Friday, July 24, 2015
As previously blogged, the GAO Report to Congress (the full report is here) on the IRS processes for political activity referrals found significant deficiencies with respect to the initial allegations that triggered an audit. In some cases, no case files were found by the GAO. These deficiencies "increase the risk that EO could select exempt organizations for examination in an unfair manner - for example, based on an organization's religious, educational, political or other views." According to Bloomberg BNA, in the hearing before the Ways and Means Oversight Committee in which the GAO report was released, it was determined that for the past six years, "one person working alone at the IRS has been deciding which complaints about the political activities of exempt organizations should be followed up."
Following the above-referenced hearing, IRS Commissioner John Koskinen reported to Bloomberg BNA that final regulations on political campaign activities by exempt organizations will not be in place prior to the 2016 presidential election (see proposed regulations here). The regulations will likely not be effective until January 2017. See prior blog posts on the proposed regulations and political activity regulations generally (April 16, 2014; July 16, 2015).
Thursday, July 23, 2015
IRS Issues Memorandum on Political Activities Referral Committee while determined to be "at risk" by GAO
On July 21, the IRS released a memorandum (TEGE-04-0715-0018) that defines the operation and composition of the Political Activities Referral Committee (PARC) that is charged with reviewing referrals for exempt organization audits. According to Bloomberg BNA, the memorandum was released in advance of a hearing where the Government Accountability Office has now issued a report finding that "poor oversight" places the IRS at risk that its agents could target exempt organizations for audits based on the organization's religious, educational or political views.
The memorandum describes the basic composition of a PARC:
Effective immediately, a PARC will consist of three IR-04 managers (OPM General Schedule (GS) grade 14 equivalent) who will be selected at random. All EO Examinations and Rulings & Agreements front-line IR-04 managers are eligible for selection to a PARC. The managers who are selected to serve on a PARC will receive appropriate training, and will serve on that committee as a collateral assignment for a period of two years. The inventory volume of political activities referrals received will determine the number of PARCs established and the time commitment required by the members of a PARC.
A PARC will review and recommend referrals for audit in an impartial and unbiased manner. A PARC must identify and document to the case file that the referral and associated publicly available records establish that an organization and any relevant persons associated with that organization may not be in compliance with Federal tax law. All PARC members will use the Reporting Compliance Case Management System (RCCMS) to document their activities and conclusions for the duration of their assignment to a PARC. In order for a referral considered by the PARC to be forwarded to an EO Examination group for audit consideration, two out of three PARC members must make that forwarding recommendation (majority rule).
(More on GAO Report: Washington Post, "Watchdog: IRS at risk for unfairly auditing political groups")
Monday, July 20, 2015
As reported by the Daily Tax Report, a tax law specialist in the IRS's Exempt Organizations office commented in a recent IRS webcast that social clubs must have individual, not corporate, members to qualify for tax-exempt status under Section 501(c)(7). In order to meet the social interaction and recreational purposes of 501(c)(7), individuals are necessary in that "corporate members are incapable of personal contact." If individuals hold memberships sponsored by corporations, the particular country club or sports club will still qualify for tax-exempts status.
As explained by the IRS, "substantially all" of a tax-exempt social club's income must come from dues, fees, assessments or other payments for typical social functions, or facilities that the club provides to its members. The IRS reiterated that this is a key consideration for tax-exempt status under 501(c)(7). The "substantially all" rule does permit a club to receive up to 35 percent of its gross receipts from non-member sources. Within that 35 percent rule, no more than 15 percent of the organization's gross receipts can be from the use of its facilities or services by nonmembers. If the "35-15 test" is not met, the IRS will examine all facts and circumstances to determine if a 501(c)(7) determination is proper.
Pursuant to a July 14, 2015 notice published in the Federal Register, the IRS is seeking comments concerning Form 990, Return of Organization Exempt from Income Tax under Section 501(c), 527, or 4947(a)(1) of the Internal Revenue Code. In the notice, the IRS specifically sought comments on:
- Schedule A (Form 990 or 990-EZ), Public Charity Status and Public Support, used to elicit special information from Section 501(c)(3) organizations; and
- Schedule B (Form 990, 990-EZ, or 990-PF), Schedule of Contributors, which is used by tax-exempt organizations to list contributors and allows the IRS to distinguish and make public disclosure of the contributors list within the requirements of Section 527.
