Thursday, December 27, 2012
The Treasury Department has released final and temporary regulations regarding the requirements to quality as a Type III ("operated in connection with") supporting organization. Changes from the proposed regulations include (1) adding back in the defined term "publicly supported organization," (2) clarifying which Form 990 such a supporting organization must provide to its supported organizations, (3) clarifying certain aspects of the requirements for being considered "functionally integrated," and, most significantly, (4) modifying the payout requirement for non-functionally integrated Type III supporting organizations to now require an annual distribution equal to the greater of 85% of adjusted net income or 3.5% of the fair market value of the supporting organization's non-exempt-use assets. The Treasury also stated it is still considering certain further changes, including providing a definition of "control" for purposes of the provision prohibiting the acceptance of gifts or contributions from a person who controls the governing body of a supporting organization, providing additional examples of how Type III supporting organizations can satisfy the responsiveness test, and whether program-related investments may count toward the payout requirement for non-functionally integrated Type III supporting organizations.
Last month Treasury released the Priority Guidance Plan for this fiscal year. Listed items for tax-exempt organizations are:
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(r) on requirement for community health needs assessments by charitable hospitals as added by §9007 of the ACA.
4. 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.
5. Final regulations under §§509 and 4943 regarding the new requirements for supporting organizations (SOs) as added by §1241 of the Pension Protection Act of 2006. Proposed regulations were published on September 24, 2009.
6. Additional guidance on §509(a)(3) supporting organizations (SOs).
7. Additional guidance under §§4942 and 4945 regarding reliance standards for making equivalency determinations. PUBLISHED 09/24/12 in FR as REG-134974-12 (NPRM).
8. Final regulations under §4944 on program-related investments. Proposed regulations were published on April 19, 2012.
9. Regulations regarding the new excise taxes on donor advised funds and fund management under §4966 as added by §1231 of the Pension Protection Act of 2006.
10. Regulations under §6033 on group returns.
11. Revenue Procedure under §6033 to update and consolidate all non-regulatory exceptions from filing.
12. Final regulations under §6104(c). Proposed regulations were published on March 15, 2011.
13. Final regulations under §7611 relating to church tax inquiries and examinations. Proposed regulations were published on August 5, 2009.
Additional items that may be of interest to tax-exempt organizations include:
- Final regulations under §170 regarding charitable contributions. Proposed regulations were published on August 7, 2008.
- Notice under §170 regarding charitable contributions to disregarded entities. PUBLISHED 08/27/12 in IRB 2012-35 as NOT. 2012-52 (RELEASED 07/31/12).
- Guidance concerning adjustments to sample charitable remainder trust forms under § 664.
- Regulations under §1014 regarding uniform basis of charitable remainder trusts.
Friday, December 14, 2012
As reported by the Dayton Daily News, the Internal Revenue Service determined that a nonprofit organization affiliated with the Tea Party, Ohio Liberty Council, is exempt from federal income taxes under Section 501(c)(4) of the Internal Revenue Code. In a statement issued by the organization, its president opined that “our victory today will pave the way for other liberty groups around the nation to replicate our success’’
Meanwhile, as reported by the Washington Post, Crossroads GPS, the nonprofit organization formed by Karl Rove, is similarly seeking a 501(c)(4) tax-exempt status based on its primary activity of "public education."
[Hat tip on Ohio Liberty Council: Tax Prof Blog]
Thursday, December 13, 2012
The Fiscal Cliff is topping the headlines these days. A part of that discussion involves potentially severe reductions in certain deductions, like the charitable contributions deduction, in order to eliminate or minimize rate increases. At the front of the debate is the White House, two Presidential advisors of which recently posted a blog entry entitled "Why Taking Tax Rates Off the Table Threatens Non-Profits and Charitable Giving." Here is a small abstract from that blog entry:
But what is clear is that proposals that take tax rates off the table would threaten donations to universities, non-profit hospitals, social services providers, arts and cultural institutions and other nonprofit organizations. This is because – to make the math work – these proposals rely on hundreds of billions of dollars of revenue that would result from drastically cutting or eliminating the charitable deduction as we now know it.
