Thursday, October 2, 2014

Leff: Preventing Private Inurement in Tranched Social Enterprises

h/t to our friends over at TaxProf Blog:

Benjamin M. Leff (American), Preventing Private Inurement in Tranched Social Enterprises, 41 Seton Hall L. Rev. ___ (2015):

Social Enterprises are organizations that are operated for the dual purpose of engaging in profit-making activity and furthering a social good. Because of their “hybrid” nature, social enterprises are perceived to be stymied by a legal system that is overly devoted to defining organizations as either businesses or nonprofits. Legal academics and legislatures have been hard at work trying to make room for social enterprises by experimenting with modifications the laws that constrain both businesses and nonprofits. One significant sector of this reform movement is devoted to making it easier for social enterprises to receive funding from both for-profit investors and charitable non-profits. They argue that social enterprises will not flourish until charitable non-profits are permitted make below-market investments in social enterprises for the purpose of subsidizing the return expected by for-profit investors. This combination of below-market charitable investments and market-rate for-profit investments is generally called a “tranched investment structure.” It is not impossible under current law, but reformers argue that it is unnecessarily difficult, primarily because of federal laws restricting nonprofit activities.

This article addresses the specific legal issues raised by a tranched investment structure. Previous scholarship (and legislative reform) has focused on specific rules that apply only to “private foundations,” a subcategory of § 501(c)(3) organizations, the general federal classification of charities. But, surprisingly, commentators have largely ignored the laws that apply to tranched investment structures involving any § 501(c)(3) organization. This article fills that gap.

This article argues that the IRS should issue guidance clarifying that the "private inurement regime" prevents a charity's insiders from investing in a for-profit social enterprise in which the charity is also an investor. At the same time, it should issue guidance clarifying that a fully independent charity investing in a for-profit social enterprise is not at risk of losing its tax exemption because of the "private benefit regime." Emphasizing the importance of independence as a check on abuses of the tranched structure will enable social entrepreneurs to innovate while the law continues to protect the interests of charitable contributors, the federal government and the charitable sector.

October 2, 2014 in Federal – Executive, Paper Presentations and Seminars, Publications – Articles | Permalink | Comments (0) | TrackBack (0)

Monday, September 29, 2014

What happens if charity care becomes obsolete?

An article last week in the Washington Post (h/t Chronicle of Philanthropy) discussed a report by the Department of Health and Human Services that indicated that hospitals are experiencing significant declines in charity care and bad debt, thanks to expansions in Medicaid and a drop in the number of otherwise uninsured individuals due to the Affordable Care Act.  The report projects $5.7 billion (that’s billion, with a “b”) in savings in uncompensated care costs in 2014.

The first thing that I thought was, “Wow, that’s a big number!  Great news!”   The second thing I thought was, “Gee, I wonder if that will change how we evaluate nonprofit hospitals.”    What that might say about my mental state aside, it will be interesting to see how this structural change to the way we pay for health care works its way through the standards for tax exemption.

I note that the HHS report tracks “uncompensated care,” which it treats as the sum of bad debt and charity care.  While the HHS report does indicate that there is a difference between “self-pay” patients and “charity care”, the report is quick to note that not all hospitals break down their reporting this way.   (See HHS Report, FN 6).  Of course, part of the raging debate is whether bad debt is charity care – the Catholic Hospital Association says it isn’t but not all hospitals agree.

Either way, under traditional formulations of the community benefit standard, charity care is not the be-all and end-all of for exempt status – it might not even be necessary.   The recent trend, first evident in the Revised 990 Form’s Schedule H and then in the community assessment report requirements of the ACA, appears to lean toward wanting more discussion and disclosure of charity care as component of tax-exemption, even if that doesn’t appear anywhere formally quite yet.  It will be interesting to see if a structural reduction in the need for charity care (however defined) changes that conversation.

Then, of course, there are the states.   Having practiced in Illinois at the time of the Provena decision (good summary here), I’m particularly curious to see how that might play out.   For those of you who weren’t following Provena, Illinois revoked the property tax exemption for a number of nonprofit hospitals, stating that the Illinois property tax charitable exemption provisions (some of which are in the state constitution) require actual charitable use (as in relieving- poverty-charitable-use) of the property.   While denying that charitable use is a numbers game (that is, you need to show that there are enough charitable dollars spent to offset the property tax uncollected) – the court then engages in exactly that mathematical exercise.  

I’ve moved from Illinois since Provena came down, but I understand there was a legislative fix (SB 2194 and SB 3261, passed in 2012), that partially codifies this math-based analysis.  What happens if a hospital doesn’t meet its charity care dollars spent requirement because they are simply not necessary anymore due to ACA?

