Wednesday, March 18, 2015
501(c)(4) Update: Handful of Applications Still Pending, Do Lost Emails = A Crime?, and (Another) Court Dismisses Claims Against Lerner
IRC Section 501(c)(4) Applications: The IRS reported that as of last month it had closed 138 or 95% of the 145 organizations that had applied for recognition of exemption under section 501(c)(4) and were eligible for optional expedited processing because the only issues their applications raised were possible involvement in political campaign intervention or providing private benefit to a political party. The optional expedited process results in a favorable determination letter if the applicant represents that it devotes (1) 60 percent or more of both spending and time to activities that promote social welfare and (2) 40 percent or less of both spending and time to political campaign intervention. Of the 106 favorable determination letters issued by the IRS, 43 were the result of applicants choosing this process. Nevertheless a handful of such applications are still pending, including the application for Crossroads GPS and also several much smaller "mom-and-pop outfits," according to Politico.
Lost Emails: Politico also reports that in response to questioning from members of Congress a representative of the Treasury Inspector General for Tax Administration told a congressional Committee that TIGTA's ongoing search for IRS emails has revealed "potential criminal activity" in that the IRS failed to initially disclose some backup tapes and that other tapes were erased. The TIGTA representatives emphasized, however, that the investigation was still ongoing and it was too soon to determine if the actions were purposeful or the result of ill intent. A video of the full hearing is available here.
Federal Court Dismisses Claims Against Lerner: In a decision issued late last month, the U.S. District Court for the Northern District of Texas (Dallas Division) dismissed claims brought by Freedom Path, Inc. against Lois Lerner without prejudice for lack of personal jurisdiction. The claims arose out of the IRS's alleged mishandling of Freedom Path's application for recognition of exemption under IRC section 501(c)(4). The court found that the group's allegations did not demonstrate sufficient contacts with the state of Texas to grant the court personal jurisdiction over Lerner. The court also rejected several of the group's claims against the IRS and unnamed federal officials, including claims that challenged the constitutionality of two revenue rulings relating to political activity (2004-6 and 2007-41), finding the group had not pled sufficient facts to establish standing to challenge those rulings, and two other claims (for other deficiencies). The court did, however, give the group 28 days to file an amended complaint although it felt that the defects in some of the dismissed claims appeared to be incurable.
Monday, March 16, 2015
Tax Analysts reports (subscription required) that the IRS has deciding to stop automatically providing the media with copies of favorable determination letters issued in response to applications for recognition of exemption because of the changes in the structure and geographic location of the IRS Exempt Organizations Division and related IRS Office of Chief Counsel functions. Practitioners quoted in the article expressed disappointment with this decision. While the media and other members of the public can still request such letters by submitting Form 4506-A for each organization for which the letter is sought, practitioners noted the burden doing so imposes and the usually lengthy delay in the IRS response to such requests.
Additional coverage: Forbes (contributor opinion).
UPDATE: To clarify, the letters were previously provided by the IRS National Office and so were limited to the relatively few letters issued by that office, as opposed to the Cincinnati office that issues the vast majority of determination letters. That said, the National Office tended to handle the most difficult - and interesting - cases. According to later comments from the IRS, the change is apparently driven by the fact that the National Office will no longer be issuing determination letters.
The issuance of a new, streamlined Form 1023-EZ has caused a major shift in the exemption application world of the IRS. The IRS reported last week that it has received 20,103 such forms, or approximately half of all applications for recognition of exemption under Internal Revenue Code section 501(c)(3) since the IRS introduced the Form 1023-EZ. The IRS also reported that using streamlined procedures based on the Form 1023-EZ - that is, resolving open issues by asking applicants to attest to certain facts as opposed to requesting documents or narrative statements - it has reduced the backlog of all applications that had been pending for more than 270 days by 91 percent (from 54,564 in April 2014 to 4,791 in September 2014). The GAO previously also reported that the IRS closed 117,000 cases in fiscal year 2014, more than double the closure rate for the previous fiscal year. Not everyone is happy with the new form - see previous posts reporting concerns expressed by the National Association of State Charity Officials and the National Taxpayer Advocate, plus having a shortened form was not part of the recommendations promulgated by the IRS Advisory Committee on Tax Exempt and Government Entities when it looked at the application process.