The notice stated that comments should address: (i) whether the collection of information is necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; (ii) the accuracy of the agency's estimate of the burden of the collection of information; (iii) ways to enhance the quality, utility, and clarity of the information to be collected; (iv) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques or other forms of information technology; and (v) estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.
Monday, July 6, 2015
In the wake of Obergefell, the Internet was a dangerous place to be as a tax lawyer. Oh, a nickel for all the posts that lamented the loss of tax-exempt status for churches that didn't perform same sex marriages forthwith! Of course, I was sure to correct them all right away, because you know, nothing on the internet can be wrong, right?
There's been a lot of coverage by the news media on this issue as we've had some more time to discuss the issues, as discussed previously here at the Nonprofit Tax Prof Blog. Here's the latest in the coverage from the Baltimore Sun, which discusses the tax exempt status of religiously-affiliated universities. The article hedges on the issue of tax-exempt status, but I think both sides of the tax argument can find some common ground in the discussion found there. Under a Bob Jones University analysis, I'm not sure that we are there yet - there being that discrimination on the basis of sexual orientation is so fundamentally against public policy as to cause loss of tax-exempt status. While Obergefell certain makes it a stronger case, I think we will need to see more from the other branches of government before we get to that level. That being said, I agree with the Sun article in the thought that even if we aren't there now, I think we may be within my lifetime.
I do think that it is important to point out that Bob Jones University specifically talked about racial discrimination in education as being the fundamental public policy at issue and that the case involved the tax-exempt status of a university, not a church. Note that this article only talks about colleges and universities - the question of the tax-exempt status of churches is much more complicated. I don't believe there there is a case that we know of that where a church lost its tax-exempt status on the basis of religious discrimination. Can any of my Tax Prof or Nonprofit Prof Blog colleagues think of any example?
Wednesday, June 24, 2015
Skadden, Arps Requests Guidance on Taxation of Retirement Payments to Providers of Pro Bono Legal Services
As reported in Tax Notes Today (subscription required), Skadden, Arps has written the Assistant Secretary (Tax Policy) in Treasury and the IRS Chief Counsel to request inclusion in the 2015-2016 Priority Guidance Plan of published guidance addressing the tax treatment of retirement payments to retired law firm partners who provide pro bono legal services to the poor and to charitable organizations that serve them. The following paragraph of the firm's letter explains the legal issue:
[T]he question is whether pro bono services provided by retired partners constitute "services with respect to [a] trade or business carried on by [the law firm] partnership," such that the retirement payments would no longer qualify for the exception to the definition of "net earnings from self-employment." Section 1402(a)(10(A) provides that if a retirement plan meets certain requirements, any payments made pursuant to that plan are excluded from a partner's net earnings from self-employment so long as, among other things, the partner "rendered no services with respect to any trade or business carried on by such partnership . . . during the taxable year of such partnership . . . in which such amounts were received." The issue raised by the Chief Judge's pro bono initiative focusing on retired partners is whether a retired partner who is currently receiving retirement payments that otherwise qualify for the Section 1402(a)(10(A) exclusion could be treated as "rendering services with respect to any trade or business" of the law firm partnership by taking on a pro bono legal representation that is connected to the law firm, whether it involves supervision of other law firm lawyers and staff, use of law firm resources (office space, computer and other equipment), and/or coverage under the law firm's malpractice insurance.
The letter argues that “uncertainty surrounding the tax treatment of the retirement payments presents a significant impediment to the retired partner's provision of pro bono services, thereby serving to discourage important pro bono work by retired law firm partners who would not otherwise be subject to self-employment tax on their retirement payments, but for their pro bono assistance to needy underserved individuals and communities.”
Electronic Citation: 2015 TNT 121-18
Tuesday, June 16, 2015
The Washington Post reported yesterday that a coalition of community groups filed a 22 page complaint against WalMart Foundation, essentially accusing the foundation of operating for private benefit rather than the public good: From the Post article:
More than a dozen community groups filed a complaint with the Internal Revenue Service Monday alleging that the Walmart Foundation violated its tax-exempt status by using charitable funds to advance the retailer’s entrance into urban markets including Washington. The 22-page complaint, addressed to IRS Commissioner John Koskinen, details the retailer’s marketing and lobbying activities as it sought approval to open stores in New York City, Boston, Chicago, Los Angeles and other cities. The groups allege that the foundation is completely controlled by the company and that it “appears to target its donations and influence its grantees primarily to assist WalMart to achieve those expansion goals, ultimately providing Walmart more than an incidental benefit. Walmart Foundation’s activities are impermissible under the Code.”