I might be going out on a limb here, but I’m guessing that Prof. Colombo might have a thought or two on this…

EWW

September 29, 2014 in Current Affairs, Federal – Executive, State – Legislative, Studies and Reports | Permalink | Comments (0) | TrackBack (0)

Wednesday, September 3, 2014

IRS 501(c)(4) Application Controversy Update

IRSThe slow motion train wreck of the IRS 501(c)(4) exemption applications controversy continues to unfold, with of course partisan spin.  

Over the summer those who believe the controversy is overblown - or even that the IRS did not do anything wrong in the first place - could point to a report from the Center for Public Integrity that the IRS had denied the exemption application of the left-leaning Arkansans for Common Sense as evidence that the IRS was, or least now is, even-handed in its treatment of such applications.  

Critics of the IRS could point to a report from Judicial Watch that Justice Department attorneys have admited the emails of Lois Lerner and other IRS officials are not truly lost, but that it is simply too onerous to retrieve them from an apparently cumbersome backup system.  (Additional coverage:  The Hill; The Washington Free Beacon).  They also could point to the decision by federal District Court Chief Judge Susan J. Dlott to let some of the claims made by NorCal Tea Party Patriots against the IRS proceed, although a careful reading of Judge Dlott's opinion reveals that some of the asserted claims did not in fact survive motions to dismiss.  More specifcally, the claim of vionlations of the First and Fifth Amendments and of section 6103 (relating to confidentiality of tax return information) survived the motions to dismiss as against Treasury, the IRS, and IRS employees in their official capacities, but the constitutional claims did not survive as against IRS employees in their individual capacities (the 6103 claim was not asserted against the employees in their individual capacities).  Interestingly, in allowing the constitutional claims to proceed the court relied significantly on an earlier opinion in the pending Z Street case.   

Lloyd Mayer

 

September 3, 2014 in Federal – Executive, In the News | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 27, 2014

2014-15 EO Guidance Plan Includes Proposed Regs under 501(c) on Political Campaign Intervention

IRSYesterday the Department of the Treasury and the IRS issued the 2014-2015 Priority Guidance Plan.  Included in the Exempt Organizations section of the list are numerous continuing projects, but also several new entries.  The most notable new entry is "Proposed Regulations under 501(c) relating to political campaign intervention.", indicating that Treasury and the IRS plan to look at the political campaign intervention more broadly that just with respect to 501(c)(4) social welfare organizations.

Here is the full list:

1. Revenue Procedures updating grantor and contributor reliance criteria under §§170 and 509.

2. Revenue Procedure to update Revenue Procedure 2011-33 for EO Select Check.

3. Regulations under §§501(a), 501(c)(3), and 508 to allow the Commissioner to adopt a streamlined application process that eligible organizations may use to apply for recognition of tax-exempt status under §501(c)(3).

    • PUBLISHED 07/02/14 in FR as TD 9674 (FINAL and TEMP) and REG-110948-14 (NPRM).

4. Revenue procedure setting forth procedures for issuing determination letters on exempt status under §501(c)(3) to eligible organizations that submit Form 1023-EZ.

    • PUBLISHED 07/21/14 in IRB 2014-30 as REV. PROC. 2014-40 (RELEASED 07/01/2014).

5. Proposed regulations under §501(c) relating to political campaign intervention.

6. Final regulations on application for recognition of tax exemption as a qualified nonprofit health insurer under §501(c)(29) as added by §1322 of the ACA.  Temporary and proposed regulations were published on February 7, 2012.

7. Final regulations under §§501(r) and 6033 on additional requirements for charitable hospitals as added by §9007 of the ACA. Proposed regulations were published on June 26, 2012 and April 5, 2013.

8. Additional guidance on §509(a)(3) supporting organizations.

9. Guidance under §512 regarding methods of allocating expenses relating to dual use facilities.

10. Guidance under §4941 regarding a private foundation's investment in a partnership in which disqualified persons are also partners.

11. Final regulations under §§4942 and 4945 on reliance standards for making good faith determinations. Proposed regulations were published on September 24, 2012.

12. Final regulations under §4944 on program-related investments and other related guidance. Proposed regulations were published on April 19, 2012.

13. Guidance regarding the excise taxes on donor advised funds and fund management.

14. Guidance under §6033 relating to the reporting of contributions.

15. Final regulations under §6104(c). Proposed regulations were published on March 15, 2011.

16. Final regulations under §7611 relating to church tax inquiries and examinations.  Proposed regulations were published on August 5, 2009.