Currently, the tax code encourages gifts to charity by allowing taxpayers to claim itemized deductions for charitable giving. But – as a new report by the National Economic Council (NEC) shows, the most prominent dollar cap proposals would effectively eliminate the charitable deduction for up to 13 million households and for as much as 60 percent of currently deductible giving.
Using Congressional Budget Office assumptions, the NEC estimates that a $50,000 cap would reduce charitable giving by about $150 billion over 10 years, while a $25,000 cap would reduce giving by about $200 billion. Even a $25,000 cap that applied only to high-income households would reduce giving by at least $10 billion per year. As the report discusses, a cap could impact nonprofit organizations in every sector and in every state.
In a recent article in the Tulsa World, the newspaper reported that last week approximately 225 nonprofit representatives travelled to Washington "warning elected officials that tampering with the charitable tax deduction would limit or even eliminate their ability to serve those in need." A similar article was published by The Oregonian, titled "Oregon charities give good reasons for dodging fiscal cliff."
As reported by the Chronicle of Philanthropy, the Independent Sector published a 2-page advertisement in Politico, directed to President Obama and Congress and President Obama, entitled “Don’t push charities over the fiscal cliff.” Another large nonprofit association, the American Hospital Association, sent a letter to Senate Majority Leader Harry Reid urging him to preserve the charitable contributions deduction.
The Wall Street Journal reported that the lingering uncertainty around the negotiations between President Obama and Congress is resulting in donors making contributions to "charitable-gift funds" (i.e., donor-advised funds) prior to the end of the year, allowing them to take a deduction in 2012 but delay giving decisions until a later time. Specifically, fear surrounding Congress's potential cuts or caps on charitable contributions for 2013 is leading to urgency to take advantage of deductions under current law.
Monday, November 26, 2012
According to this story from Lancaster Online, last May the IRS denied tax-exempt status to two joint ventures run by Lancaster General Hospital in Lancaster, PA. One of the joint ventures was a 50-50 deal with a for-profit company to run a rehabilitation center; the other was a 50-50 deal with doctors to run an ambulatory surgery center. According to the story, the IRS denied exemption because the 50-50 arrangement did not give Lancaster General (a tax-exempt 501(c)(3) charity) sufficient control over the joint ventures to assure they were run in a charitable manner.
This result indicates that the IRS's "control" test for determining charitable status of joint venture operations between a charity and a for-profit enterprise is still alive and well. The control test first surfaced in the "whole hospital joint venture" ruling, Rev. Rul. 98-15, and then was relaxed somewhat in the "ancillary" joint venture ruling, Rev. Rul. 2004-51. In that latter ruling, which would seem to govern the kinds of transactions involving Lancaster General, the IRS approved a 50-50 ownership arrangement, where the charity (a university in this case) had absolute control over the way in which the substantive services (educational distance learning) were delivered - (e.g., approval of the curriculum, training materials and instructors). After Rev. Rul. 2004-51, the control test sort of disappeared from view as practitioners learned to draft deals around the requirements. But the Lancaster General story indicates that it is still very much alive and enforced by the IRS.
I've frankly never understood why the IRS presses a "control" requirement in the context of ancillary joint ventures. "Ancillary" joint ventures by their nature are simply business deals done by a charity. The question involved in these cases should ONLY be whether the deal is a fair one to the charity (to avoid issues of private inurement and private benefit); if so, then the joint venture interest should be treated like any other commercial activity: that is, subject to the unrelated business income tax if indeed the venture's business is "unrelated" (in many cases, I would suggest that joint ventures entered into by hospitals to expand health services in fact are "related," but that's another story). It is very odd to me that an exempt hospital or exempt university could open a BMW dealership with no ill effects on exemption other than having to pay the UBIT. And a direct investment in a business corporation via stock doesn't create any exemption issues at all, not even UBIT issues. But a business investment done as a joint venture suddenly causes us to break out in hives . . . In my opinion, very odd, and not well-justified by any underlying theory applicable to exempt status.