Walmart has been forced to defend itself against allegations that its multi-billion dollar foundation has been using tax-exempt funds to help the retail chain expand into urban areas. On Monday, more than a dozen community groups filed a complaint with the Internal Revenue Service alleging that the WalMart Foundation violated tax code by targeting its donations to cities where the big-box giant has faced opposition to its growth plans. Data analysis of tax returns by these local nonprofits shows an uptick to the tune of millions in donations from the WalMart Foundation to organizations in Boston, New York, Washington D.C., and Los Angeles as WalMart pursued store openings in these cities.
What I found most curious and -- from a purist's standpoint, I suppose -- most disconcerting is the complaint's imprecise sort of casual discussion of private inurement and private benefit. Granted, I have only skimmed the complaint thus far but it seems the complainers are really just sorta casting a wide net and hoping to catch violations that might be lurking rather than making a strong case to suggest any real violations they know to exists. Sometimes premature accusations made for the purpose of attention or sensationalism do more harm than good. I can't help but wonder if this is a case in point.
Wednesday, May 27, 2015
I have been thinking about the impact of yesterday's indictment of numerous FIFA officials on the various organizations' tax statuses, both here in the United States and abroad -- particularly under the tax laws of Switzerland. The FIFA matter would make for good class discussion, I think. According to a DOJ Press Release issued this morning:
A 47-count indictment was unsealed early this morning in federal court in Brooklyn, New York, charging 14 defendants with racketeering, wire fraud and money laundering conspiracies, among other offenses, in connection with the defendants’ participation in a 24-year scheme to enrich themselves through the corruption of international soccer. The guilty pleas of four individual defendants and two corporate defendants were also unsealed today.
The defendants charged in the indictment include high-ranking officials of the Fédération Internationale de Football Association (FIFA), the organization responsible for the regulation and promotion of soccer worldwide, as well as leading officials of other soccer governing bodies that operate under the FIFA umbrella. Jeffrey Webb and Jack Warner – the current and former presidents of CONCACAF, the continental confederation under FIFA headquartered in the United States – are among the soccer officials charged with racketeering and bribery offenses. The defendants also include U.S. and South American sports marketing executives who are alleged to have systematically paid and agreed to pay well over $150 million in bribes and kickbacks to obtain lucrative media and marketing rights to international soccer tournaments.
I did some preliminary checking and learned that FIFA is a complicated Swiss based international charitable organization comprising several other national and international nonprofit and tax exempt organizations, including the U.S. Soccer Foundation. It seems rather axiomatic that when executives -- insiders and disqualified persons, likely -- use the organization's venue selection and contracting processes to extract bribes, kickbacks, and other illicit payments from third parties, the organization is being operated for private benefit. I wonder, though, about the extent to which an umbrella organization's misdeeds can cause legal issues for one or more of its member organizations, such as the U.S. Soccer Foundation. And even if the bribes and kickbacks constitute or indicate private benefit, would the organizations subject to U.S. law be able to point to their other activities to support an argument that whatever private benefit existed was substantially outweighed by their good deeds and therefore not fatal to tax exemption? Anyway, the whole topic, along with all the exhibits and so forth available online would make for good discussion fodder in a class or seminar dealing with tax exemption in the international arena. The L.A. Times has some useful articles on the subject.
