Monday, October 10, 2016
With the Election approaching, many are voicing their opinion on the Johnson Amendment, which denies 501(c)(3) organizations the ability to actively campaign or lobby for a political candidate. Currently, in addition to being unable to support a candidate for political office, nonprofit organizations are also unable to oppose political candidates.
Proponents of the rule fear that allowing nonprofits to advocate for candidates could create unhealthy political factions within their organizations and communities at large. A larger concern is that donations from these organizations would be tax deductible and could exacerbate the level of spending and the political power of large scale donors, heavily influencing electoral outcomes. A statement from the Americans United for Separation of Church and State exclaimed “If individual organizations came to be regarded as Democratic charities or Republican charities instead of the nonpartisan problem solvers that they are, it would diminish the public’s overall trust in the sector and thus limit the effectiveness of the nonprofit community.”
Opponents of the rule, like Republican Party Nominee Donald Trump, believe that organizations have a right to voice their opinion for leaders they believe would best represent them. In a speech to Christian leaders Trump stated “if you like somebody or want somebody to represent you, you should have the right to do it.” Opponents also believe freeing 501(c)(3) organizations from these regulations would increase voter participation and elevate levels of political debate.
It is unlikely that this debate will be solved in the near-term, and certainly not in time to impact the nearing election. However, a fundamental change to the Johnson Amendment could drastically change the way campaigns are ran and financed.
Friday, August 12, 2016
One of the odd side stories of this crazy election season was the decision by the IRS to deny the application of the Democratic National Convention host committee for tax-exempt status under section 501(c)(3) even though it had earlier granted the application of the Republican National Convention host committee under the same section. (Coverage: Philadelphia Inquirer.) While according to the news stories the DNC quickly had a workaround available for those donors interested in a charitable contribution deduction, the disparity in treatment was notable, particularly since the denial was apparently based on some committee activities being too political under section 501(c)(3) even though the two host committees reportedly had very similar applications. Apparently the IRS forgot its statement 10 years ago to the Campaign Finance Institute that it would monitor future host committee applications for consistent treatment (see last sentence of last bullet point).
The IRS made that statement in the context of research by the Campaign Finance Institute into the financing of the political party conventions, which focused on the 2004 and 2008 conventions. That research led CFI in 2005 to call on the IRS to revisit the tax status of host committees under either section 501(c)(3) or section 501(c)(6) in light of the apparently pervasive political activity of those committees. Perhaps inadvertently, the IRS appears to have begun that reconsideration.
(Full disclosure: I am on the Board of Academic Advisors for the Campaign Finance Institute.)
Thursday, August 11, 2016
The "Tea Party" application controversy continues to take a toll on the IRS, even as the Service implements the congressionally enacted notice requirement for section 501(c)(4) social welfare organizations. First, the IRS suffered setbacks in two of the cases pending against it that grew out of the controversy:
- In Freedom Path, Inc. v. Lerner, the U.S. District Court for the Northern District of Texas rejected the government's motion to dismiss a First Amendment claim against the IRS, finding that the plaintiff's concerns regarding future curtailment of speech was sufficient to establish injury and that the case still presented a live controversy despite changes in the Service's processing of applications. Coverage: Bloomberg BNA Daily Tax Report.
- In True the Vote, Inc. v. IRS and Linchpins of Liberty v. United States, decided together although argued separately, the U.S. Court of Appeals for the District of Columbia Circuit reversed the lower court's dismissal of actions for injunctive and declaratory relief as against the government, concluding that those claims were not moot. (The appellate court did, however, affirm the lower court's dismissal of Bivens actions and statutory claims against individual government officials and the Service.) Coverage: Wall Street Journal. For blog posts discussing the opinion, see The Surly Subgroup (Philip Hackney) and The Volokh Conspiracy (Eugene Volokh).
Second, many Republicans in the House of Representatives continue to call for the impeachment of IRS Commissioner John Koskinen, not satisfied with his earlier censure by the House Oversight and Government Reform Committee on a party-line vote. (Coverage: The Hill; Politico; Roll Call.) Third, new documents relating to the controversy continue to trickle out from various sources, at a minimum providing an excuse to reassert claims against the Service and its (mostly now gone) officials. For example, see this Judicial Watch press release in the wake of it gaining access to approximately 300 pages of FBI documents relating to the FBI's investigation of the controversy.