UPDATE: New memo dated March 12, 2015 regarding the streamlined application process that replaces the previously linked to February 27, 2015 memo.
Last week the IRS issued Revenue Procedure 2015-21, which provides "guidance regarding correction and disclosure procedures for hospital organizations to follow so that certain failures to meet the requirements of § 501(r) of the Internal Revenue Code will be excused for purposes of § 501(r)(1) and 501(r)(2)(B)." Failures that are not willful or egregious may generally be resolved without financial penalty if they are both (1) corrected in a timely fashion, including restoring affecting individuals to the position they would have been in absent the failure and ensuring appropriate safeguards to prevent future failures, and (2) disclosed on the next Form 990 filed by the organization. If the IRS has contacted the hospital organization concerning an examination, the organization must have already corrected or be in the process of correcting the failure and must have disclosed the failure on its annual information return for the year in which the failure was discovered (if the due date, including extensions, for that return has passed).
The IRS has issued both final regulations and Revenue Procedure 2015-17 providing the final procedures for issuing determination letters and rulings relating to exemption under Internal Revenue Code section 501(c)(29). Paragraph 29 is the latest addition to section 501(c); it provides a federal income tax exemption for qualified nonprofit health insurance issuers (QNHIIs), also known as CO-OP health insurance insurers, that under the Affordable Care Act receive a loan or grant under the federal Consumer Operated and Oriented Plan Program. The CO-OP Program is designed to foster the creation of these new nonprofits to offer competitive health plans. These health care co-ops have had mixed success, as NPR reported earlier this year that the second largest one in the country recently collapsed.
Additional coverage: Squire Patton Boggs Alert.
Friday, March 6, 2015
The Internal Revenue Service has issued a newly revised Publication 557, Tax-Exempt Status for Your Organization. The beginning “What’s New” section lists the following topics: IRS issues new interim guidance for supporting organizations and grantors; New guidance provides transition relief for employee health insurance expenses; Final regulations under section 501(r) issued in December 2014; Correction and disclosure procedures under section 501(r); New Form 1023EZ; Exempt Organizations Division Limited the Types of Cases that Are Referred to Exempt Organizations (“EO”) Technical, and Provided for Administrative Review of EO Technical Determinations; and Future developments.
Tuesday, February 3, 2015
President Obama’s proposed Fiscal Year 2016 Budget (“Proposed Budget”) contains a few provisions affecting charities and charitably minded donors. The following proposals are of interest. Direct quotes are from either the Proposed Budget or the Department of the Treasury’s General Explanations of the Administration’s Fiscal Year 2016 Revenue Proposals (“Treasury Explanations”), as indicated.
Limit the Benefit of the Charitable Contributions Deduction
“The Budget would limit the value of most tax deductions and exclusions to 28 cents on the dollar, a limitation that would affect only couples with incomes over about $250,000 (singles with incomes over about $200,000). The limit would apply to all itemized deductions, as well as other tax benefits, such as tax-exempt interest and tax exclusions for retirement contributions and employer-sponsored health insurance.” Proposed Budget, 56.
Obviously, the charitable contributions deduction is, as in prior years’ budgets proposed by the President, subject to the limitation. According to Treasury Explanations, the provision “would apply to itemized deductions after they have been reduced by the statutory limitation on certain itemized deductions for higher-income taxpayers.” Treasury Explanations, 155.