Thursday, May 21, 2015
FTC and All 50 States File 148 Page Complaint Alleging Massive Fraud by Cancer Charities, Collect More than $100 Million in Restitution
I have not yet even begun to read the alleged details yet, but two days ago the Federal Trade Commission and all 50 states of the Union plus the District of Columbia filed a nearly 150 page complaint against four cancer charities alleging fraud and what amounts to massive examples of private inurement and excess benefit transactions. What interested me most in the complaint were allegations pertaining to defendants' failure to "observe rudimentary corporate governance practices" used apparently to bolster the allegations of private benefit that run throughout the complaint. I am going to give it a more thorough read and talk more about that later. From the Press Release:
The Federal Trade Commission and 58 law enforcement partners from every state and the District of Columbia have charged four sham cancer charities and their operators with bilking more than $187 million from consumers. The defendants told donors their money would help cancer patients, including children and women suffering from breast cancer, but the overwhelming majority of donations benefitted only the perpetrators, their families and friends, and fundraisers. This is one of the largest actions brought to date by enforcers against charity fraud.Named in the federal court complaint are Cancer Fund of America, Inc. (CFA), Cancer Support Services Inc. (CSS), their president, James Reynolds, Sr., and their chief financial officer and CSS’s former president, Kyle Effler; Children’s Cancer Fund of America Inc. (CCFOA) and its president and executive director, Rose Perkins; and The Breast Cancer Society Inc. (BCS) and its executive director and former president, James Reynolds II.
CCFOA and Perkins, BCS, Reynolds II and Effler have agreed to settle the charges against them. Under the proposed settlement orders, Effler, Perkins and Reynolds II will be banned from fundraising, charity management, and oversight of charitable assets, and CCFOA and BCS will be dissolved. Litigation will continue against CFA, CSS and James Reynolds Sr.
. . . . . .
According to the complaint, the defendants used telemarketing calls, direct mail, websites, and materials distributed by the Combined Federal Campaign, which raises money from federal employees for non-profit organizations, to portray themselves as legitimate charities with substantial programs that provided direct support to cancer patients in the United States, such as providing patients with pain medication, transportation to chemotherapy, and hospice care. In fact, the complaint alleges that these claims were deceptive and that the charities “operated as personal fiefdoms characterized by rampant nepotism, flagrant conflicts of interest, and excessive insider compensation, with none of the financial and governance controls that any bona fide charity would have adopted.” According to the complaint, the defendants used the organizations for lucrative employment for family members and friends, and spent consumer donations on cars, trips, luxury cruises, college tuition, gym memberships, jet ski outings, sporting event and concert tickets, and dating site memberships. They hired professional fundraisers who often received 85 percent or more of every donation. The complaint alleges that, to hide their high administrative and fundraising costs from donors and regulators, the defendants falsely inflated their revenues by reporting in publicly filed financial documents more than $223 million in donated “gifts in kind” which they claimed to distribute to international recipients. In fact, the defendants were merely pass-through agents for such goods. By reporting the inflated “gift in kind” donations, the defendants created the illusion that they were larger and more efficient with donors’ dollars than they actually were. Thirty-five states alleged that the defendants filed false and misleading financial statements with state charities regulators. In addition, the FTC and 36 states charged CFA, CCFOA and BCS with providing professional fundraisers with deceptive fundraising materials. The FTC and the attorneys general also charged the defendants with violating the FTC’s Telemarketing Sales Rule (TSR), CFA, CCFOA and BCS with assisting and facilitating in TSR violations, and CSS with making deceptive charitable solicitations.
The Press Release contains links to the complaint the proposed final orders against two of the four malefactors as well as stipulated orders resulting in restitution in excess of $100,000,000.
Thursday, May 14, 2015
The Treasury Inspector General for Tax Administration issued a new "Final Report" on the IRS handling of exemption applications involving political campaign intervention. Here are excerpts from the conclusions:
The IRS has taken significant actions to eliminate the selection of potential political cases based on names and policy positions, expedite processing of Internal Revenue Code (I.R.C.) Section (§) 501(c)(4) social welfare organization applications, and eliminate unnecessary information requests.
First, the IRS eliminated the use of Be On the organizations, if it becomes a permanent Look Out (BOLO) listings, . . . .
Second, the Exempt Organizations function completed processing for 149 of the 160 applications for tax-exempt status that, as of December 2012, had been open for lengthy periods. . . . .
The report further provides that in the absence of BOLO listings the IRS has created an "Emerging Issues Committee" to screen, review, and monitor emerging issues based on actual or planned activities of applicants, as opposed to names or policy positions. The report also provides of 149 closed applications, the IRS approved 107 (72%) and disapproved 7 (5%), while applicants either withdrew (8 or 5%) or failed to respond to requests for information (27 or 18%) the remaining applications. Of the 11 applications still open, six are in litigation and five have either proposed adverse determinations or are in Appeals. Reading between the lines, a Bloomberg article notes that these figures suggest that the IRS has sent Crossroads GPS a denial letter, since the Crossroads application is still outstanding and is not in litigation. As the Center for Responsive Politics notes, however, the statute of limitations might now bar collection of any taxes from Crossroads even if its application is ultimately denied. Additional Coverage: Forbes (Peter Reilly).