Lloyd Mayer

August 27, 2014 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Monday, August 25, 2014

Church Tax Inquiries Starting Up Again (without final regs)

IRSOver the summer the Freedom from Religion Foundation announced that it had agreed to the dismissal (without prejudice) of its lawsuit against the IRS alleging that the IRS had filaed to enforce against churches the prohibition on political campaign intervention.  See previous post regarding the 2013 rejection of the IRS' motion to dismiss this case for more details.  What is most dramatic about this development is the letter from the IRS to the DOJ attached to the Foundation's Memorandum in Support of Motion to Dismiss detailing the current audit activity relating to churches.  Here is the substance of that letter:

1. Subsequent to the publication of proposed regulations on section 7611 of the Internal Revenue Code on August 5, 2009, the IRS has processed several cases involving churches using procedures designed to ensure that the protections afforded to churches by the Church Audit Procedures Act are adhered to in all enforcement interaction between the IRS and churches. The procedures require the reasonable belief determination under section 7611(a) to be made by the Commissioner, TEGE, either directly or as concurrence to the determination made by the Director, Exempt Organizations.

2. Our written procedures for our Dual Track process for information items (a.k.a. referrals) alleging violation of the political intervention prohibition of section 501(c)(3) require evaluation of the information item by our Review of Operations (“ROD”) unit and then the Political Activities Referral Committee (“PARC”). With regard to these referrals that concern violations by churches, the PARC has determined that as of June 23, 2014, 99 churches merit a high priority examination. Of these 99 churches, the number of churches alleged to have violated the prohibition during 2010 is 15, during 2011 is 18, during 2012 is 65, and during 2013 is one.

This comes after an apparent hiaitus in such activity, as detailed in a previous post.  What is perhaps most surprising is that it has come without the finalization of the proposed regulations referenced in the above letter regarding exactly who, within the IRS, has sufficient authority to sign off on church tax inquiries and, if justified, church examinations.  

While an intervenor represented by the Becket Fund for Religious Liberty sought to prevent the dismissal, according to the Becket Fund the court ultimately granted the requested dismissal.

Media Coverage:  Christianity Today; Washington Times.

Lloyd Mayer

August 25, 2014 in Church and State, Federal – Executive, In the News | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 20, 2014

Status of EO Application Backlog

Tax Notes Today (subscription required) reports that the Internal Revenue Service’s Tax-Exempt and Government Entities Division is progressing significantly in clearing its backlog of exempt organization applications that existed as of the beginning of the year. TE/GE Deputy Commissioner Donna Hansberry is quoted as saying that the IRS has now closed 97 percent of the 15 percent of exempt organization applications which, at the beginning of fiscal 2014, were more than one year old.

A major reason for the backlog serves as a helpful practical reminder to exempt organizations (especially small ones) and their advisors.  Hansberry attributes the increase in applications since 2010 to the rule (enacted as part of the Pension Protection Act of 2006) that automatically revokes the exemption of an organization that fails to file an information return for three consecutive years.

Electronic citation: 2014 TNT 161-5

JRB

August 20, 2014 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Wednesday, July 30, 2014

The National Taxpayer Advocate Isn't Happy with EO but the Form 1023 EZ Isn't the Answer

On July 16, the National Taxpayer Advocate released its mid-year report to Congress.   The IRS release is here and the report itself is here.

Given all that has occurred in the last year in EO, I suppose it is not a big surpise that the Taxpayer Advocate Service (TAS) has a lot to say about EO and not very much of it is good.   One of its areas of focus is the exempt status process, with the relevant part of the report entitled, "Despite Improvements, TAS Remains Concerned About IRS Treatement of Taxpayers Applying for Exempt Status."

Rather than focus on the Section 501(c)(4) and political activities issues, which makes up much of this section of the report, I wanted to focus on the TAS' comments on the new Form 1023-EZ.  One would have thought that the TAS, which was been extraordinarly critical of exempt status wait times (and rightfully so), would have welcomed the Form 1023-EZ.   In fact, the report notes that the TAS suggested the creation of a Form 1023-EZ as part of its 2011 report to Congress.   So you'd think that the new form (available here) would be good news.

 But not so much, apparently:

The National Taxpayer Advocate continues to be deeply concerned about the IRS' abdication of its responsibility to determine whether an organization is organized and operated for an exempt purpose and not mrerely accept an organization's statement to that effect.

Back in practice, the issue often arose whether to attach a certain document or not to the Form 1023.   My response, with which many may disagree, was usually to attach more and not less - assuming, of course, there was really no issue to be raised by the additional documentation.   I always liked the security of being able to say that we sent everything in, the IRS vetted it (or at least had the opportunity to vet it), and we could rely on having provided a complete application.   Clearly, an organization submitting the 1023-EZ can't have that limited comfort, illusory as it may have been, as it really submits almost nothing as part of the application.