Tuesday, November 13, 2012
As it did with 9/11 and Katrina, the IRS has issued Notice 2012-69 granting favorable treatment to certain vacation/leave donation programs run by employers. In summary, it appears that an employee may release vacation or similar leave back to the employer. In return, the employer makes a cash donation to charity. Under the Notice, the payments from the employer must be made to Section 170(c) organizations "for the relief of victims of Hurrican Sandy" and must be made before January 1, 2014. (The Sandy Notice is almost exactly the same as the Katrina Notice and the revised 9/11 Notice).
If a program is structured appropriately, then the IRS will not treat the payments as income to the employee or take the position that the employee was in constructive receipt of funds. Of course, that means the employee cannot take a Section 170 deduction for the donation, since the value of the leave time will be fully excluded from his or her income - allowing the deduction would be double counting!
Interestingly, the Notice indicates that the the IRS "will not assert that an employer will only be permitted to deduct these cash payments" under Section 170 rather than Section 162. Thus, it appears that the employer may fully deduct the value of any foregone leave, even if Section 170's limitations might otherwise disallow part of the deduction.
I'm curious why the benefit to the employer - I'm also curious as to why there is no requirement that the value given to charity be somehow equal to the value of the leave surrendered. It seems like a potential "win-win-win" for employers. They get employees to release their vacation time, potentially for less than a cash out would be worth, and they get to take a deduction for it, without regard to Section 170 limits - as if it were still compensation paid under Section 162. Wondering outloud, it appears from the language of the Notice that an employer could get a full charitable contribution for other donations, and then take these donations on top. And they get the good PR to boot. That seems like a really good deal! (Don't get me wrong - I think such a program, and anything else that gets funds to our friends on the East Coast, is a good thing).
Finally, I wonder what an employer would have to do to demonstrate that the recipient charity is "for the relief of victims of Hurricane Sandy." If one gave a grant to the Red Cross for general operating expenses (or with a partial allocation to general operating expenses), would that be sufficent?
Okay - I'm not done wondering outloud quite yet. It seems like it is well within bounds of authority for the IRS to act on the assignment of income issue - after all, that's a pretty mushy, facts-and- circumstancy-type test. But what about the Section 162/170 determination? (I know,I know... say thank you, IRS.. and move along. Nothing to see here!)
Monday, November 12, 2012
With h/t to our friends at the TaxProf Blog:
Preservation Easements in an Uncertain Regulatory Future
Jess R. Phelps (Historic New England), Preserving Preservation Easements?: Preservation Easements in an Uncertain Regulatory Future, 91 Neb. L. Rev. 121 (2012):
While federal tax deductions are an important tool for organizations operating easement programs, recent IRS enforcement activity has called the future of this incentive into question--at least as currently constituted. Even if these incentives continue, the presence of continued regulatory uncertainty will make federally subsidized easements less viable unless enforcement activity decreases or easement-holding organizations begin to change how they protect privately-owned homes. However, these challenges provide easement-holding organizations a chance to step back and evaluate their accomplishments of the past thirty years. Many significant structures have been protected, but preservation easements lag far behind in numbers, impact, and public awareness when compared to land conservation efforts. The public has yet to fully “buy in” to the concept of preservation easements and are suspicious of efforts to provide funds to protect private residences.
For this perception to change, easement-holding organizations need to fundamentally re-evaluate the role they play within the preservation movement and determine whether a larger role is possible. There are a variety of ways that easement-holding organizations can shift their thinking and practices to expand the benefit provided through their programs. Similarly, there are clear alternatives to securing the preservation of significant historic resources via reliance on the federal tax incentives. In the end, the efforts of easement-holding organizations to respond to these challenges and reimagine the possibilities of preservation easements will go a long way toward fulfilling SPNEA's original vision of obtaining control of the most significant historic properties and “let[ting] them to tenants under wise restrictions.” Perhaps more importantly, these efforts can also expand upon this vision to protect the underlying stories and preserve a more meaningful spectrum of our collective architectural heritage.
Last month the IRS released information about the questionnaire that it is sending to more than 2,000 randomly selected central organizations to complete. The stated purpose of the questionnaire is "[t]o help us better understand the relationship between central or parent organizations of group rulings and their subordinates, and learn how they satisfy their exemption and filing requirements." These inquiries reflect the apparently continuing IRS concerns regarding groups rulings, as reflected in the IRS Advisory Committee on Tax Exempt and Government Entitites report relating to such rulings, issued in 2011.
