Thursday, August 30, 2012
As we previously reported here, the IRS issued proposed regulations on program-related investments (PRIs) under Code Section 4944. These proposed regulations took the form of nine additional examples to be added to the existing PRI regulations that cover a variety of fact patterns, including equity investing, international activities, and credit enhancement.
On August 8, 2012, the ABA Section of Taxation submitted comments to the IRS regarding the proposed regulations. I know that many members of the Exempt Organizations Group of the Tax Section (specifically including David Chertoff, formerly of the MacArthur Foundation and Rob Wexler from Adler & Colvin in San Fransico) had worked tirelessly with the IRS for years to obtain an update from the IRS on the PRI regulations. The comments themselves are summarized as follows:
The Tax Section requested that the preamble to the Proposed Regulations, which summarizes the types of transactions that the new PRI examples cover, be included in the Regulations themselves.
The comments further request that the IRS issue additional examples in certain subtantive areas, such as mixed-income housing and nonprofit newspapers. In its prior submissions to the IRS, the Tax Section proposed such examples. I understand that one of the objections that the IRS raised was that it wanted the examples to describe activities that were clearly already charitable under existing law. Examples in some of these new areas might have raised issues under Section 501(c)(3)/Section 170, and not just under Section 4944.
Finally, the Tax Section raised specific comments on some of the examples (example 11, regarding the for-profit subsidiary that developed vaccines; example 15, regarding international disaster relief, and example 16, regarding LLC investments.)
Congratulations to everyone at the ABA Tax Section - Exempt Orgs group for their success so far in getting *actual* proposed regulations on the books! We look forward to seeing how those final regs turn out.
Wednesday, August 29, 2012
From and with a deep hat tip to Prof. Paul Caron's most wonderful Tax Prof Blog, we have three recent papers on charitable topics, including one by our own Prof. Lloyd Mayer:
Lloyd H. Mayer (Notre Dame), The ‘Independent’ Sector: Fee-for-Service Charity and the Limits of Autonomy, 65 Vand. L. Rev. 51 (2012):
Although numerous scholars have attempted to explain and justify the benefits provided to charities, none has been completely successful. Their theories share, however, two required characteristics for charities. First, charities must be distinct from other types of entities in society, including governmental bodies, businesses, other types of nonprofit organizations, and informal entities such as families. Second, charities must provide some form of public benefit. Given these defining characteristics, the principal role for the laws governing charities is to protect charities from influences that could potentially undermine these traits. This Article is the first to recognize fully the importance of this approach, which I term the autonomy perspective. Applying this new perspective to the law governing charities reveals that while existing law generally protects charity autonomy, it fails to do so in one major respect. Current law does not directly address the growing and often negative influence of consumers who purchase services from charities primarily for the consumer’s own benefit and with little if any regard to the public benefit charities must provide. This Article then considers under what market conditions the influence of these consumers, whether patients, students, retirement community residents, or others, is likely to be detrimental to a charity’s pursuit of public benefit, and what options exist for addressing this influence. It concludes with suggestions for further research that would help lawmakers target this influence and so better address questionable behavior by charities.
Jaclyn Cherry (South Carolina), Charitable Organizations and Commercial Activity: A New Era. Will the Social Entrepreneurship Movement Force Change?, 5 J. Bus. Entrepreneurship & L. 345 (2012):
The purpose of this article is to take a broad look at where we are now as a result of the continuing confusion regarding the “commerciality doctrine.” It will focus on three areas influencing and defining organizations that are struggling with the law in this sector: 1) it will briefly define commercial activity in terms of social entrepreneurship and provide examples of organizations that have entered this hybrid sector as L3C Organizations and B Corporations; 2) it will give an overview of the law that has developed as the “commerciality doctrine;” and 3) it will discuss the UBIT and suggest that this test needs to be utilized by courts in conjunction with the “commerciality doctrine” for there to be any semblance of order for nonprofits to follow. Finally, this article concludes by suggesting that changes within the system are overdue. It suggests a three part analysis requiring that the IRS and courts apply the UBIT tests in coordination with, and not separate from, the “commerciality doctrine” (with a new definition of “substantial commercial activity”); second, that the “commerciality doctrine” be defined more clearly by synthesizing the courts tests from Presbyterian and Reformed Publishing and Airlie Foundation; and third, that an “intermediate sanction” type penalty be developed which would be triggered by failure to meet the above tests, before the loss of tax exempt status occurs. If nothing is done to address this issue, which may well end up being the case, then organizations will drift between the nonprofit and for-profit worlds in a very counter-productive manner for the sector and for the individuals they are created to benefit.