And yet life still goes on, which in this instance means implementation of the new section 506 notice requirement for section 501(c)(4) organizations. That implementation has taken the form of Revenue Procedure 2016-41 and related final and temporary regulations (T.D. 9775). These documents detail how the notice requirement applies both to new section 501(c)(4) organizations formed after December 18, 2015 (the date of enactment for section 506) and to previously existing section 501(c)(4) organizations that had not yet either filed an application for recognition of exemption or an annual return. The required form is Form 8976, which can be submitted electronically here.
Wednesday, August 10, 2016
The NY Times is running a series of articles on the influence donors, particularly large corporations, appear to have over research conducted by some prominent think tanks. As its front page articles on August 8th and August 9th detail, many researchers associated with think tanks are paid consultants or lobbyists for corporate clients, and many think tanks also receive contributions directly from corporations that have an interest in the research the think tank is conducting. Some of the think tanks identified have either admitted to lapses in oversight or adopted more stringent conflict of interest and disclosure policies, but it is not clear how widespread such admissions or changes are within the think tank community.
While in theory reaching research conclusions that are helpful to donors or clients could constitute providing prohibited private benefit on the part of the think tanks, which are generally tax-exempt under Internal Revenue Code section 501(c)(3), the connections detailed in the articles seem too tenuous to support such a claim. This is especially true given both that proving a solid link between a donation and research results is difficult and that the think tanks identified generally engage in a broad range of research projects, only a small portion of which may be tainted by donor influence. Similarly, while some think tanks then arrange for meetings or conferences centering on their research and attended by government policy makers that might constitute lobbying for federal tax purposes, most such events likely fall outside of the technical definition of lobbying and the few that may not are almost certainly within the limited amount of lobbying permitted for tax-exempt charitable organizations such as think tanks.
Nevertheless, the stories are troubling because they throw into question the ability of government policymakers to rely on such research, as noted by Senator Elizabeth Warren in a video the NY Times posted with these stories. In its regular Room for the Debate feature, the NY Times therefore invited a number of commentators to suggest possible ways to address the concerns raised in its stories. Suggestions ranged from greater transparency about possible conflicts (including a certification process), better internal procedures to ensure unbiased research results, greater skepticism regarding those results on the part of journalists and others who report or rely on those results, and a diversification of funding sources (including ensuring various governmental funding sources) to support such research. I frankly am skeptical of transparency, certification, and internal procedure improvement if only because it may be too difficult for busy lawmakers, much less journalists and other members of the public, to shift through various disclosures or to determine what certification schemes or particular think tanks are reliable. I believe the diversification of funding sources idea has more promise, particularly if there are (nonpartisan) ways for government agencies to provide such funding conditioned on accurate, unbiased results. Bottom line, this strikes me as not a narrow federal tax issue but a larger issue about how to incentivize truth telling in public policy research.
Tuesday, August 9, 2016
As reported by Accounting Today and Bloomberg BNA Daily Tax Report (subscription required), the IRS yesterday issued Revenue Procedure 2016-42 (available through Bloomberg BNA) to provide some relief for donors desiring to create a charitable remainder annuity trust (CRAT) but frustrated because low interest rates make it difficulty to do so. The articles explain that CRATs are subject to a "probability of exhaustion" test (described in Revenue Rulings 70-452 and 77-374) that requires there be no more than a 5 percent chance that there is no remainder to go to the designated charity or charities. When interest rates are low, as they are now, it can be difficult to satisfy this requirement and also the requirement under Internal Revenue Code section 664(d) that a CRAT pay out a minimum 5 percent annuity to the trust beneficiary. The Revenue Procedure permits CRATs to include an early termination provision that ends the CRAT and causes the distribution of the remainder to the designated charity or charities when the trust corpus minus the annual payment and multiplied by a discount factor falls below 10 percent of the initial trust corpus; if the sample provision is included in a CRAT, then the probability of exhaustion test will not apply.
The Revenue Procedure will be published in Internal Revenue Bulletin 2016-34, which will be dated August 22nd.
Friday, June 10, 2016
So this is off topic, I'll admit, but it gave me a laugh this morning so I thought I'd share. There's some law in there, somewhere. From fellow Law Prof Blog blogger Anne Tucker at the Business Law Prof Blog, her blog post entitled Your Daily Funny Courtesy of the FEC:
Keep reading only if you have 3 minutes that you don't care about being productive or relating to business law, at least not directly.