The TAS' primary concern appears to be with the IRS' intention to police determinations made through the 1023-EZ process with a follow-up audit.   Given the state of the IRS' budget, I'm not really worried about those audits actually happening.   Personally, I'm more worried for donors, who often seem to use the "Section 501(c)(3)" label as a filter for fraud protection.   That probably was never truly accurate, but it's even less accurate now.

I'd love to hear thoughts....

EWW 

 

 

 

July 30, 2014 in Federal – Executive, In the News | Permalink | Comments (1) | TrackBack (0)

Wednesday, July 16, 2014

Notes on the CPI Report on the IRS Targeting Scandal

The Center for Public Integrity has released an investigative report about the IRS Tea Party targeting scandal, in which the CPI reviewed thousands of pages of documents and interviewed dozens of insiders. The report provides a good high-level overview of the scandal, and makes a few useful findings about the Exempt Organization function within the IRS. To many, the findings may come as no surprise, but bear repeating: over time the IRS has fewer employees to regulate a rapidly growing sector, the already low rate at which the IRS investigates exempt organizations is shrinking, the social welfare category (i.e., the one at the heart of the targeting scandal) is growing, and the IRS is increasingly timid – backing down to political pressure. Unfortunately, none of this makes for an effective overseer of a vital part of civil society.

Although the report is useful, some peripheral statements should be more closely considered if only because a number of misconceptions about the IRS targeting scandal continue inadvertently to be spread. One statement in the report is that “It wasnʼt until the Supreme Courtʼs Citizens United v. Federal Election Commission decision in 2010, however, that politically active nonprofits — social welfare groups as well as 501(c)(5) labor unions and 501(c)(6) trade groups — became a major force in political elections, all while receiving a de facto tax subsidy.” The implication from the “de facto tax subsidy” language is that political activity, when conducted after Citizens United by a noncharitable tax-exempt like a 501(c)(4), (5), or (6), gets an unwarranted subsidy and is abusive. But this is not really right. Political activity by a noncharitable exempt generally is not tax-advantaged relative to the same activity by a political organization (aka a “527”). Rather, political activity by a noncharitable exempt actually triggers a tax that is intended to make the tax treatment of political activity consistent across sections of the tax code. There is no abusive subsidy for political activity here.

Later, the report notes that “Social welfare and other nonprofit groups galloped into the post-Citizens United era with an inherent advantage over overtly political groups: They could hide the source of their funding, regardless of whether those sources were corporations, individuals or other special interests. And they're only required tell the FEC the names of donors who give money to help produce specific ads — something that rarely happens.” This point bears more than passing emphasis. The anonymity offered to donors by noncharitable exempt status, and not a tax subsidy, is the underlying legal issue at the heart of the targeting scandal post-Citizens United. In other words, the targeting scandal is not really about taxes at all, it is about donor disclosure or the lack thereof.

The report says that: “The tea party affair has directed attention away from what many IRS workers say is the much larger problem — regulating the activities of politically charged nonprofits.” and also that the IRS is “supposed to ensure 501(c) nonprofit organizations don't become more political than the law allows.” The broad meaning here is right: the targeting scandal has diverted attention from some real problems with the legal architecture. Also, the IRS does have a legitimate role to play when it comes to political activity and tax exemption. But these statements unintentionally play into another misconception about the IRS’s role when it comes to the political activity of noncharitable exempts and political organizations. In this context, the IRS does not really “regulate” political activity in the sense of deciding whether or not the activity is permitted. Rather, the IRS’s function is to classify organizations based on their purpose as measured by the quantum of their activities. This is an important distinction. The IRS does not regulate speech or activity as such; rather, the IRS, as charged by Congress, assesses organization purposes and activities and applies a tax label ((c)(4), 527, etc.). So political activity is relevant to tax classification, but it is not a question of permitting or prohibiting political activity.

The report also states that “Political ‘527 groups’ are tax exempt like 501(c)(4) groups, but unlike them, they must disclose their donors.” It should be noted that the point about disclosure is correct, but not the point about tax-exemption. Broadly, 527 groups are taxed on their investment income whereas 501(c)(4)s and other noncharitable exempts are not. So the tax treatment is not equivalent. But as noted earlier, if a noncharitable exempt engages in political activity, then a tax is triggered, which is intended to make the organizational tax treatment of political activity broadly uniform across exemption categories.

But none of this undermines the key thrust of the report's message -- that the regulatory environment of the IRS exempt organization function is in crisis and in need of constructive solutions.