Thursday, November 8, 2012
With the 2012 election (mostly) behind us, and the fiscal cliff and growing federal government debt in front of us, it is an appropriate time to consider possible changes to the charitable contribution deduction.
Cap on Value of Itemized Deductions: As we have previously noted, the Obama administration has repeatedly called for a cap on itemized deductions, including the charitable contributiond deduction, by limiting the benefit from such deductions to 28%. This would mean that taxpayers with a higher marginal rate than 28% would not avoid completely the otherwise owed federal income tax on the income offset by the deduction. Not surprisingly, leading charitable organizations, including Independent Sector, have come out in opposition to this proposal. For an analysis of this proposal, see the 2010 Congressional Research Service report on it.
Replace Deduction with a Non-Refundable Tax Credit: The National Commission on Fiscal Responsiblity and Reform, more commonly known as the Simpson-Bowles Commission, proposed replacing the charitable contribution deduction with a 12 percent non-refundable tax credit for charitable contributions that exceed 2 percent of adjusted gross income in the Commission's final report (page 31). With Erskine Bowles being mentioned as a possible candidate for Secretary of the Treeasury if and when current Secretary Tim Geithner steps down, the Commission's recommendations may very well still be in play despite the lack of initial enthusiam for them from either the Obama Administration or Congress.
Other Revenue-Saving Modifications: As the agenda for the recent NYU National Center on Philanthropy and the Law Conference illustrates, there are numerous, less dramatic ways that the charitable contribution deduction could be modified, many of which could result in significant revenue savings for the federal government. The most recent Joint Committee on Taxation tax expenditures report states that cost of the deduction over the 2011 thru 2015 fiscal years is $242.6 billion (see pages 40 and 42), so even a relatively small change could potentially generate a not insubstantial amount of additional federal income tax. For additional resources regarding possible changes, see the Urban Institute's Tax Policy and Charities website, and especially the report titled Evaluating the Charitable Deduction and Proposed Reforms by Roger Colinvaux, Brian Galle, and C. Eugene Steuerle.
Tuesday, November 6, 2012
With today's election, the perennial issue of church political involvement has once again gained prominence. What is new is the since-repudiated statement of an IRS official confirming what many have long suspected - that the still pending regulations on who exactly within the IRS can sign off on a church tax inquiry have left such inquiries in limbo. As reported by the AP and republished at the Huffington Post, and also previously reported by Christianity Today, a manager in the IRS Mid-Atlantic region said such inquiries had been suspended pending these regulations, but an IRS spokesman quickly said the manager "misspoke", although the spokesman refused to provide any more details about the status of such inquiries. Both an academic and a practitioner quoted in the AP story said they were not aware of any church tax inquiries over the past three years. This is apparently the case even with the increasingly popularity of Pulpit Freedom Sunday, as the press has noticed (see, for example, coverage by NBC News and The Nonprofit Quarterly).
There is also an interesting lack of activity on the side of those seeking to challenging the limits on church political activity, not with respect to such activity itself but instead with respect to forcing the IRS into court. While a church that allegedly violates the prohibition on political campaign intervention cannot force the IRS to launch a church tax inquiry, such a church that has not yet applied for tax-exempt status could file such an application, fully disclose its actual or planned political activity, and then wait to see what the IRS does. If the IRS grants the application that would give a green light for such activity. If the IRS denies the application or refuses to rule on it for 270 days, the church could file a declaratory judgment action seeking a declaration that it qualifies for exemption, thereby forcing the IRS to litigate the validity of the prohibition assuming the church otherwise qualifies for exemption under Internal Revenue Code section 501(c)(3). It is not clear why the the Alliance Defending Freedom (previously named the Alliance Defense Fund), which has brought us Pulpit Freedom Sunday, or other groups that assert they are seeking to challenging the prohibition have not pursued this route in order to bring this issue to a head.