The Federal Election Committee issued a proposed draft of an advisory opinion on a question brought by Huckabee for President, Inc.--the committee responsible for the 2016 presidential campaign of former Arkansas Governor Mike Huckabee. The Committee wanted to know if it can use part of a legal defense fund to pay a settlement. The FEC says yes. This isn't an election law blog, so I won't go into the details. The litigation arose over the campaign's use of the song "Eye of the Tiger". The FEC, feeling quite cheeky writes the following:
The complaint, seeking injunctive relief and monetary damages, alleged that 21 the Committee had violated federal copyright law by playing the song “Eye of the Tiger” at a campaign event on September 8, 2015. The Committee,rising up to the challenge of its rival, incurred attorneys’ fees and other expenses in defending itself in that litigation. After briefly relishing the thrill of the fight, the parties settled the lawsuit for an undisclosed amount.
Has the political circus of the 2016 election warped the sense of decorum at the FEC or should we all want to be friends with the lawyers there? I can't decide. But I do know that you should (a) click on the link to the song, and (b) jam away in your office for the next 4 minutes.
You are welcome.
Monday, June 6, 2016
According to this Chronicle of Philanthropy article (citing arts newsletter Hyperallergic), Senate Finance Committee Chair is continuing his scrutiny of private museums, now by requesting clarification from the IRS regarding its stance on private museums. You may recall that last fall, Senator Hatch sent a letter of inquiry to a number of private museums, requesting details regarding the museum's operation - fellow blogger Nickolas Mirkay detailed those letters here. Hyperallergic indicated that one of Hatch's primary concerns was the public availability of collections (including limited hours and advance reservations) and the continuing role of donor of the art collection in the management of the museums. Much of this scrutiny may stem from a series of New York Times articles regarding private museums, including here and here.
Inquiries of this type bother me somewhat. It seems to me that current law regarding private benefit is probably sufficient to handle many of the perceived abuses (maybe it's an enforcement issue - just throwin' it out there). The drumbeat of the articles and the Senate inquiry may lead to additional regulation - and I suspect they will use a mallet rather than a surgical instrument to deal with the issue, if history is any guide.
Monday, May 2, 2016
Last week the IRS published final regulations under IRC section 4944 that finalize several new examples of program-related investments by private foundations. The Service made few changes to the proposed regulations, so the most interesting part of the final regulations is actually the Summary of Comments and Explanation of Revisions, which summarizes the 15 comments received by the IRS and explains why Treasury did (or more commonly, did not) adopt the requested changes. For example, this section discusses the conflicting comments received regarding adding one or more examples relating to low-profit limited liability companies (L3Cs) or benefit corporations and explains that no such examples are included in the final regulations because "[t]he Treasury Department and the IRS see no need to amend the examples to refer more narrowly to an L3C or benefit corporation when such status is not determinative of the examples' conclusions."
In both Congress and the federal courts battles continue over disclosure of information relating to tax-exempt organizations. In California, a federal district judge ruled that California Attorney General Kamala Harris cannot force Koch brothers-related IRC section 501(c)(3) Americans for Prosperity Foundation (AFP) to provide a copy of the substantial donor list it files with the IRS (Schedule B to Form 990). While the decision was on an as-applied challenge and so only directly affects AFP, it was somewhat surprising given the earlier Ninth Circuit decision upholding the state disclosure requirement against a facial challenge. Whether the latest decision survives the almost certain appeal remains to be seen, however. Coverage: L.A. Times; Washington Post.
Not satisfied with the limited protected provided by this decision, Congress is now moving to eliminate the Schedule B entirely. H.R. 5053 cleared the House Ways and Means Committee late last week on a party-line vote, according to the Wall Street Journal (quoting LSU Professor Philip Hackney). The bill's fate is unclear, however, as it has already attracted public opposition from various outside groups, the N.Y. Times editorial board, and the Ranking (Democratic) Member of the Committee, according to the EO Tax Journal. It probably does not help its chances that the President for Government & Public Affairs at Koch Companies Public Sector, LLC publicly urged passage of the legislation.