Roger Colinvaux

July 16, 2014 in Current Affairs, Federal – Executive, Federal – Legislative, Studies and Reports | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 1, 2014

IRS Issues Form 1023-EZ Rules Limiting Eligibility to Smaller (Financially) Organizations

Form 1023-ezThe IRS today issued rules governing use of the recently proposed Form 1023-EZ.  As detailed in the instructions for this form, an organization must answer "No" to all three of the following questions relating to financial size in order to be eligible to use this shortened application form:

1.  Do you project that your annual gross receipts will exceed $50,000 in any of the next 3 years?

2.  Have your annual gross receipts exceeded $50,000 in any of the past 3 years?

3.  Do you have total assets in excess of $250,000?

The instructions also provide 23 other questions relating to the characteristics of the applying organization (such as whether the organization is a church, school, hospital, or supporting organization), that also all have to be answered "No" for the organization to be eligible to use the Form 1023-EZ.  More information about the new form is available from the IRS here, including how to obtain a copy of the form.

The IRS also issued final and temporary regulations, with the temporary regulations also serving a proposed regulations, governing which organizations are eligible to use the streamlined application process for recognition of tax-exempt status under section 501(c)(3) provided by Form 1023. Finally, the IRS issued Revenue Procedure 2014-40, which "sets forth procedures for applying for and for issuing determination letters on the exempt status under § 501(c)(3) of the Internal Revenue Code (Code) using Form 1023-EZ, Streamlined Application for Recognition of Exemption under Section 501(c)(3) of the Internal Revenue Code.  This revenue procedure is generally available for certain U.S. organizations with assets of $250,000 or less and annual gross receipts of $50,000 or less."  

Lloyd Mayer

July 1, 2014 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Thursday, June 26, 2014

IRS Update on Clearing Exemption Application Backlog

Tax Notes Today (subscription required) reports that the IRS has provided updated information concerning its progress on clearing the backlog of exemption applications identified in the May 2013 report by the Treasury Inspector General for Tax Administration, which concluded that the IRS had used improper criteria to select social welfare organization exemption applications for additional scrutiny.  The IRS reports that as of June 18, 2014, 132 cases in the original backlog (91 percent) have been closed (including 101 cases that received favorable determination letters).

Electronic Citation: 2014 TNT 123-14

JRB

June 26, 2014 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Monday, June 23, 2014

Social Club’s Sale of Conservation Easement Taxed Favorably

Today’s edition of Tax Analysts’ Tax Notes Today (subscription required) contains several entries relevant to exempt organization lawyers.  One that especially interests me is Private Letter Ruling 201425016, which involves a country club exempt from federal income tax as an organization described in Section 501(c)(7) of the Internal Revenue Code (the “Code”).  The country club proposed to sell a conservation easement to a city and use the sales proceeds to improve its golf course, purchase personal property, and renovate and expand its facilities.  The Internal Revenue Service ruled that the sale would not jeopardize the organization’s exempt status, and that proceeds reinvested within three years after the closing of the sale of the conservation easement would not generate unrelated business taxable income because of Code section 512(a)(3)(D).  Further, the capital improvements contemplated in the ruling request that are made in the year preceding closing will constitute other property purchased and used directly in the performance of an exempt function for purposes of Code section 512(a)(3)(D).

Electronic Citation: 2014 TNT 120-34

JRB

June 23, 2014 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Friday, June 20, 2014

Lawsuit to Compel IRS to Release 990s in Readable Format

 As reported by The Chronicle of PhilanthropyPublic.Resource.Org ("PRO") filed a lawsuit seeks to compel the IRS to release Forms 990 in a format that can be read and, thus, searchable by computers.  The IRS practice to date is to convert all filed 990s into images, which renders the content therein incapable of being searched.  Organizations that provide access to exempt organizations' 990s, like GuideStar and Charity Navigator, must manually enter the data in order to make it accessible to the public.  PRO seeks to end the IRS practice that makes such forms effectively useless to organizations wishing to search the filed returns for specific data or information.  The IRS argues that current open-records laws do not require it to utilize any particular format in making the information public.

According to The Chronicle, on Wednesday, June 18, 2014, Judge William Orrick (U.S. District Court for Northern District of CA) "tentatively" denied the IRS's motion to dismiss the lawsuit, thus allowing the lawsuit to proceed.

 

Nicholas Mirkay

June 20, 2014 in Federal – Executive, Federal – Judicial, In the News | Permalink | Comments (0) | TrackBack (0)

Lost Lerner Emails Fuel Ongoing IRS Controversy

UntitledIn the ongoing controversy involving the IRS EO division and its past director Lois Lerner, new revelations about lost emails (in the thousands) has reignited the wrath of Congress and the public.  As reported in The New York Times, IRS informed Congress in a filing to the Senate Finance Committee last Friday that approximately two years of Lerner's emails (both sent and received) were lost in a 2011 computer crash.  The IRS Commissioner is scheduled to be grilled by House committees next week on the lost emails.  According to the Daily Tax Report, House Republicans notified the IRS Commissioner via a letter that they intend to question IT employees at the IRS about the lost emails.