Tuesday, October 2, 2012
Sandy Deja, a former IRS Exempt Organizations Specialist and author of books and websites on obtaining tax-exempt status, has posted a report, including charts and graphs, on organizations whose tax-exempt status was automatically revoked and then reinstated. The report is available at: http://501cfreebook.com/The_Comeback_Kids.php.
Tuesday, September 25, 2012
Last week Senator Carl Levin (D-MI) released an exchange of correspondence with the IRS in which he called for the IRS to enforce the limitations on political activity by section 501(c)(4) social welfare organizations. In that exchange, the IRS revealed that it currently "has more than 70 ongoing examinations of section 501(c)(4) organizations," although not all of those exams necessarily relate to possible excessive political activity. It also stated that "[t]here are currently more than 1,600 organizations in the determination process seeking recognition as a section 501(c)(4) organization," including some for which their level of political activity is an issue. More Coverage: Bloomberg BNA ("IRS to Look at Political Activity of Section 501(c)(4) Organizations").
The Congressional Research Service has also been busy, releasing reports on "501(c)(4)s and the Gift Tax: Legal Analysis" (Hat tip: Election Law Blog) and "Political Ads: Issue Advocacy or Campaign Activity Under the Tax Code". In the first report CRS states that "it appears the stronger argument is that contributions to 501(c)(4) groups are statutorily subject to the gift tax" but then concludes that in light of a history of IRS non-enforcement and the 2011 IRS decision to close all examinations on this issue, "it appears that, for now at least, the gift tax will not be enforced on donations to 501(c)(4) groups." In the second report CRS reviews the existing guidance on political ads with respect to tax-exempt organizations, concluding (as those who have studied this area have long known) that "the line between issue advocacy and campaign activity can be difficult to discern."
Finally, the political spending by 501(c)(4)s, as well as by 501(c)(5) labor organizations and 501(c)(6) business organizations continues apace. According to the Center for Responsive Politics, based on only on express advocacy and electioneering communications such groups have already reported spending spent close to $100 million with six weeks still to go until the election. These figures do not include spending that does not fall within these election-law based categories but still could be viewed for federal tax purposes as political activity. While spending by candidates and superPACs dwarf this amount, it remains to be seen whether 501(c) political spending could be the difference in close races this fall.
Monday, September 24, 2012
The Treasury Department recently issued proposed regulations that expand who is able to make a determination that a foreign organization is the equivalent of a charitable organization (other than a private nonoperating foundation) under U.S. federal tax law. These "equivalency determinations" are important for private foundations seeking to make grants to such organizations because they permit foundations both to avoid the need to exercise expenditure responsibility over these grants (under Code section 4945) and to count such grants toward their minimum required distribution (under Code section 4942). Current regulations require that foundations rely on either an affidavit of the foreign organization or an opinion of counsel (for the foundation or for the grantee). The proposed regulations would expand who can provide such an opinion to any "qualified tax practitioner," which includes not only attorneys but also certified public accountants and enrolled agents, as defined in Treasury Department Circular No. 230. The expansion would not reach foreign counsel, however, unless they are otherwise a qualified tax practitioner. Treasury also stated it is considering whether to place a time limit on how long a foundation may rely on such an opinion, whether the ability to rely on affidavits should be modified, restricted, or eliminated, and whether any further modifications to Revenue Procedure 92-94 are need to take into account changes to the public support test (for avoiding private foundation classification). Until the final regulations are issued, they may be relied upon as of the scheduled date for publication in the Federal Register (today).
While private foundations likely will appreciate the expanded and likely usually lower-cost options for obtaining equivalency determinations, which is one of the reasons Treasury gave for the change, the proposed regulations do not address another frequently raised issue in this area. That issue is the creation of repositories for equivalency determinations so that all private foundations, and indeed all charities, could access and rely on them rather than each grantmaking organization having to obtain its own determination. Most prominently, the Advisory Committee on Tax Exempt and Government Entities ("ACT") recommended that the IRS facilitate the formation of such repositors in its 2009 report. The proposed regulations do not acknowledge this proposal, however, suggesting that at least for the time being it is not an option that Treasury and the IRS are interested in formally facilitating
Friday, September 21, 2012
Congress has folded its tent until after the election and, by most peoples' lights, has accomplished extraordinarily little, leaving untouched a profusion of urgent matters. One unresolved issue is the looming "fiscal cliff": massive automatic budget cuts that will take place if Congress and the president cannot agree on an alternative plan for reducing the budget deficit. Last week, the White House issued a report on how it will execute the massive cuts if no agreement is reached. According to a recent analysis published in The Nonprofit Quarterly, the picture is grim for the nonprofit sector. There will be crippling cuts in support for programs that 1) provide housing for the elderly and disabled, 2) focus on juvenile justice, 3) combat violence against women, 4) spur community economic development. And so on.