Relatedly, the NorCal Tea Party Patriots have convinced the federal judge overseeing their lawsuit against the IRS to require the IRS to identify the 298 groups that had submitted applications identified as potential political cases as of May 31, 2012 (mentioned on page 4 of the TIGTA Final Report) in order to facilitate class certification in that litigation. The Judge's order explains why she concluded Internal Revenue Code section 6103 does not prevent this limited discovery. Additional coverage: Forbes (Peter Reilly).
In other news, TIGTA managed to recover 6,400 emails to or from Lois Lerner from between 2004 and 2013, although it is unclear how many might be duplicates of the tens of thousands of emails previously recovered by the IRS and turned over to Congress. No final word from the congressional committees reviewing the emails regarding whether they add anything to the ongoing investigations, although initial indications are that there is little new in them. Coverage: CNN; Forbes (Kelly Phillips Erb); The Hill.
Finally, the House has passed a package of bills relating to the 501(c)(4) application mess, although their fate in the Senate (and on the President's desk) is uncertain. The most prominent is H.R. 1104, which would extend a gift tax exemption to 501(c)(4) social welfare organizations, 501(c)(5) labor, agricultural, and horticultural organizations, and 501(c)(6) trade associations and chambers of commerce. Currently donors to 501(c)(3) charities generally enjoy such a deduction (under Internal Revenue Code section 2522), and transfers to 527 political organizations are exempt from the gift tax (under section 2501(a)(4)). The other bills are H.R. 709 (termination for political targetting), H.R. 1026 (taxpayer privacy), H.R. 1058 (Taxpayer Bill of Rights), H.R. 1152 (use of personal email accounts prohibition), H.R. 1295 (self declaration process and declaratory judgment actions for 501(c)(4)s), and H.R. 1314 (right to appeal). Coverage: Forbes (Robert W. Wood); Politico.
Wednesday, May 6, 2015
I was wondering what all the traffic gridlock was about when I got out of LaGuardia airport early Monday afternoon and tried to make my way to Poughkeepsie. fearing the worst, I tuned in to 1010 WINS to catch the traffic report. That was when I heard it: President Obama had been at Lehman College where he had announced the creation of a nonprofit called the My Brother's Keeper Alliance. The new organization is a spinoff of a White House initiative of the same name aimed at uplifting African American and Hispanic boys from preschool through high school.
In launching the new Charity, President Obama stated that the My Brother’s Keeper Alliance will "continue the work of opening doors for young people -- all our young people -- long after I've left office."
Reporting on the launch, TheNonProfitTimes reports that the President
told the audience at Lehman that the new organization has secured $80 million from companies such as Deloitte, News Corp and American Express. The group's star-studded executive team and advisor board will include former Secretary of State Gen. Colin Powell, Sen. Cory Booker (D-N.J.), basketball stars Alonzo Mourning and Shaquille O'Neal, and former Attorney General Eric Holder, among others.
The new organization will be led by former Deloitte CEO Joe Echevarria and might serve as a vehicle through which the president can influence policy after his second term is up. Speaking to reporters, White House Press Secretary Josh Ernest stated:
While I'm not in a position to describe the specific, detailed relationship between the president and this alliance that will continue after his presidency, I can tell you that this is an issue that the president intends to continue to be focused on long after he has left the Oval Office.
Meanwhile, Broderick Johnson, chair of the White House initiative, linked the My Brother's Keeper with the unrest in Baltimore following the death of Freddie Gray. Writing on the My Brother's Keeper initiative's website, Johnson stated:
For so many of us, the My Brother's Keeper initiative is deeply personal. As a proud son of Baltimore, this week's announcement comes at a time of unique and special resonance for me. As the country reflects on our shared responsibility to ensure that opportunity reaches every young person, I urge everyone to look at their own capacity to make a difference.