As reported by The Minority Report (Blog), U.S. Representative Stockman (TX) has written to National Security Angency Director, Admiral Michael S. Rogers, requesting that the Agency "produce all metadata it has collected on all of Ms. Lerner's email accounts for the period between January 2009 and April 2011."  Politico.com opined that since Lerner's crashed hard drive has been recycled, it is unlikely the lost emails will ever be found.

A Dallas Morning News editorial published yesterday calls for the Obama Administration to appoint a special counsel to independently investigate the entire IRS controversy, including the lost emails.  Clearly, the IRS and its credibility will be continue to be embattled for the foreseeable future.

(See also Time and TaxProfBlog (a detailed list of articles from numerous sources)) 

 

Nicholas Mirkay

June 20, 2014 in Current Affairs, Federal – Executive, Federal – Legislative, In the News | Permalink | Comments (0) | TrackBack (0)

Wednesday, June 18, 2014

IRS EO Division - Recent Memoranda on Application Processes

On June 13, 2014, the IRS Exempt Organizations division released several intermal memoranda addressing the EO application process:

1.    Appeals Office Consideration of EO Technical Unit Adverse Determinations.  Memorandum TEGE-07-0514-0012 provides that when EO Technical issues a proposed adverse ruling, organizations now have the opportunity to request consideration of the adverse determination by the Appeals Office within 30 days from the date of the letter setting forth such adverse determination.  Prior to this guidance, the EO Technical process was different - an organization that received an adverse determination from EO Technical did not have the right to request consideration by the Office of Appeals. 

2.    Retroactive Reinstatement & Pending Applications. Memorandum TEGE-07-0414-0010 provides that if an organization filed its Form 1023 appliction for exemption prior to the due date of filing its Form 990 or 990-PF, and the IRS later determines that the organization qualifies for tax exemption, the will be granted under usual procedures as long as it has filed a 990 within the past three years.  If the organization has not done so and its tax exemption was automatically revoked, the IRS will now treat the application for exemption as a request for reinstatement.  Because of IRS backlog in determinations, some organizations suffered a revoked exemption before the IRS could even process its application.

3.    EO to Use Six Sigma to Streamline Application ProcessMemorandum TEGE-07-0514-0014 provides that EO specialists will be treated on streamline processes evolving from Lean Six Sigma Organization (LSSO) concepts.  This streamlining should aid in the IRS's efforts to effect "fair and efficient tax administration."

 

Nicholas Mirkay 

June 18, 2014 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Tuesday, June 17, 2014

TE/GE Advisory Committee: Regulations Needed on Commerciality Test

In its 2014 Report of Recommendations, the IRS Advisory Committee on Tax Exempt and Government Entities specifically recommended:

 The IRS Exempt Organizations Division should recommend that Chief Counsel and Treasury open a regulation project so that profits from a substantial commercial activity will not preclude exemption under I.R.C. § 501(c)(3) as long as an organization’s income and its financial resources are used commensurate in scope with its charitable program.

The advisory panel specifically explained:

The IRS should open a regulation project to: (1) formalize the commensurate test articulated in Rev. Rul. 64-182; and (2) to reject application of the commerciality test. Recent court cases and IRS rulings have been applying a "commerciality test" to determine: (1) when certain business activity conducted by a Section 501(c)(3) organization will preclude tax exemption; and (2) what constitutes unrelated business generating taxable income. Neither the tax law nor the implementing regulations provide support for a commerciality test.

The report ultimately concludes that the commerciality doctrine "is not only unsupported by the Internal Code or its implementing regulations, the doctrine is also inconsistent with the common law of charitable trusts," upon which current regulations are based (referring to §1.501(c)(3) -1(c)(1) and -1(e)(1) promulgated in 1959).  The advisory panel concludes that the primary purpose test in the Regulations has basically been replaced with a commerciality test in the IRS's determination of an organization's extent of business activity.

The advisory panel also recommended IRS cooperation with the Chief Counsel's office and the Treasury Department to promulgate a comprehensive revenue ruling on various other unrelated business income issues including activities that will be considered related and unrelated; preparatory time spent on activities; and situations evolving from the IRS' college and university compliance project, such as facility rentals and dual-use properties. 

Most practitioners would clearly find such guidance helpful as well as definitive IRS guidance reconciling the commensurate test with the regulatory primary purpose test and their interaction with the UBIT rules.