Repeal the Non-Hospital Bond Limitation on Qualified Section 501(c)(3) Bonds
As discussed in Treasury Explanations, “[t]he Tax Reform Act of 1986 established a $150 million limit on the volume of outstanding, non-hospital, tax-exempt section 501(c)(3) bonds. The limit was repealed in 1997 with respect to bonds issued after August 5, 1997, if at least 95 percent of the net proceeds were used to finance capital expenditures incurred after that date. Thus, the limitation continues to apply to bonds more than five percent of the net proceeds of which finance or refinance (1) working capital expenditures, or (2) capital expenditures, incurred on or before August 5, 1997.” Treasury Explanations, 77. Treasury believes that the $150 million limitation “results in complexity and provides disparate treatment depending on the nature and timing of bond-financed expenditures,” and that repealing it “would enable nonprofit universities to utilize tax-exempt financing on a basis comparable to public universities.” Id. Under the administration’s proposal, “[t]he $150 million limit on the volume of outstanding, non-hospital, tax-exempt bonds for the benefit of any one section 501(c)(3) organization would be repealed in its entirety, effective for bonds issued after the date of enactment.” Id.
Disallow Deduction for Payments Entitling Payor the Right to Buy College Athletics Tickets
As Treasury Explanations notes, “donors to colleges and universities that receive in exchange for their contributions the right to purchase tickets for seating at an athletic event may deduct 80 percent of the contribution.” Treasury Explanations, 177. The administration’s proposal would disallow a deduction for any such transfer for the right to buy tickets to sporting events. See id.
Consolidate AGI-Based Limitations on Charitable Contributions Deduction
Current law limits the charitable contributions deduction to various percentages of a taxpayer’s “contribution base” (basically AGI), depending on the type of charitable donee and the type of donated property. “The proposal would simplify this complicated set of rules limiting deductions for charitable contributions. Under the proposal, the contribution base limit would remain at 50 percent for contributions of cash to public charities. For all other contributions, a single deduction limit of 30 percent of the taxpayer's contribution base would apply, irrespective of the type of property donated, the type of organization receiving the donation, and whether the contribution is to or for the use of the organization. In addition, the proposal would extend the carry-forward period for contributions in excess of these limitations from five to 15 years.” Treasury Explanations, 280.
Modify Deduction for Qualified Conservation Contributions
Code section 170 provides special rules for qualified conservation contributions. The administration proposes several modifications to the rules governing the deduction, and also proposes “to pilot a non-refundable credit for conservation easement contributions as an alternative to the conservation contribution deduction ….” Treasury Explanations, 191.
Additional details excerpted from Treasury Explanations:
This proposal would make permanent the temporary enhanced incentives for conservation easement contributions that expired on December 31, 2014. In addition, to address concerns regarding abusive uses of this deduction and to promote effective, high-value conservation efforts, the proposal includes a number of reforms:
First, the proposal would strengthen standards for organizations to qualify to receive deductible contributions of conservation easements by requiring such organizations to meet minimum requirements, specified in regulations, which would be based on the experiences and best practices developed in several States and by voluntary accreditation programs. For example, the regulations could, among other things, specify that a “qualified organization” must not be related to the donor or to any person that is or has been related to the donor for at least ten years; must have sufficient assets and expertise to be reasonably able to enforce the terms of all easements it holds; and must have an approved policy for selecting, reviewing, and approving conservations [sic] easements that fulfill a conservation purpose. An organization that accepts contributions that it knows (or should know) are substantially overvalued or do not further an appropriate conservation purpose would jeopardize their status as a “qualified organization.”
Second, the proposal would modify the definition of eligible “conservation purposes” for which deductible contributions may be made, requiring that all contributed easements further a clearly delineated Federal conservation policy (or an authorized State or tribal government policy) and yield significant public benefit.
Third, in order to take a deduction, a donor must provide a detailed description of the conservation purpose or purposes furthered by the contribution, including a description of the significant public benefits it will yield, and the donee organization must attest that the conservation purpose, public benefits, and fair market value of the easement reported to the IRS are accurate. Penalties would apply on [sic] organizations and organization managers that attest to values that they know (or should know) are substantially overstated or that receive contributions that do not serve an eligible conservation purpose.
Finally, the proposal would require additional reporting of information about contributed conservation easements and their fair market values. Section 6033 would be amended to require electronic reporting and public disclosure by donee organizations regarding deductible contributions of easements that is sufficient for transparency and accountability including: detailed descriptions of the subject property and the restrictions imposed on the property, the conservation purposes served by the easement, and any rights retained by the donor or related persons; the fair market value of both the easement and the full fee interest in the property at the time of the contribution; and a description of any easement modifications or actions taken to enforce the easement that were taken during the taxable year. As is the case under current law, personally identifying information regarding the donor would not be subject to public disclosure.