The My Brother's Keeper initiative was designed to focus federal resources towards closing the opportunity gap experienced by African American and Latino males. To that end, Johnson identified almost $1 million in funds from a number of federal agencies: the departments of Education and Health and Human Services announced $750 million in Preschool Development Grants for 18 states this past December, and the Department of Labor and the National Guard have programs that will together expend $100 million to improve career prospects for minorities.
Wednesday, March 18, 2015
501(c)(4) Update: Handful of Applications Still Pending, Do Lost Emails = A Crime?, and (Another) Court Dismisses Claims Against Lerner
IRC Section 501(c)(4) Applications: The IRS reported that as of last month it had closed 138 or 95% of the 145 organizations that had applied for recognition of exemption under section 501(c)(4) and were eligible for optional expedited processing because the only issues their applications raised were possible involvement in political campaign intervention or providing private benefit to a political party. The optional expedited process results in a favorable determination letter if the applicant represents that it devotes (1) 60 percent or more of both spending and time to activities that promote social welfare and (2) 40 percent or less of both spending and time to political campaign intervention. Of the 106 favorable determination letters issued by the IRS, 43 were the result of applicants choosing this process. Nevertheless a handful of such applications are still pending, including the application for Crossroads GPS and also several much smaller "mom-and-pop outfits," according to Politico.
Lost Emails: Politico also reports that in response to questioning from members of Congress a representative of the Treasury Inspector General for Tax Administration told a congressional Committee that TIGTA's ongoing search for IRS emails has revealed "potential criminal activity" in that the IRS failed to initially disclose some backup tapes and that other tapes were erased. The TIGTA representatives emphasized, however, that the investigation was still ongoing and it was too soon to determine if the actions were purposeful or the result of ill intent. A video of the full hearing is available here.
Federal Court Dismisses Claims Against Lerner: In a decision issued late last month, the U.S. District Court for the Northern District of Texas (Dallas Division) dismissed claims brought by Freedom Path, Inc. against Lois Lerner without prejudice for lack of personal jurisdiction. The claims arose out of the IRS's alleged mishandling of Freedom Path's application for recognition of exemption under IRC section 501(c)(4). The court found that the group's allegations did not demonstrate sufficient contacts with the state of Texas to grant the court personal jurisdiction over Lerner. The court also rejected several of the group's claims against the IRS and unnamed federal officials, including claims that challenged the constitutionality of two revenue rulings relating to political activity (2004-6 and 2007-41), finding the group had not pled sufficient facts to establish standing to challenge those rulings, and two other claims (for other deficiencies). The court did, however, give the group 28 days to file an amended complaint although it felt that the defects in some of the dismissed claims appeared to be incurable.
Monday, March 16, 2015
Tax Analysts reports (subscription required) that the IRS has deciding to stop automatically providing the media with copies of favorable determination letters issued in response to applications for recognition of exemption because of the changes in the structure and geographic location of the IRS Exempt Organizations Division and related IRS Office of Chief Counsel functions. Practitioners quoted in the article expressed disappointment with this decision. While the media and other members of the public can still request such letters by submitting Form 4506-A for each organization for which the letter is sought, practitioners noted the burden doing so imposes and the usually lengthy delay in the IRS response to such requests.
Additional coverage: Forbes (contributor opinion).
UPDATE: To clarify, the letters were previously provided by the IRS National Office and so were limited to the relatively few letters issued by that office, as opposed to the Cincinnati office that issues the vast majority of determination letters. That said, the National Office tended to handle the most difficult - and interesting - cases. According to later comments from the IRS, the change is apparently driven by the fact that the National Office will no longer be issuing determination letters.
The issuance of a new, streamlined Form 1023-EZ has caused a major shift in the exemption application world of the IRS. The IRS reported last week that it has received 20,103 such forms, or approximately half of all applications for recognition of exemption under Internal Revenue Code section 501(c)(3) since the IRS introduced the Form 1023-EZ. The IRS also reported that using streamlined procedures based on the Form 1023-EZ - that is, resolving open issues by asking applicants to attest to certain facts as opposed to requesting documents or narrative statements - it has reduced the backlog of all applications that had been pending for more than 270 days by 91 percent (from 54,564 in April 2014 to 4,791 in September 2014). The GAO previously also reported that the IRS closed 117,000 cases in fiscal year 2014, more than double the closure rate for the previous fiscal year. Not everyone is happy with the new form - see previous posts reporting concerns expressed by the National Association of State Charity Officials and the National Taxpayer Advocate, plus having a shortened form was not part of the recommendations promulgated by the IRS Advisory Committee on Tax Exempt and Government Entities when it looked at the application process.
