HCCA in it's current form dissolves, our assets will go to one or both of the two new organizations we've established. Along with the assets will be our obligations (or liabilities) as well.

     One "liability" is the money the HCCA has collected for lifetime memberships, about 10% of our members. Last year, Gil Fitzhugh undertook a huge effort to quantify the amount money needed to meet our obligations to this special group and with that actuarial study completed, the Board identified that sum as a "liability" that will be part of our ongoing discussions with the IRS.

     Other aspects of our organization are being reviewed including our logo, merchandise, insurance etc. All with the goal of continuing as an organization no matter what we're called.

     While no one likes dealing with this IRS issue, your Board has no intention of giving up. We have learned a lot through this ordeal and are doing everything we can think of to avoid any hardship to the membership as we continue to plan for the future. WE ARE STILL IN BUSINESS and plan to stay that way!

Posted July 30, 2012

     We still have not received our official letter from the IRS appeals agent. In fact they requested more time up to December 13, 2013 to respond to our appeal. In the mean time, I feel confident that your HCCA Board has things well lined up for whatever the IRS says and we're in a good position to argue towards a reasonable settlement.

     We have been getting a number of calls from concerned regional groups. That is understandable if you're not directly in the loop. It is the fear of the unknown. All I can do, however, is try to reassure the members that your Board is not sitting idly by. The Board continues to be proactive laying out options to the possible IRS final position with goal of making whatever transition that is required to be as seamless as possible.

     For example: You MAY get a new membership card that says "Member of the Horseless Carriage Club Association dba Horseless Carriage Club of America (HCCA)". Members would still get the Gazette, continue to have access to the web site, and the office would stay the same. Current Life Members would still be Life Members. In other words, we think any changes wouldn't be discernable by most.

     As I keep saying, "we are still in business (as the HCCA)" and we are planning well out into the future. National tours are being encouraged, Board elections are still occurring, and our membership continues to grow! The worst thing we can do worry about things over which we have no control. Instead we'll implement those things where we do have control.

     If you were at the Colorado Springs tour, you saw a very dynamic HCCA. We plan on keeping it that way.

Posted September 26, 2012:

      I would be thrilled if I could write that the IRS issues have been resolved. I can't. In fact there has been no word from the IRS since they sent a letter requesting more time to respond to our appeal letter up to December 13, 2013.

     So while we are "patiently" waiting, I thought it might be a good idea to summarize where we are:

     What we have NOT done is give up. The Board did not fold while complaining that the "sky is falling". We have taken an engineering approach to analyze and solve the problem. With the exception of those measures considered prudent under the IRS cloud, the Club is functioning nicely. National tours are being approved. Regional groups are forming. Membership is up!

     What your Board has done to protect the Club against a worst case scenario is form the Horseless Carriage Club Association ("new" HCCA) as a 501(c)7 organization. Bylaws were written and paperwork submitted. This is a recognized organization in California and we're waiting for IRS approval (they are late on this as well). If we're successful in negotiations with the IRS, this organization will not be needed.

     We have formed the Horseless Carriage Educational Institute (HCEI) as a 501(c)3 organization. This group has already had some meetings, but is essentially waiting in the wings for any IRS fallout if they are needed.

     I'm asked constantly what's the difference between the 501(c)7 designation and the 501(c)3 designation. Both are not-for-profit. Both can accept donations. However, donations to a (c)7 are NOT tax deductable where they are tax deductable under (c)3 designations. A (c)7 is usually a social organization. A (c)3 organization is required to provide a community service of some kind.

     The Board mantra these days is "we're still in business." With that in mind, we hope the membership sees little difference in the services they receive.

Posted December 3, 2012:

     In my last posting I said the IRS wanted until December 13th to provide the HCCA with its response to the appeal. We sorta got that with a 5 page form. I say "sorta" because our attorney and I agree it says nothing. They didn't even put our name on it.

     Apparently this is something of a standard MO for the IRS and they will be told that this not something that is acceptable. This is also a standard MO. (Games!)

     What this essentially means is that they are confirming that we are no longer a 501(c)3 organization and are a for profit organization. That's what was said before. We have been filing with the IRS as if we were a for profit organization just to be safe, so no big deal there.

     We do have applications into the IRS for the new 501(c)3 organization (HCEI) and the new 501(C)7 organization (we've come to call the "new" HCCA). These should have been approved by now, but haven't. Because they have not, we're not in a big rush to get the appeal and agreement with the IRS finalized.