Finally, the Sixth Circuit recently moved the disclosure needle in the other direction with respect to applicants for recognition of exemption. In In re United States (United States v. NorCal Tea Party Patriots, et al.), the court resolved a discovery dispute by holding that the names, addresses, and taxpayer-identification numbers of applicants for tax-exempt status are not “return information” and so are not protected from discovery by IRC section 6103, even if their applications are pending, withdrawn, or denied. The only immediate effect of the decision is to allow the plaintiffs to identify possible class members in this class-action litigation arising out of the IRS Exempt Organizations Division selection of section 501(c)(4) applicants for additional scrutiny. But the larger ramification is that such information likely is now exposed to Freedom of Information Act requests that can be litigated in the Sixth Circuit, as section 6103 was the sole barrier to such requests. IRS Commissioner John Koskinen also suggested that some other types of IRS filings may also be exposed to public disclosure as a result of this decision. For those who may be interested in learning more about the ramifications of this case, I will be providing additional coverage in the "At Court" section of the ABA Tax Times' next issue. Additional coverage: Wall Street Journal.
Monday, April 11, 2016
Happy National Volunteer Week! We know that volunteering can do lots of good, but what about when volunteering goes bad? Volunteer law is one of my primary scholarly interests, and in honor of the millions of Americans who volunteer each year, below are just a few of the ways that law deals with volunteering disasters. (But don’t be deterred! Volunteers live longer, happier lives, and these problems probably won’t happen to you or your organization.)
Volunteer Liability: Who gets sued when a volunteer commits a tort? The Federal Volunteer Protection Act provides a low level of immunity—with lots of exceptions and caveats—to volunteers for simple negligence. (Ask yourself whether regulation of unpaid labor fits within Congress’s power under the commerce clause.) Some states also offer immunity of different flavors. Iowa immunizes volunteers for almost anything they do within the scope of their employment. Vermont immunizes volunteer librarians. (?!) Ohio just enacted a law immunizing volunteer architects. (Why architects? No idea. Underworked lobbyists, possibly.)
Fortunately, volunteers are rarely sued, and most suits involve intentional torts or accidents while driving (covered by insurance). (So, please don't sue me.)
Organizational liability: Organizations are liable for the acts of their agents under common law master-servant principles. This applies to employees and volunteers alike. But volunteers often interact with organizations in less formal ways than employees, and not always as simple to determine scope of “employment.” Notably, immunity for the volunteer does NOT immunize the organization, making charities the prime defendant when suit is brought. Which, again, is fortunately pretty rare, especially for your small, community-based charity.
Volunteer Discrimination: Employers can’t discriminate against employees on race, sex, religion, disability, and other protected characteristics. Sometimes, but not often, these laws also protect volunteers. (In fact, there is a circuit split about whether unpaid workers are covered under federal employee anti-discrimination laws.) Still, even if anti-discrimination isn’t the law, be nice to your volunteers. It’s the right thing to do.
Volunteers and Minimum Wage: One of the least settled areas of law involves application of minimum wage laws to volunteers. Cases are all over the place on this, and challenges involving unpaid interns and student-athletes add layers of confusion to the tests for charitable volunteers. Department of Labor has issued various informal “guidance” (read: no Chevron deference) on the topic of unpaid workers, but their positions are rejected by courts as often as they are upheld. Nevertheless, it would be pretty weird if your organization violated minimum wage laws by allowing someone to volunteer for your charity. (Not legal advice: just common sense.) One caveat is that a paid employee of your nonprofit can’t “volunteer” for your organization performing the same type of services as would normally be paid to perform. (Note that the linked regulation only applies to government, but Department of Labor applies same rationale to nonprofits).
Much, much more could be said, which is why this is a fun area in which to write (not to mention volunteering as a rewarding personal pastime). Happy National Volunteer Week everyone!
Friday, March 4, 2016
IRS Scandal Update: Crossroad GPS Approval, Class Certification in One Case, Settlement of Another, and 501(c)(4) Notices
The biggest development coming out of the IRS scandal in recent months was the public revelation that in November 2015 the IRS approved the application by Crossroads GPS for recognition of exemption under Internal Revenue Code section 501(c)(4). This approval means the entire application file is available to the public, and Robert Maguire has very helpfully made all the documents available at OpenSecrets.org at the end of his analysis of them. Based on a quick review of these hundreds of pages of documents, here are several take-aways:
- Part V of the Protest (and Part VI of the Revised Protest) highlights the most constitutionally problematic aspect of the existing limit on political activity by section 501(c)(4) organizations (and also of the prohibition on such activity by section 501(c)(3) organizations) - the vagueness of the facts and circumstances approach for determining whether a given communication or other activity is actually political campaign intervention.