UPDATE: New memo dated March 12, 2015 regarding the streamlined application process that replaces the previously linked to February 27, 2015 memo.
Last week the IRS issued Revenue Procedure 2015-21, which provides "guidance regarding correction and disclosure procedures for hospital organizations to follow so that certain failures to meet the requirements of § 501(r) of the Internal Revenue Code will be excused for purposes of § 501(r)(1) and 501(r)(2)(B)." Failures that are not willful or egregious may generally be resolved without financial penalty if they are both (1) corrected in a timely fashion, including restoring affecting individuals to the position they would have been in absent the failure and ensuring appropriate safeguards to prevent future failures, and (2) disclosed on the next Form 990 filed by the organization. If the IRS has contacted the hospital organization concerning an examination, the organization must have already corrected or be in the process of correcting the failure and must have disclosed the failure on its annual information return for the year in which the failure was discovered (if the due date, including extensions, for that return has passed).
The IRS has issued both final regulations and Revenue Procedure 2015-17 providing the final procedures for issuing determination letters and rulings relating to exemption under Internal Revenue Code section 501(c)(29). Paragraph 29 is the latest addition to section 501(c); it provides a federal income tax exemption for qualified nonprofit health insurance issuers (QNHIIs), also known as CO-OP health insurance insurers, that under the Affordable Care Act receive a loan or grant under the federal Consumer Operated and Oriented Plan Program. The CO-OP Program is designed to foster the creation of these new nonprofits to offer competitive health plans. These health care co-ops have had mixed success, as NPR reported earlier this year that the second largest one in the country recently collapsed.
Additional coverage: Squire Patton Boggs Alert.
Friday, March 6, 2015
The Internal Revenue Service has issued a newly revised Publication 557, Tax-Exempt Status for Your Organization. The beginning “What’s New” section lists the following topics: IRS issues new interim guidance for supporting organizations and grantors; New guidance provides transition relief for employee health insurance expenses; Final regulations under section 501(r) issued in December 2014; Correction and disclosure procedures under section 501(r); New Form 1023EZ; Exempt Organizations Division Limited the Types of Cases that Are Referred to Exempt Organizations (“EO”) Technical, and Provided for Administrative Review of EO Technical Determinations; and Future developments.
Tuesday, February 3, 2015
President Obama’s proposed Fiscal Year 2016 Budget (“Proposed Budget”) contains a few provisions affecting charities and charitably minded donors. The following proposals are of interest. Direct quotes are from either the Proposed Budget or the Department of the Treasury’s General Explanations of the Administration’s Fiscal Year 2016 Revenue Proposals (“Treasury Explanations”), as indicated.
Limit the Benefit of the Charitable Contributions Deduction
“The Budget would limit the value of most tax deductions and exclusions to 28 cents on the dollar, a limitation that would affect only couples with incomes over about $250,000 (singles with incomes over about $200,000). The limit would apply to all itemized deductions, as well as other tax benefits, such as tax-exempt interest and tax exclusions for retirement contributions and employer-sponsored health insurance.” Proposed Budget, 56.
Obviously, the charitable contributions deduction is, as in prior years’ budgets proposed by the President, subject to the limitation. According to Treasury Explanations, the provision “would apply to itemized deductions after they have been reduced by the statutory limitation on certain itemized deductions for higher-income taxpayers.” Treasury Explanations, 155.