(See also:  Daily Tax Report

 

Nicholas Mirkay 

 

June 17, 2014 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Thursday, May 29, 2014

Hospitals Cutting Charity Care; Relying on Affordable Care Act Coverage

As reported in Sunday's The New York Times, a trend among hospitals around the country is to reduce financial assistance to uninsured patients with the intent of forcing such patients to obtain coverage under the Affordable Care Act.  The criticism is obvious - uninsured lower- and middle-income citizens without coverage will not take advantage of the ACA due to perceived, and perhaps actual, unaffordability and therefore forgoe health care all together.  The push-and-pull for hospitals centers on the ACA's reduction of federal payments to hospitals that treat large number of uninsured patients (again, hoping to force such patients to seek coverage in online marketplaces) and the actual need to provide free or reduced-cost health care to those most in need of it.  

The Times article illustrates hospitals' various policies to address this real problem:

In St. Louis, Barnes-Jewish Hospital has started charging co-payments to uninsured patients, no matter how poor they are. The Southern New Hampshire Medical Center in Nashua no longer provides free care for most uninsured patients who are above the federal poverty line — $11,670 for an individual. And in Burlington, Vt., Fletcher Allen Health Care has reduced financial aid for uninsured patients who earn between twice and four times the poverty level.

Continuing charity care for the uninsured, argues some health care providers, defeats the very purpose of the ACA.  However, uninsured advocates argue that many uninsureds forgoe coverage under the ACA inaugural enrollment because the plans are expensive, even with government subsidies.  Some argue that it is still a matter of message - encouraging people who now have access to coverage under the ACA to take advantage of the opportunity.

The article further states:

Many hospitals appear focused on reducing aid only for patients who earn between 200 percent and 400 percent of the poverty level, or between $23,340 and $46,680 for an individual. Many of those people presumably have jobs and would qualify for subsidized coverage under the new law.

The Times further reported that financial challenges for uninsureds are "particularly daunting" in the states that have not yet expanded their Medicaid programs, which currently totals over 24 states.

An issue not addressed by the Times Article is how these emerging charity care policies, to best comply with and take advantage of the new ACA reimbursement rules, will affect these tax-exempt hospitals' Form 990 Schedule H reporting?  Has Congress and the IRS contemplated the changes to charity care numbers in light of the above-referenced ACA rules?

 

Nicholas Mirkay

May 29, 2014 in Current Affairs, Federal – Executive, Federal – Legislative, State – Executive | Permalink | Comments (0) | TrackBack (0)

Atheist Organizations Lose Challenge to IRC/IRS Differing Treatment of Churches

In American Atheists v. Shulman, the U.S. District Court for the Eastern Division of Kentucky rejected three atheist organizations' contentions that the IRS unconstitutionally discriminates against non-religious tax-exempt organizations.  Specifically, the Atheists alleged that the IRS’s differing treatment of churches as opposed to  other tax-exempt organiations was unconstitutionally.  Specifically, the Atheists requested that the Court issue a judgment “[d]eclaring that all Tax Code provisions treating religious organizations and churches differently than other 501(c)(3) entities are unconstitutional violations" of the Equal Protection laws of the Fifth Amendment, the First Amendment and the Religious Test Clause of Article VI, §3 of the Constitution. The Atheists claimed "upon information and belief a number of atheist organizations have tried to obtain IRS classification as religious organizations or churches under §501(c)(3) or to otherwise obtain equal treatment,” and “most of those applications and attempts were rejected by the IRS."  However, the Court found that the Atheists admitted in pleadings that they themselves had never sought recognition as a religious organization or church under §501(c)(3).  The Atheists responded that they have not applied for exemption as a religious organization or a church because seeking such a classification would "violate their sincerely held belief."

Nevertheless, the Court found that the Atheists lacked the necessary standing to bring the suit, in part because they could have applied for religious  designation.  The Court concluded that the Atheists failed to establish any injury-in-fact and their assertion that they would fail to qualify as a church or religious organization was "mere speculation."  To the contrary, stated the Court, "[a] review of case law establishes that the words ‘church,’ ‘religious organization,’ and ‘minister,’ do not necessarily require a theistic or deity-centered meaning." 

(See also articles in The Salt Lake Tribune, Forbes, and ABA Journal)

Nicholas Mirkay

 

May 29, 2014 in Federal – Executive, Federal – Judicial, In the News | Permalink | Comments (0) | TrackBack (0)

Z Street's Unconstitutionality Claim Against IRS Upheld by U.S. District Court

Over 2 years ago, we blogged about a unique lawsuit being filed by Z Street, a pro-Israel nonprofit corporation, against the IRS.  Specifically, Z Street alleged that the IRS's "Israel Special Policy” utilized in reviewing the organization's application for Section 501(c)(3) status violated the organization's First Amendment rights in that the IRS policy constituted viewpoint discrimination.  Z Street requested an injunction compelling the IRS to disclose the policy and its parameters and usage, and to refrain from such use in evaluating the organization's exemption application.  