* * *
The proposal would amend the charitable contribution deduction provision to prohibit a deduction for any contribution of a partial interest in property that is, or is intended to be, used as a golf course.
* * *
The proposal would disallow a deduction for any value of an historic preservation easement associated with forgone upward development above an historic building. It would also require contributions of conservation easements for all historic buildings, including those listed in the National Register, to comply with a 2006 amendment that requires contributions of historic preservation easements on buildings in registered historic districts to comply with special rules relating to the preservation of the entire exterior of the building and the documentation of the easement contribution. Treasury Explanations, 190-192.
Reform Private Foundation Excise Tax on Net Investment Income
As discussed in Treasury Explanations, under Code section 4940, tax-exempt private foundations generally are subject to a two percent excise tax on their net investment income. However, the applicable rate is generally one percent in any year in which the foundation’s qualifying distributions exceed the average level of its qualifying distributions over the five preceding taxable years. Treasury Explanations, 267. The administration proposes to “replace the two rates of tax on private foundations that are exempt from Federal income tax with a single tax rate of 1.35 percent.” Id. No special reduction in excise tax would apply to tax-exempt private foundations that maintain their historic levels of charitable distributions. See id. Further, “[t]he tax on private foundations not exempt from Federal income tax would be equal to the excess (if any) of the sum of the 1.35-percent excise tax on net investment income and the amount of the unrelated business income tax that would have been imposed if the foundation were tax exempt, over the income tax imposed on the foundation.” Id.
Monday, February 2, 2015
The Internal Revenue Service recently issued a public warning about groups “masquerading as a charitable organization” to lure unsuspecting donors, a scam making the IRS’s 2015 “Dirty Dozen” list. Here are some of the highlights of the IRS’s admonition:
Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.
Don’t give out personal financial information, such as Social Security numbers or passwords to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money. People use credit card numbers to make legitimate donations but please be very careful when you are speaking with someone who called you.
Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.
Call the IRS toll-free disaster assistance telephone number (1-866-562-5227) if you are a disaster victim with specific questions about tax relief or disaster related tax issues.
According to Tax Notes Today (subscription required), at the Exempt Organizations session of the American Bar Association Section of Taxation meeting in Houston, Victoria Judson, IRS Associate Chief Counsel (Tax Exempt & Government Entities), stated that cuts to the agency’s budget – 5% this year alone – could adversely affect the issuance of private letter rulings on topics important to tax-exempt organizations. The IRS may attempt to fill the void through small guidance projects addressing issues commonly appearing in requests for letter rulings, and through model letter rulings issued under an automatic approval process if a letter ruling request follows a pattern.
Electronic Cite: 2015 TNT 21-21
Thursday, January 22, 2015
Completing a previously announced realignment, the IRS formally reassigned responsibility for most rulings relating to tax-exempt organizations to the Office of Associate Chief Counsel (Tax Exempt and Government Entities) ("TEGE Counsel") as of January 2, 2015. In Announcement 2014-34, the IRS shifted responsibility away from the Tax Exempt and Government Entities Division of the IRS ("TE/GE") for revenue rulings, revenue procedures, technical advice, and letter rulings relating to exempt organizations (other than certain letter rulings relating to employee plans that will remain with TE/GE). With respect to exempt organizations, TE/GE will only retain responsibility for determination letters, including exemption determination letters and determination letters issued in response to an IRS Form 8940 (Request for Miscellaneous Determination).
Wednesday, January 21, 2015
National Taxpayer Advocate Recommendations: In her 2014 Annual Report to Congress, Nina Olson called on Congress ot create an optional "safe harbor" election for section 501(c)(4) organizations that would give such organizations a numerical test they could use to ensure that their level of political campaign activity is permissible given their tax-exempt status (similar to the existing section 501(h) election for section 501(c)(3) organizations with respect to lobbying) (Legislative Recommendation #5). Ms. Olson also recomended that Congress give groups seeking section 501(c)(4), (c)(5), or (c)(6) status the ability to seek a declaratory judgement in the same manner as groups seeking section 501(c)(3) status now enjoy, and that the IRS adopt administrative review procedures for groups that have had their tax-exempt status automatically revoked (Legislative Recommendation #12).