- Regardless of your views on the merits of the application and the final IRS decision regarding it, the legal writing and submissions by the attorneys representing Crossroads GPS provide a good example of professional but strong (and ultimately effective) advocacy based on an extensive factual record. This advocacy both focused on small but critical details - such as whether particular communications were in fact political campaign intervention - and larger legal issues such as the constitutional issue mentioned above.
- The application materials provide many examples of communications and other activities that may - or may not - cross the line into political campaign intervention. In addition, most and possibly all of the communications are helpfully summarized in charts submitted by Crossroads GPS that include the geographic area of distribution, whether the organization asserted that the communication was part of an ongoing series, and other facts that the IRS has identified as relevant.
- Taken as a whole, the documents provide a comprehensive illustration of the application for recognition of exemption process, including the initial application, IRS questions and detailed responses, proposed denial, protest, communications with IRS Appeals regarding the protest, and then finally the favorable determination letter. It also reveals several apparent procedural missteps on the part of the IRS that Crossroads GPS then used to strengthen its case for granting the application.
Media coverage: Politico; ProPublica; Washington Post. Not surprisingly, the IRS decision has generated both scathing criticism (see this NY Times editorial), as well as defenders (see this commentary by exempt organizations and constitutional law attorney Barnaby Zall).
In other news, the IRS lost a motion in one case related to the scandal but managed to settle another case. The loss came in NorCal Tea Party Patriots v. IRS, where a U.S. District Court certified a class consisting of various groups that allege they were subject to an improper level of scrutiny by the IRS during the exemption application process because of their political views. For an analysis of the decision, see this Forbes column by Peter J. Reilly. More positively for the IRS, Law360 reports that the IRS agreed with the Republican National Committee to dismiss a federal suit by the RNC against the Service involving a request for documents relating to the Service's treatment of exemption applications under section 501(c)(4). As part of the settlement, the IRS agreed to pay more than $20,000 in attorney's fees.
Finally, the IRS announced in Notice 2016-09 that the new notice required from certain section 501(c)(4) organizations based on a statutory change Congress made this past December will not be due until at least 60 days after Treasury and the IRS issue temporary regulations under new section 506. The Notice also clarifies that an organization seeking recognition from the IRS of its exemption under section 501(c)(4) will still need to apply for such recognition and, until further guidance is issued, organizations seeking such recognition should continue to use Form 1024. Such an application remains optional, however.
Thursday, March 3, 2016
IRS Changes to Advisory Committee, EO Audits, Form 990-N Filing, and Supporting Org Regs (latter only proposed)
Since the beginning of the year the IRS has proposed several minor but still significant changes to its practices relating to tax-exempt organizations:
- In January the IRS announced that because of structural changes within the TE/GE Division the Advisory Committee on Tax Exempt and Government Entities (ACT) will now focus on tax administration issues encountered across that Division and have, as of June 2016, a smaller membership of 15 as opposed to the current 21. ACT's new charter, effective as of last May, also changed the terms of members to a flat three years as opposed to the previous two years plus the option of a one-year extension.
- Bloomberg BNA Daily Tax Report reported (subscription required) yesterday that the IRS has issued an internal memorandum (TEGE-04-0216-0003) stating that the IRS will no longer modify an organization's exemption category when the organization is found to no longer qualify for exemption under its original exemption category. So, for example, if an organization originally recognized as exempt under section 501(c)(4) is found to no longer qualify for that status but could qualify for recognition of exemption under section 501(c)(7), the IRS will no longer modify its status to exemption under section 501(c)(7) but will instead simply revoke (or treat as revoked for declaratory judgment purposes) its status under section 501(c)(4). Such an organization may, however, apply or reapply for recognition of exemption under a new exemption category. The memorandum states this change is necessary because Congress has now made a declaratory judgment process available for all revoked exempt organizations, not just revoked 501(c)(3)s, and so all revocations must be treated the same. While not completely clear, this change appears to driven by a need to ensure all organizations that lose their recognition of exemption under a particular category have the option to seek declaratory judgment because modifying an organization's status to place it under a different category would, or at least could, prevent it from exercising its declaratory judgment rights.
- Effective as of the end of last month, the e-filing system for Form 990-N has moved to the IRS website. Filers will need to complete a one-time registration form when they first file on the IRS website. Previously the Urban Institute hosted the e-filing webpage for this form, but that webpage now sends readers to the new IRS webpage.
