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 The limit was repealed in 1997 with respect to bonds issued after August 5, 1997, if at least 95 percent of the net proceeds were used to finance capital expenditures incurred after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of outstanding, non-hospital, tax-exempt bonds for the benefit of any one section 501(c)(3) organization would be repealed in its entirety, effective for bonds issued after the date of enactment.”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.
Wednesday, August 20, 2014
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
Wednesday, July 30, 2014
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....
Wednesday, July 16, 2014
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.
Tuesday, July 1, 2014
The 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."
Thursday, June 26, 2014
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
Monday, June 23, 2014
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