IRS Modification of Section 501(c)(4) Expedited Application Process: In a memo released just before Christmas, the Acting Director, EO, Rulings and Agreements provided revised and clarified previously issued procedures for applicants seeking recognition under section 501(c)(4) that are given the option of choosing an expedited application process. The new procedures only apply to applicants that are given this option after the issue date (12/23/14) for the memo. Applicants who were told they were eligible for this option before that date are subject to slightly different procedures (included as Appendix B to the memo).
Omnibus Spending Bill Again Limits (?) IRS: As was the case a year ago in Public Law 113-76 (see "Cryptic Legislation" section of this post), Congress has once again included with the funding of the IRS the following limitations (Hat Tip: EO Journal):
SEC. 107. None of the funds made available under this Act may be used by the Internal Revenue Service to target citizens of the United States for exercising any right guaranteed under the First Amendment to the Constitution of the United States.
SEC. 108. None of the funds made available in this Act may be used by the Internal Revenue Service to target groups for regulatory scrutiny based on their ideological beliefs.
It is still unclear what exactly the effect, if any, of these provisions actually is.
House Oversight & Government Reform Committee Staff Report: Released by outgoing Chairman Darrell Issa, the report, not surprisingly, slams the IRS and the Obama Administration, and also promises more fact-finding.
The Shrinking IRS: As numerous news outlets have reported, the IRS faces a shrinking budget - likely at least in part because of the 501(c)(4) mess - even as the demand for its services from taxpayers continues to increase. According to Taxpayer Advocate Nin Olson, the decline is 17.5 percent since 2010, taking inflation into account (see NPR). IRS Commissioner John Koskinen has even said the agency might have to shut down for two days, with employees put on unpaid furlough (see The Hill). For other examples of the flood of coverage, see Forbes, NBC News, the NY Times, and the Washington Post.
It is too soon to make a final call, but at least some positive changes may result - clarification of the standards for political activity by noncharitable 501(c) organizations and clearance of the exemption application backlog come to mind. At the same time, the damage to the Service and the tax system seems greater - trading speed for accuracy in the application process, damaged morale among the remaining IRS employees and greater difficulty in recruiting future such employees, and a collapsing budget even as the tax law continues to become more complex.
Monday, January 12, 2015
As reported here on your faithful Nonprofit Law Prof Blog by Roger Colinvaux, the IRS issued final regulations under Section 501(r) on the requirements for nonprofit hospitals at the very end of last year.
Over the weekend, The New York Times did a report on these regulations, focusing on efforts to stop "aggressive tactics to collect payments from low-income patients." To me, the most interesting part of the article isn't the summary of the regs with regard to collections - it's the quote (and accompanying picture) from Senator Grassley: "Nonprofit hospitals and for-profit hospitals have often been indistinguishable... The rules make clear that tax-exempt hospitals have to earn their tax exemption."
It seems to me that Senator Grassley has been some what low key on charitable issues in the past few years - I'm guessing we will be hearing more from him with the resurgence of Republicans in Congress.
For other coverage of the final regulations:
-briefly, at Independent Sector
I'm happy to add any other links that people have found useful.
Saturday, November 29, 2014
Update on Nonprofits & Politics: Aprill and Colinvaux Articles, AALS Program, IRS Controversy Developments & More
While perhaps the congressional attention to the now 18 months old and counting IRS controversy will decline as the focus shifts to governing (we hope) and 2016 (unavoidably), the bubbling pot that is now nonprofits and politics continues to boil. Here are some of the latest developments:
Ellen Aprill (Loyola-L.A.) has posted The Latest Installment of the Section 501(c)(4) Saga: The Section 527 Obstacle to Effective Section 501(c)(4) Regulations, and Roger Colinvaux (Catholic) has posted Political Activity Limits and Tax Exemption: A Gordian's Knot, Virginia Tax Review (forthcoming). (And, as noted by Paul Caron when I presented at Loyola-L.A., I am working on a draft article currently titled Taxing Politics, which I should hopefully be able to post early in the new year.)