Repeal the Non-Hospital Bond Limitation on Qualified Section 501(c)(3) Bonds
As discussed in Treasury Explanations, “[t]he Tax Reform Act of 1986 established a $150 million limit on the volume of outstanding, non-hospital, tax-exempt section 501(c)(3) bonds. The limit was repealed in 1997 with respect to bonds issued after August 5, 1997, if at least 95 percent of the net proceeds were used to finance capital expenditures incurred after that date. Thus, the limitation continues to apply to bonds more than five percent of the net proceeds of which finance or refinance (1) working capital expenditures, or (2) capital expenditures, incurred on or before August 5, 1997.” Treasury Explanations, 77. Treasury believes that the $150 million limitation “results in complexity and provides disparate treatment depending on the nature and timing of bond-financed expenditures,” and that repealing it “would enable nonprofit universities to utilize tax-exempt financing on a basis comparable to public universities.” Id. Under the administration’s proposal, “[t]he $150 million limit on the volume of outstanding, non-hospital, tax-exempt bonds for the benefit of any one section 501(c)(3) organization would be repealed in its entirety, effective for bonds issued after the date of enactment.” Id.
Disallow Deduction for Payments Entitling Payor the Right to Buy College Athletics Tickets
As Treasury Explanations notes, “donors to colleges and universities that receive in exchange for their contributions the right to purchase tickets for seating at an athletic event may deduct 80 percent of the contribution.” Treasury Explanations, 177. The administration’s proposal would disallow a deduction for any such transfer for the right to buy tickets to sporting events. See id.
Consolidate AGI-Based Limitations on Charitable Contributions Deduction
Current law limits the charitable contributions deduction to various percentages of a taxpayer’s “contribution base” (basically AGI), depending on the type of charitable donee and the type of donated property. “The proposal would simplify this complicated set of rules limiting deductions for charitable contributions. Under the proposal, the contribution base limit would remain at 50 percent for contributions of cash to public charities. For all other contributions, a single deduction limit of 30 percent of the taxpayer's contribution base would apply, irrespective of the type of property donated, the type of organization receiving the donation, and whether the contribution is to or for the use of the organization. In addition, the proposal would extend the carry-forward period for contributions in excess of these limitations from five to 15 years.” Treasury Explanations, 280.
Modify Deduction for Qualified Conservation Contributions
Code section 170 provides special rules for qualified conservation contributions. The administration proposes several modifications to the rules governing the deduction, and also proposes “to pilot a non-refundable credit for conservation easement contributions as an alternative to the conservation contribution deduction ….” Treasury Explanations, 191.
Additional details excerpted from Treasury Explanations:
This proposal would make permanent the temporary enhanced incentives for conservation easement contributions that expired on December 31, 2014. In addition, to address concerns regarding abusive uses of this deduction and to promote effective, high-value conservation efforts, the proposal includes a number of reforms:
First, the proposal would strengthen standards for organizations to qualify to receive deductible contributions of conservation easements by requiring such organizations to meet minimum requirements, specified in regulations, which would be based on the experiences and best practices developed in several States and by voluntary accreditation programs. For example, the regulations could, among other things, specify that a “qualified organization” must not be related to the donor or to any person that is or has been related to the donor for at least ten years; must have sufficient assets and expertise to be reasonably able to enforce the terms of all easements it holds; and must have an approved policy for selecting, reviewing, and approving conservations [sic] easements that fulfill a conservation purpose. An organization that accepts contributions that it knows (or should know) are substantially overvalued or do not further an appropriate conservation purpose would jeopardize their status as a “qualified organization.”
Second, the proposal would modify the definition of eligible “conservation purposes” for which deductible contributions may be made, requiring that all contributed easements further a clearly delineated Federal conservation policy (or an authorized State or tribal government policy) and yield significant public benefit.
Third, in order to take a deduction, a donor must provide a detailed description of the conservation purpose or purposes furthered by the contribution, including a description of the significant public benefits it will yield, and the donee organization must attest that the conservation purpose, public benefits, and fair market value of the easement reported to the IRS are accurate. Penalties would apply on [sic] organizations and organization managers that attest to values that they know (or should know) are substantially overstated or that receive contributions that do not serve an eligible conservation purpose.
Finally, the proposal would require additional reporting of information about contributed conservation easements and their fair market values. Section 6033 would be amended to require electronic reporting and public disclosure by donee organizations regarding deductible contributions of easements that is sufficient for transparency and accountability including: detailed descriptions of the subject property and the restrictions imposed on the property, the conservation purposes served by the easement, and any rights retained by the donor or related persons; the fair market value of both the easement and the full fee interest in the property at the time of the contribution; and a description of any easement modifications or actions taken to enforce the easement that were taken during the taxable year. As is the case under current law, personally identifying information regarding the donor would not be subject to public disclosure.
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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.
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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