     So what is the current prognosis? This is not confirmed, but we think the "new" HCCA will be approved and all assets and liabilities of the old (current) HCCA will be transferred to the new HCCA. We will carry on with some kind of name manipulation that could include "dba Horseless Carriage Club of America".

     The 501(c)3 organization (HCEI) will be there if we need it for fund transfers, but if not for that purpose, I hope it can take on a life of its own and provide the education we would like with tax deductable donations!

     The bottom line remains, we are still in business. Your Board of Directors has done, and will continue to do, all that is needed to keep us in business. Our name may change, maybe more than once, but we're not going anywhere. Our goal is to make any required transition as seamless as possible with no interruptions in service or benefits.

Posted January 1, 2013:

     We can start off the New Year with some good news. The IRS has approved the new 501(c) (3) not for profit organization known as the Horseless Carriage Educational Institute (HCEI). The HCEI Board will be meeting in February to lay out plans. We are still waiting for more information on the existing HCCA status and the approval from the IRS on the new 501(c)(7) HCCA, but with the HCEI approval, the HCCA now has something to fall back on if required.

     In the mean time, the HCEI has a mission statement and can start raising tax deductable funds to promote education of the history of early automobiles!

Posted March 5, 2013:

     As stated in January, the Horseless Carriage Educational Institute (HCEI) was approved by the IRS as a 501(c)3 organization. That Board has met and is laying out plans.

     We did receive additional questions from the IRS regarding the Horseless Carriage Club Association (what we're referring to as the "new" HCCA) and a response was provided in March. Most of the questions are related to unrelated income from outside of the Club as there is a percentage we are not allowed to exceed.

     At this point, we think we'll be fine, but the 501(c)7 status we're seeking has not been granted so the next step of asset transfer is still on hold.

     I think there are two things that bear repeating:
1. Lifetime memberships should not be affected because of the efforts of your Board to protect that status.
2. When we are all done, we will be able to say, "doing business as Horseless Carriage Club of America" so the old name will not fade away.

Posted March 28, 2013:

     Things seem to moving a little faster now. The "new" HCCA has been approved by the IRS as 501(c)7 not-for-profit organization. There are a couple of minor things we'll need to watch as we go forward, but your Board will be implementing safe guards at the next Board meeting.

     Our attorney is now discussing with the IRS what we can do with our assets. The goal remains to have all the assets transfer to the "new" HCCA, but unless the IRS throws us huge curve ball, we feel confident that we're now in a good position to take whatever they throw at us.

Posted July 8, 2013:

     The IRS has been good at providing little in the way of follow-up to questions as they relate to "what's next?" With the lack of these specifics, we are moving forward with what we believe to be correct. Our goal is to show good intentions reducing the possibility of any further action by the IRS towards our organization. We will take silence as a positive sign.

     With the appeal denial, the Horseless Carriage Club of America (old HCCA) is considered a for profit organization. Donations that were made to the HCCA as tax deductible need to go to an approved 501.c.3 organization and are therefore being transferred to the new Horseless Carriage Educational Institute (HCEI) we created. This is about $26,000. These funds will be used to develop educational material for the general public. Since the HCEI is a small organization, the HCCA will likely be called upon to assist in these efforts and can be reimbursed for these efforts.

     The old HCCA will be paying taxes retroactively to the time we received the original 501.c.3 status, but our CPA has done a magnificent job determining what these taxes should have been and we're talking about money well below $10,000 in total.

     Last year the Board took advantage of actuarial skills of one of its members to determine what funds should be maintained to provide services to life-time members. That sum closely matches the funds the HCCA has invested and those funds will be retained by the HCCA. Should the IRS question this, our position is that these funds were accumulated prior to the HCCA receiving the 501.c.3 status and therefore should be maintained by the HCCA.

     We have not forgotten about the Horseless Carriage Club Association (new HCCA) we created as another fallback potential, but it appears we will not need it. Instead we are going to file papers to reinstate the old HCCA back to the 50.c.7 status. That is, a not for profit "club" where donations can still be made, but without the tax-deductible status for the donor. We may not have it in time for our fiscal year beginning October 1, 2013 so we'll ask to have this status retroactive to that date.

     I do not consider this the "FINAL WORD" but it does seem that we're closing in on the end of this saga. No matter what, we're still in business!