At the 2015 AALS Annual Meeting, the Section on Nonprofit and Philanthropy Law and the Section on Taxation are co-sponsoring IRS Oversight of Charitable and Other Exempt Organizations – Broken? Fixable? on Saturday, January 3rd, from 10:30 a.m. to 12:15 p.m. The topic grew out of the IRS controversy, although the panel's scope will be much broader. Marcus Owens (Caplin & Drysdale) will be moderating, and panelists include Ellen Aprill (Loyola-LA), Phil Hackney (LSU), Jim Fishman (Pace), Terri Helge (Texas A&M), Dan Tokaji (Ohio State), and Donald Tobin (Maryland).
In news relating directly to the IRS controversy, the staffs of the Senate Permanent Subcommittee on Investigations issued dueling reports, neither of which said much more than we have already heard (repeatedly) from both sides of the aisle. At the IRS, new TE/GE Commissioner Sunita Lough issued her annual Program Letter, emphasizing accountability and transparency as she continues to try to move the division beyond the controversy (referenced obliquely as "the challenges over the last year for the IRS and TE/GE specifically"). And to the annoyance of her critics, Lois Lerner gave an extensive interview to Politico.
And there is more:
- Pulpit Freedom Sunday 2014 launched on October 5th, to very limited media coverage, although there were a few stories right around election day about the over 1600 participating pastors and churches. See the stories in Politico, a Washington Post blog, and the Washington Times.
- On the election law/FEC side of things, there are lawsuits still pending that asset Crossroads GPS (Public Citzen v. FEC) and American Action Network and Americans for Job Security (CREW v. FEC) should have registered and reported as political commitees. (Hat tip: Paul Barton's article this past week in the BNA Daily Tax Report)
Monday, November 24, 2014
Cass Brewer (Georgia State) provided the following analysis of two recent IRS private letter rulings that may indicate the IRS is rethinking whether a section 501(c)(3) tax-exempt nonprofit corporation that either changes its category of nonprofit corporation status in a single state or "redomesticates" by switching its state of incorporation has to reapply for recognition of its 501(c)(3) status.
Reconsideration of Reincorporation/Redomestication of 501(c)(3) Corporations?
Generally, if an IRC § 501(c)(3) organization changes its legal form (e.g., from a trust or unincorporated association to a nonprofit corporation), the new form of organization must reapply for tax-exempt status. See American New Covenant Church v. Commissioner, 74 T.C. 293 (1980)(unincorporated association becomes a nonprofit corporation); Rev. Rul. 77-469, 1977-2 C.B. 196 (same). Moreover, in Case 4 of Rev. Rul. 67-390, the IRS set forth its position that mere incorporation of an exempt corporation from one state to another requires a new exemption application. See Rev. Rul. 67-390, 1967-2 C.B. 179 (describing four distinct transactions—incorporation of an exempt trust, incorporation of an exempt association, reincorporation by Act of Congress, and reincorporation from one state to another—all requiring new applications for exempt status). The IRS’s restrictive position with respect to mere reincorporation transactions involving exempt corporations seems especially harsh, particularly when compared to the much more liberal approach taken for nonexempt corporations. See I.R.C. § 368(a)(1)(F) (allowing reincorporation from one state to another with no significant income tax effect whatsoever).
Two recent private letter rulings, however, perhaps indicate that the IRS is reconsidering its position. Specifically, in PLR 201426028 (June 27, 2014), the IRS held that a legislatively mandated, intrastate conversion from “public nonprofit corporation” status to “nonprofit corporation” status did not require an organization to reapply for exemption. Then, in PLR 201446025 (Aug. 20, 2014), the IRS went one step further to hold that a “redomestication” of an exempt corporation from one state to another did not require a new exemption application. The “redomestication” in PLR 201446025 was effectuated by filing a “Certificate of Conversion” in the original state and filing “Articles of Domestication” in the destination state. According to the private ruling, the “redomestication” was undertaken because the corporate law of the destination state offered more flexibility.