- Last month the IRS issued a set of proposed regulations for Type I and Type III Supporting Organizations. The preamble to the proposed regulations states "[t]hese proposed regulations focus primarily on the relationship test for Type III supporting organizations." Comments on the proposed regulations are due by May 19, 2016.
The IRS Statistics of Income Division has published Nonprofit Charitable Organizations and Donor-Advised Funds, 2012, reporting on selected data for Internal Revenue Code section 501(c)(3) organizations and donor-advised funds. Highlights from the tax year 2012 Form 990 and Form 990-EZ filings include the following:
- 279,405 501(c)(3)s reported an estimated $3.3 trillion in assets, $1.3 trillion in liabilities, $1.7 trillion in revenues, and $1.6 trillion in expenses, representing modest increases in all of these categories over amounts reported for tax year 2011
- 501(c)(3) with $10 million or more in assets represented only 8% of returns but reported 92% of total assets and 86% of total revenues
- donor-advised funds, which less than 1% of 501(c)(3)s sponsor (2,121 total), had a value of nearly $53 billion
- only 4% of 501(c)(3)s had donor-advised fund holdings over $100 million, but these organizations held over 80% of the total value of such funds and Fidelity Investments Charitable Gift Fund held $24 billion in such funds alone
Thursday, February 4, 2016
David Cay Johnston (Syracuse) published " Was Involvement of Private Foundation in Trump Event Illegal?" in the February 1st 1edition of TaxAnalysts:
Did Donald Trump violate the law January 28 by involving his private foundation in his campaign for the Republican presidential nomination?
Maybe -- and maybe not, according to three practitioners specializing in the nexus of tax and nonprofit law. But all agreed that Trump's actions put front and center why Congress needs to take a serious look at the growing connections between the charitable world and partisan politics, with a focus on what will make for sound policy.
Trump clearly used the charitable foundation under his control to further his campaign for the White House. But that may not be illegal.
Other politicians -- including the Clintons, the Kennedys, and the Rockefellers -- have or had foundations that they control. However, the politicians in those families did not hold campaign rallies to raise money for their charities while running for office.
Still, the existence of those foundations has sometimes led to controversy. The receipt of gifts to the Clinton Foundation, especially from foreign governments when Democratic presidential candidate Hillary Clinton was secretary of state, has drawn sharp rebuke from some Republicans and calls for an investigation.
(Hat tip: TaxProfBlog)
Wednesday, February 3, 2016
Kadir Nagac (Zirve University, Department of Economics) has posted "Religiosity and Tax Compliance" to SSRN:
The intention of this paper is to analyze religiosity as a factor that potentially affects tax compliance. Studies in the 90s have shown that the puzzle of tax compliance is "why so many individuals pay their taxes" and not "why people evade taxes". It has been noted that compliance cannot be explained entirely by the level of enforcement (Graetz and Wilde, 1985; Efflers, 1991). Countries set the levels of audit and penalty so low that most individuals would evade taxes, if they were rational, because it is unlikely that cheaters will be caught and penalized. Nevertheless, a high degree of compliance is observed. Therefore, studies that analyze a variety of factors other than detection and punishment are need. Religiosity can play an important role in determining one's tax compliance decision. I use religious adherence data from the American Religious Data Archive and reported income data from IRS to analyze independent effects of church adherence rates on tax compliance in the United States at the county-level. Tax compliance at the county-level is measured as discrepancy in reported income between IRS data and census data. Existing studies focus on effect of religiosity on tax fraud acceptability (tax morale), not the actual tax fraud or tax compliance behavior. To writer's knowledge, this study is the first study that analyzes the effect of religiosity on actual tax compliance behavior.
(Hat tip: TaxProfBlog)
As published in the Daily Tax Report, at the ABA Tax Section meeting last week, Andrew Morton, a partner at Handler Thayer LLP, opined that a good number of "high-profile charitable foundations" need substantially more oversight and legal assistance than they are currently receiving. He clarified that the neglect of these organizations is not malicious or deliberate: "Not because they are deliberately trying to manipulate the system, not because they're trying to do anything wrong, they just don't know. They don't get that a nonprofit is a corporation … it's a real thing. You have to take care of it.” He explained that most of the problems that arise with such celebrity-affiliated foundations are due to a lack of written policies, such as conflict-of-interest and whistle-blower situations, and the lack of reporting those policies on the foundations' annual Forms 990. In addition, these foundations are typically not aware of charitable registration requirements, which are governed by the states: “501(c)(3) is an adjective—not a noun. You don't have a 501(c)(3). You have a state nonprofit corporation, which has been conferred tax-exempt status from the federal government,” he explained. “There are 51 jurisdictions that require compliance for nonprofits. The federal government has their requirements, but every state has a different landscape.”