In a May 27 decision, the U.S. District Court for the District of Columbia denied the IRS's motion to dismiss the organization's complaint on all 3 grounds.  The IRS presented three legal arguments that the Court lacked subject-matter jurisdiction over the organization's constitutional claim.  First, the IRS argued that the Anti-Injunction Act (“AIA”), 26 U.S.C. § 7421 (2013), precluded the Court from exercising jurisdiction.  Second, it asserted that the Court could not grant the relief sought by the organization under the Declaratory Judgment Act (“DJA”), 28 U.S.C. § 2201 (2013).  Finally, the IRS argued that Z Street's complaint was barred by the doctrine of sovereign immunity.   In addition, the IRS asserted that Z Street failed to state a claim upon which relief can be granted because the organization has an adequate remedy at law (namely, 26 U.S.C. §7428), thereby foreclosing the equitable relief that it sought. Because the Court rejected the IRS's "core contention" that Z Street sought a determination on its eligibility for Section 501(c)(3) tax-exempt status, the Court rejected the IRS's assertions that the AIA, the DJA, or sovereign immunity barred the organization's request for equitable relief and that Z Street had an adequate remedy at law.

With respect to the remedies sought by Z Street, Judge Ketanji Brown specifically acknowledged:

In this regard, looking at the requested remedy as the D.C. Circuit requires, Z  Street’s complaint requests only two things: (1) a declaration that the Israel Special Policy violates the First Amendment, and (2) an injunction that requires disclosure of information regarding the Israel Special Policy, bars the IRS from subjecting Z Street’s application for Section 501(c)(3) status to the Israel Special Policy, and that mandates that Z Street’s application be adjudicated “fairly” and “expeditiously.”

In the opinion's conclusion, Judge Brown opines:

Defendant [IRS] struggles mightily to transform a lawsuit that clearly challenges the constitutionality of the process that the IRS allegedly employs when it determines the tax-exempt status of certain organizations into a dispute over tax liability as a means of attempting to thwart this action's advancement,” Jackson said. “But the instant complaint, which in no way seeks an assessment of the taxes to be paid or even a determination of the Plaintiff's Section 501(c)(3) status, is not so easily deterred.

 (Hat tip:  Daily Tax Report)

Nicholas Mirkay

May 29, 2014 in Federal – Executive, Federal – Judicial | Permalink | Comments (0) | TrackBack (0)

TE/GE Advisory Committee Sets June 11th Public Meeting

The IRS Tax-Exempt and Government Entities Advisory Committee will hold a public meeting on June 11, 2014 with respect to significant issues affecting such entities.  Per the May 28th Federal Register notice, the meeting will be held from 9:30 to 11:30 a.m. in the main IRS building on 1111 Constitution Avenue., N.W. , Washington, D.C., Room 3313.

Issues to be addressed include:

  • Preapproved and determination letter programs;
  • Unrelated business income tax compliance of colleges and universities;
  • Government employees and the Affordable Care Act; 
  • IRS tribal consultation and compliance audit improvements; and
  • Tax-exempt bonds and increased reliance on the facts-and-circumstances test to analyze management contracts.

Nicholas Mirkay

May 29, 2014 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)

Friday, May 23, 2014

Status of Proposed Section 501(c)(4) Rule Changes

As reported in multiples news sources (e.g., the NY Times, Reuters, and Business Week), the IRS has announced that it will likely revise proposed regulations addressing the political activities of section 501(c)(4) entities.  Here is the text of the official announcement from the IRS:

 

Last November, Treasury and the IRS proposed a new regulation governing political activity of section 501(c)(4) organizations. The proposal generated over 150,000 written comments — the most comments ever received by Treasury and IRS on a proposed tax regulation. Consistent with our standard rulemaking process, we intend to review those comments carefully, take into account public feedback, and consider any necessary changes. Consistent with what Commissioner Koskinen has previously stated, it is likely that we will make some changes to the proposed regulation in light of the comments we have received. Given the diversity of views expressed and the volume of substantive input, we have concluded that it would be more efficient and useful to hold a public hearing after we publish the revised proposed regulation. Treasury and the IRS remain committed to providing updated standards for tax-exemption that are fair, clear, and easier to administer.

 

JRB

May 23, 2014 in Federal – Executive | Permalink | Comments (0) | TrackBack (0)