To reach these favorable holdings, the IRS distinguished American New Covenant Church, Rev. Rul. 77-469, and Case 4 of Rev. Rul. 67-390 primarily on two grounds. First, with respect to the exempt corporations involved in the private rulings, controlling state law and governing documents clearly provided that each corporation’s existence continued “uninterrupted” from its original incorporation and original exemption application. Second, each exempt corporation’s activities, assets, and obligations (including liabilities to the IRS) remained the same before and after the reorganization transactions.
The IRS further reasoned that the state to state “reincorporation” transaction described in Case 4 of Rev. Rul. 67-390 (which required a new exemption application) was fundamentally different from the state to state “redomestication” in PLR 201446025 (which did not require a new exemption application). Without providing details, the IRS stated that the “reincorporation” in Case 4 of Rev. Rul. 67-390 resulted in a new legal entity whereas the “redomestication” in PLR 201446025 did not. Yet, in the author’s experience with nonexempt corporations, reincorporations and redomestications are effectively identical (i.e., despite changing the state of incorporation the corporation’s existence continues uninterrupted and the corporation’s activities, assets, and obligations remain the same).
If in fact the IRS is reconsidering its position with respect to reorganization transactions involving exempt corporations, a published ruling clarifying Rev. Rul. 67-390 is critical. Otherwise, exempt corporations will be left wondering whether their reorganization transaction is a “reincorporation” demanding a new exemption application or a “redomestication” not requiring a new exemption application. In this regard it is worth noting that some states have fairly sophisticated “redomestication” statutes for nonprofit organizations (e.g., Indiana, Ind. Code Ann. §§ 23-17-31-1 through -6). Other states (e.g., Georgia, O.C.G.A. 14-3-101 through 1703) do not have such statues, relying instead on merger statutes to accomplish reorganization transactions across states. PLR 201446025 does not identify the states involved in the “redomestication” that was the subject of the private ruling. If, though, redomestication statutes are the key to avoiding a new exemption application after reorganizing an exempt corporation, this would be vitally important for tax advisors to know.
Georgia State University College of Law
Friday, November 21, 2014
In Private Letter Ruling 201446025 (Aug. 20, 2014), the Internal Revenue Service (“IRS”) ruled that a charitable nonprofit would maintain its tax-exempt status after changing it state of domicile by filing Articles of Domestication in the new state. The organization, originally incorporated under the laws of State 1, received a favorable determination of its exemption under Internal Revenue Code section 501(c)(3). It planned thereafter to file "Articles of Domestication" with State 2 and a Certificate of Conversion in State 1 in order to change its state of domicile. The organization sought assurance that it would continue to be recognized as tax-exempt without filing a new Form 1023 with the IRS.
According to the IRS, the conversion would not constitute “the creation of a new organization for purposes of I.R.C. § 508(a) and Treas. Reg. § 1.508-1 (a).” The IRS further concluded that the change of domicile “will not be considered a substantial change in [the entity’s] character, purposes, or methods of operation under Treas. Reg. § 1.501 (a)-(1)(a)(2) for purposes of reliance on [the organization’s] prior determination of exempt status.” Consequently, after the change in its state of domicile, the organization may “rely on the determination of tax exempt status” previously issued to it. However, amendments to the organization’s governing documents related to the change of domicile “should be reported on Form 990 as significant changes,” the IRS concluded.
The IRS also stated that its analysis “would be different if a new corporation were created in State 2” and the two entities were merged, or the old corporation transferred assets to the new corporation.
Tax Notes Today (see 2014 TNT 224-4) reports that practicing attorneys are viewing the ruling favorably.
Thursday, October 2, 2014
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):
Monday, September 29, 2014
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…
Wednesday, September 3, 2014
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.
Wednesday, August 27, 2014
Yesterday 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.
Monday, August 25, 2014
Over 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.