Friday, December 16, 2011
The IRS issued Notice 2012-4 today advising tax-exempts about its two-month suspension of its Modernized E-file (MEF) operations for 990 filers. The MEF system will not be available from January 1, 2012 through February 29, 2012 for electronic filing of Forms 990, 990-EZ, 990-PF and 1120-POL information returns due to the implementation of changes to IRS programs and systems for the 2011 tax year. The 990-N e-postcard filing system will not be affected by the temporary suspension of the MEF system. Because of this suspension on electronic filing, the IRS is granting an extension of time to file to March 30, 2012 to organizations whose due date or first extended due date for returns is January 17, 2012 or February 15, 2012.
The notice also addresses tax-exempt hospitals and filing requirements. The IRS released a draft version of the 2011 Form 990, Schedule H, Hospitals and its instructions. Input is sought on how to improve the Schedule. Nonprofit hospitals required to file Form 990 and Schedule H must complete all parts and sections of Schedule H for the 2011 tax year except for lines one through seven of Part V, Section B which relate to community health needs assessments. These lines will remain optional for tax year 2011 and are required only for tax years beginning after March 23, 2012. Hospital organizations must also attach a copy of their most recent audited financial statements to their tax year 2011 Form 990.
The IRS issued IR 2011-118 reminding taxpayers of new charitable giving provisions that have taken effect in the last several years - rules for clothing and household items, substantiation rules for monetary gifts, and special contribution rules for individual retirement account (IRA) holders. The provision offering IRA owners a tax-free transfer of up $100,000 to an eligible charity expires at the end of 2011. This provision is available to taxpayers regardless of whether they itemize or take the standard deduction. The IRA funds must be contributed directly by the IRA trustee to the eligible charity; because the transfer amount is not taxable under the IRA distribution rules, no deduction is available for the transfer. Not all charitable organizations are eligible recipients; donor-advised funds and supporting organizations do not qualify. The amount(s) transferred pursuant to this provision are counted in determining whether the IRA owner has met the required minimum distribution rules.
Thursday, December 15, 2011
We previously blogged over 3 years ago about predominantly private universities increasing their financial aid as a result of criticism over large, unspent endowments. The financial landscape has changed significantly since then, effectively ending discussion (raised by Senator Grassley in a Senate Finance Committee hearing) about a possible mandatory annual payout of large university endowments to make education more affordable to more students.
Yesterday, the University of California, Berkeley, announced that it would provide more financial aid to students from middle-class families beginning next fall. Families earning up to $140,000 a year will be expected to contribute a maximum of 15% of their annual income. The New York Times article cited experts as stating that this was "the most significant such move by a public institution." As we have discussed in prior blog posts, the article mentioned Harvard, Princeton and Yale offering similar aid to families with incomes up to $200,000. The article discusses creative assistance programs being generated by universities throughout the country to meet the increasing challenge of families to finance education.
Monday, December 12, 2011
Continued Decreases in State Funding of Social Programs
The Chronicle of Philanthropy reports that nonprofits should expect to see continued decreases in funding and additional increases in demand for services through 2013 as state governments' budgets continue to deal with decreasing revenues. A new report, issued by Changing Our World, a philanthropy consulting firm, does a historical review of the economic crisis, calculates its negative effects on state budgets, and assesses whether charitable giving can stave off the decrease in government spending on social programs. Because 44 states have greatly reduced their spending and used federal stimulus money to make up the difference, the loss of that stimulus money will mean further cuts in social programs during the next two fiscal years. In order for nonprofits to meet the resulting increase in demand for such services in some of the most affected states, the report estimates that charitable giving would need to increase by 30 percent in 2011 and 60 percent in 2012, which the report refers to as “historically unprecedented.”
Taxation of Nonprofits' Real Estate
We continuously blog about state and local governments looking to nonprofits as additional revenue sources. In another such development, The Nonprofit Quarterly reports that Pennsylvania State Senator Wayne Fontana introduced in October Senate Bill 1281, which would grant local governments the ability to tax the assessed value of nonprofits' land. The Senator stated that specific exemptions would be enacted to protect "small" nonprofits, such as Boys and Girls Clubs and churches. The bill as introduced specifically exempts properties owned by local, state, and federal governments, and by “police, fire, including volunteer fire and relief, public works or emergency services.” According to the article, although there is no mention of small nonprofits, the asserted "small" nonprofit carveout is likely the proposed exemption of the first $200,000 of aggregate land value. The tax would only be imposed on the value of the underlying land, not any improvements on it. The specified intent of the Bill reads: “It is necessary and proper for local governments to have the option to ensure the continued viability of certain essential services it provides or causes to be provided by requiring a contribution from owners of tax-exempt properties toward the cost of the services.” The Senator explained: “There are nonprofit organizations out there that are sitting on high-valued, tax-free real estate. If they sold this land, these nonprofits would make a handsome profit.”