Thursday, January 7, 2016
IRS Withdraws Controversial Proposed Regulations on Reporting Donations and Donor Identity Information
Accounting Today reports that the Internal Revenue Service has withdrawn its proposed regulations permitting charitable donees to substantiate contributions of $250 or more by reporting them directly to the agency under section 170(f)(8)(D) of the Internal Revenue Code. The proposed regulations proved controversial because the optional method for reporting donations called for disclosing donors’ taxpayer identification numbers (which typically are their social security numbers). The notice of withdrawal is available here.
Additional Coverage: The Chronicle of Philanthropy
National Taxpayer Advocate Nina Olson has submitted her 2015 Annual Report to Congress, required by section 7803(c)(2)(B)(ii) of the Internal Revenue Code. One section of the report (see pages 36-44) scathingly criticizes the review of Forms 1023-EZ (or lack thereof) by the Internal Revenue Service. The following paragraph from the Executive Summary of the report details key findings:
TE/GE’s Exempt Organization (EO) function approves 95 percent of applications submitted on Form 1023-EZ. EO’s own pre-determination review program shows that EO approves applications much less frequently — 77 percent of the time — when it reviews documents or basic information from the applicants, rather than relying only on the attestations contained in the form. EO rejects some applications simply because the applicant was not eligible to use Form 1023-EZ, but the pre-determination review also showed that almost 20 percent of Form 1023-EZ applicants, despite their attestations to the contrary, did not qualify for exempt status as a matter of law. These results are consistent with TAS’s analysis of a representative sample of Form 1023-EZ applicants that obtained exempt status, which showed that 37 percent of the organizations in the sample did not satisfy the legal requirements for exempt status. Often, a deficiency in the applicant’s organizing documents that prevented qualification as an Internal Revenue Code § 501(c)(3) organization could have easily been corrected had the applicant been advised of it.
The report recommends revising Form 1023-EZ generally to require applicants to submit to the IRS their organizing documents, a description of their actual or contemplated activities, and relevant financial information. The report further urges the IRS to determine exempt status only after reviewing the application and the recommended supporting materials.
Additional Coverage: Tax Notes Today (Electronic Cite: 2016 TNT 4-6)
Wednesday, January 6, 2016
In Memorandum SBSE-04-1215-0085, the Small Business/Self-Employed Division of the IRS has determined that the church audit procedures set forth in section 7611 of the Internal Revenue Code apply to church employment tax inquiries. Under Code section 7611, the IRS may begin a church tax inquiry only by satisfying statutory “reasonable belief requirements” and “notice requirements.”
The former is satisfied “if an appropriate high-level Treasury official reasonably believes (on the basis of facts and circumstances recorded in writing) that the church … may not be exempt, by reason of its status as a church, from tax under section 501(a), or … may be carrying on an unrelated trade or business (within the meaning of section 513) or otherwise engaged in activities subject to taxation ….”
The latter is satisfied “if, before beginning such inquiry, the Secretary [of the Treasury] provides written notice to the church of the beginning of such inquiry.” The notice must explain “the concerns which gave rise to such inquiry,” “the general subject matter of such inquiry,” and “the applicable … administrative and constitutional provisions with respect to such inquiry (including the right to a conference with the Secretary before any examination of church records), and … provisions of this title which authorize such inquiry or which may be otherwise involved in such inquiry.”
Code section 7611 also restricts the scope of church examinations and limits the period for conducting them.
Prior to the guidance in the recent memorandum, IRS examiners were instructed that Code section 7611 audit procedures do not apply to employment tax inquiries. But now examiners are instructed as follows:
Examiners should not initiate any examinations on a church. If for some reason an employment tax examiner encounters a church employment tax issue, the examiner should immediately contact the Program Manager, Exam, Programs and Review (EPR) in TE/GE Exempt Organizations Examinations.
This new guidance is effective upon issuance (12/17/2015).