Carly B. Eisenberg (Nixon Peabody, Boston) & Kevin Outterson (Boston University), Agents Without Principals: Regulating the Duty of Loyalty for Nonprofit Corporations Through the Intermediate Sanctions Tax Regulations, 5 J. Bus. Entrepreneurship & L. 243 (2012):
Delaware corporate law imposes a duty of loyalty on officers and directors as a mechanism to regulate and deter self-dealing transactions. In nonprofit corporations, however, there are generally no shareholders with direct financial incentives to monitor against self-dealing. In the absence of shareholders and other principals, Congress and the IRS have articulated duty of loyalty rules for nonprofits that reach far beyond those applied to the for-profit world — most prominently the § 4958 intermediate sanctions. This article identifies the persons who owe a duty of loyalty to a nonprofit corporation, the applicable fiduciary standards for violating the duty of loyalty, and the remedies, procedures, and exoneration provisions under these fiduciary rules. While § 4958 and Delaware corporate law cover similar territory, they take remarkably different paths. By comparing the Tax Code with Delaware corporate law, it is readily apparent that, in the absence of shareholders, tax rules police the duty of loyalty for nonprofits more strictly than Delaware corporate law.
Monday, August 27, 2012
For a while now, many of us have thought that a donor should get a charitable deduction for a gift made directly to a single member LLC (SMLLC) that is wholly owned by an organization eligible to receive deductible contributions. After all, the tax law treats the SMLLC as a disregarded entity and attributes its tax attributes up to the single member. Why shouldn't the contribution be deemed made to the parent?
While this is the logical result, the IRS has heretofore been hesistant to confirm it in writing. This has been a source of some consternation for charities, especially those faced with the prospect of high value commercial real estate gifts. Those charities certainly would love to take those gifts directly into a SMLLC and stay out of the chain of title, but donors are understandibly hesitant when their tax advisors say, "Well, you ought to get a deduction... but we can't be sure."
Happily, we now have IRS Notice 2012-52 (July 31, 2012), which states that a gift to a domestic SMLLC will be treated as "a charitable contribution to a branch or division of the U.S. charity." In an extra present, the IRS indicates that the Notice is effective for "charitable contributions made on or after July 31, 2012. However, taxpayers may rely on this notice prior to its effective date for taxable years for which the period of limitation on refund or credit under § 6511 has not expired."
One note of interest in the Notice is the discussion of substantiation. The charity/member is treated as the donee organization for purposes of the substantiation rules under Section 170(f), including the written acknowledgement rules. This means that the charity/member is supposed to send the "you've received no goods or services" letter to the donor. The IRS goes on to state: "[t]o avoid unnecessary inquiries by the Service, the charity is encouraged to disclose, in the acknowledgment or another statement, that the SMLLC is wholly owned by the U.S. charity and treated by the U.S. charity as a disregarded entity." This got me to thinking - part of the reason for using the SMLLC in the first place is to get the charity itself out of the chain of title for liability protection purposes. Would the IRS accept the following acknowledgement on the letterhead of the SMLLC?
Thank you for your donation of expensive commercial real estate that formerly held a dry cleaner and a gas station. You've received no goods and services in return for your donation. Please note that for federal income tax purposes, your donation is treated as having been made directly to Charity. LLC is a a single member limited liability company that is wholly owned by Charity and is treated as a disregarded entity for federal tax purposes. Consult your tax advisor for further details.
Charity, in its capacity as the sole member of LLC
From the language of the Notice, I'm not sure that would acceptable - would it need to be on the Charity's letterhead? Signed by Charity in its individual capacity? I'd be curious to know how others would handle this.