As previously blogged, Second Mile, the youth charity founded by former Penn State Football coach Jerry Sandusky, and its activities continue to raise issues both in the nonprofit sector as well as the community at large. In a recent Washington Post article, a nonprofit practitioner questions the structure of the charity's operations and board of directors. He first questions the various, and purportedly conflicting, roles of Sandusky as founder, an officer, and chair of the board. He also questions the large size of the charity's board (36 members). As discussed in the previous blog entry referenced herein, until there are more facts and information, there should be no rush to judgment regarding the board's historical actions or inactions leading up to the revelation of the current scandal.
The Nonprofit Quarterly reports that a California assemblyman has introduced legislation that would revoke a nonprofit's tax-exempt status if it is found that the organization fostered or concealed the sexual abuse of children. The article further discusses calls by some lawmakers to have such changes instituted at both the state and federal levels.
Sunday, December 11, 2011
The issue of how separate charities and businesses should be continues to be discussed. Here are two recent examples:
The NY Times reports that the Bill & Melinda Gates Foundation and a growing number of other private foundations are making program-related investments in businesses that advance their missions. These investments range from shares in a vaccine-delivery biotech company (Gates) to investments and loans in Armenian businesses (Gerard Cafesjian's family foundation) to microfinance (Omidyar Network). The question the article raises is whether such investments threaten to blur the line between charities and businesses, presumably leading to charitable assets that are supposed to be resulting in public benefit (since PRIs can be counted toward the annual required payout for private foundations) instead being used primarily to provide investment returns. Of course, the PRI rules are designed to avoid exactly this result, and the article does not cite any obvious abuses.
The Wall Street Journal provides a point-counterpoint debate on "Should Philanthropies Operate Like Businesses?", with Charles R. Bronfman of the Andrea and Charles Bronfman Philanthropies in the affirmative and Michael Edwards from Demos in the negative. The debate was part of larger report on philanthropy, links to which are available on the debate's webpage. The WSJ also published a number of letters responding to the debate.
The IRS also recently released its revised (as of 9/30/11) Conservation Easement Audit Technique Guide. For other recent conservation easement developments and discussions, see Incentives for Conservation Easements: The Charitable Deduction or a Better Way (74 Law & Contemporary Problems 29 (2011)) by Daniel Halperin (Harvard) and Tax Court Protects Public Investment in Consevation Easements (Emerging Issues (forthcoming 2011)) by Nancy McLaughlin (Utah). Here are the abstracts of those articles.
Therefore, to give greater assurance that the public benefit of the gift will be consistent with the claimed deduction, the donee should be required to certify that it has selected the easement consistent with its mission and it has both the resources to manage and enforce the restriction and a commitment to do so. Moreover, it is inappropriate to measure the charitable deduction by the supposed loss in value to the donor from the imposition of the easement. The focus should be on actual benefit to charity. Therefore, eligibility for a charitable deduction for a conservation easement should be contingent on certification – by a public agency or, possibly, an IRS-accredited land trust – that the public benefit from the contribution is equivalent to the claimed deduction.
In fact, the recent changes to various tax-expenditure programs – placing caps on the expenditures and requiring the participation of expert agencies – indicates that Congress is less enamored than it once was with open-ended tax expenditures administered solely by the Treasury Department. This suggests a cap on tax credits for the contribution of conservation easements. Even if the program is open-ended, Congress should mandate participation of an expert agency such as the Bureau of Land Management, which is more capable of evaluating the public value of an easement.
In two recent decisions, the Tax Court held that the conservation purpose of a conservation easement will be "protected in perpetuity" as required by IRC § 170(h) only if the holder is given an absolute right to a share of post-extinguishment proceeds. This short article discusses the import of this holding, as well as the court's approach to penalties and the deductibility of required cash payments to the donee.
Bloomberg reports that more than 30 universities have had their treatment of possible unrelated trade or businesses reviewed by the IRS, including private schools such as Harvard and Notre Dame and public schools such as Purdue and the University of Texas at Austin. Probably not coincidentially, I noticed in reviewing Notre Dame's latest Form 990-T as part of teaching Not-for-Profit Organizations this term that the amount and sources of unrelated business taxable income had increased significantly since I had last taught the class (did I mention how much I like having tenure?).