Friday, December 18, 2015
The almost certain to be approved omnibus spending bill and related tax bill illustrates in a nutshell the effects of the IRS scandal that blew up after it became known that the Service had subjected some conservative groups to greater scrutiny when they applied for tax-exempt status under Code section 501(c)(4).
No New 501(c)(4) Guidance. The provision garnering the most media attention in this area is Division E, Section 127 of the omnibus bill. It prohibits spending on guidance relating to section 501(c)(4) organizations and locks in "the standard and definitions" relating to that status "as in effect on January 1, 2010" (shortly before the Supreme Court's decision in Citizens United). While the provision only applies during the current fiscal year, which ends on September 30, 2016, it may kill any momentum such guidance had and so have more long-term effects. But if such guidance is only paused, a possible silver lining is that this delay ensures Treasury and the IRS will not issue it until after the end of the current presidential campaign.
Section 127 also does not address guidance for other types of section 501(c) organizations, including section 501(c)(5) labor unions and section 501(c)(6) chambers of commerce and trade associations. So in theory Treasury and the IRS could still issue guidance relating to the amount and definition of political activity for these entities. But given that such guidance could not be synced with guidance for section 501(c)(4) organizations until next fall at the earliest, it seems unlikely that they will pursue this course.
(The omnibus bill also bars spending by the SEC on guidance "regarding disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations" (Division O, Section 707) and on the Executive Branch of the President requesting "a determination with respect to the treatment of an organization described in section 501(c)" (Division E, Section 601(a)(2).)
Changed (Better?) IRS Procedures. The tax bill, which is also Division Q of the omnibus bill, contains several procedural changes that can be traced to the scandal:
Section 402. IRS employees prohibited from using personal email accounts for official business.
Section 403. If a person whose return or return information is improperly disclosed complains to Treasury regarding that disclosure, Treasury may inform that person about whether an investigation has been initiated, whether it is open or closed, whether any such investigation substantiated the improper disclosure by any individual, and whether any action has been taken with respect to that individual. (The provision also relates to other unlawful acts by federal employees with respect to the tax laws, as listed in Code section 7214.)
Section 404. Codifies the already available administrative appeal process relating to adverse determinations of tax-exempt status under section 501(c) and certain related determinations.
Section 405. New notification requirement for section 501(c)(4) organizations with a deadline for submitting the notice of 60 days after establishment of the organization. It applies both to entities organized after the bill's enactment and existing entities that have neither filed an application nor submitted an annual return or notice previously. There also is a provision allowing such an entity to "request" that it be treated as a section 501(c)(4) organization, in response to which Treasury (and so the IRS) "may issue a determination," and another provision allowing Treasury by regulation to require additional information supporting a new group's claimed 501(c)(4) status in their first annual return.
Section 406. Extending to all organizations seeking tax-exempt status under section 501(c) the existing declaratory judgment provision currently available to organizations seeking that status under section 501(c)(3).
Section 407. Adding to the list of "deadly sins" for IRS employees "performing, delaying, or failing to perform" any official action either for "personal gain or benefit or for a political purpose."
Section 408. Exempting from the gift tax transfers to any tax-exempt organization described section 501(c)(4), (5), or (6).
Other than the gift tax provision none of these appears problematic on its face, and the expansion of declaratory judgment option to all 501(c) is a welcome change. While the gift tax provision may draw some criticism, the reality is the IRS had already abandoned this fight (and I personally think this is the right call from a tax perspective, for reasons I plan to detail in an upcoming article). The one provision that may lead to some interesting questions and so require guidance is the new notice requirement, including how it relates to the existing (optional) application process for organizations seeking section 501(c)(4) status.
Frozen Budget for the IRS . The IRS budget continues to be frozen (and so losing ground once inflation is taken into account). More specifically, Division E provides the following, all of which are the same as for last fiscal year:
- Taxpayer Services: $2.16 billion
- Enforcement: $4.86 billion
- Operations Support: $3.64 billion
- Business Systems Modernization: $290 million
It also prohibits spending on targeting citizens for exercising their First Amendment rights and on targeting groups based on their ideological beliefs.
Bottom Line. The IRS continues to pay the price for the scandal in the form of congressional micromanagement and less funding. Any hopes of significant IRS enforcement relating to tax-exempt organizations and political activity are therefore unlikely to come to fruition in the foreseeable future.
UPDATE: For more information, see the Joint Committee on Taxation Technical Explanation for the tax bill.