Tuesday, September 11, 2012
On Sunday, September 2, the Church of St. Catherine of Siena, in NYC, published and circulated to parishioners a church bulletin containing a column by the Rev. John Farren, a member of the congregation’s pastoral staff. The column, which is ostensibly about religious freedom, reproduced in full a letter from several former U.S. ambassadors to the Vatican criticizing the Obama administration and concluding, “We urge our fellow Catholics, and indeed all people of good will, to join with us in this full-hearted effort to elect Governor Mitt Romney as the next President of the United States.” (Note that this is a quote from the ambassadors' letter, reproduced in full in Fr. Farren's column, not a quote from Fr. Farren himself). The reproduced letter, in fact, mentions Romney specifically a half-dozen times, and in each paragraph other than the very first.
Father Farren perhaps thought he had protected himself from violating the political campaign prohibition rules by framing his column as one about religious freedom, and including the following sentence: "I am aware that I and no church authority may endorse candidates for political office, but because that letter focuses on the centrality of religious freedom, I believe it is worth reproducing here." Or perhaps he thought that reproducing someone else's endorsement of Romney in an official church publication was OK as long as the endorsement words didn't come out of his mouth. Either way, he was dead wrong.
Aside from the fact that Father Farren's statement is pretty transparently a ploy to signal his approval of Governor Romney (he could easily have made his arguments regarding religious freedom without reproducing a letter that is essentially a campaign ad for Romney), the statement in the church bulletin quite clearly violates the rules the IRS laid out in Rev. Rul. 2007-41. I cited these rules in my previous post about Bishop Jenky of Peoria, but here they are again. In assessing whether a communication that is ostensibly about an "issue" rather than a political endorsement, the IRS considers the following factors:
- Whether the statement identifies one or more candidates for a given public office;
Whether the statement expresses approval or disapproval for one or more candidates’ positions and/or actions;
Whether the statement is delivered close in time to the election;
Whether the statement makes reference to voting or an election;
Whether the issue addressed in the communication has been raised as an issue distinguishing candidates for a given office;
Whether the communication is part of an ongoing series of communications by the organization on the same issue that are made independent of the timing of any election; and
Whether the timing of the communication and identification of the candidate are related to a non-electoral event such as a scheduled vote on specific legislation by an officeholder who also happens to be a candidate for public office.
My analysis is that Fr. Farren's column in the church bulletin managed to violate all seven of these criteria; a perfect (negative) score. To analogize to speeding, this isn't going 75 mph in a 65 zone; this is going 120. The fact that the rules were (mostly) broken in the context of reproducing a letter from outsiders is irrelevant; this is similar to a web link that would take you to a web page with the original endorsement. The Revenue Ruling is quite clear that one is responsible for the content behind such links in this context - in other words, you can't escape the rules by re-publishing someone else's endorsement. Link to it, or re-publish it approvingly, and it becomes your own.
As I indicated in my prior post about Bishop Jenky, it's high time the IRS made a stand on the political activity rules. Either enforce your ruling, or withdraw it and give up.
Thursday, August 30, 2012
As we previously reported here, the IRS issued proposed regulations on program-related investments (PRIs) under Code Section 4944. These proposed regulations took the form of nine additional examples to be added to the existing PRI regulations that cover a variety of fact patterns, including equity investing, international activities, and credit enhancement.
On August 8, 2012, the ABA Section of Taxation submitted comments to the IRS regarding the proposed regulations. I know that many members of the Exempt Organizations Group of the Tax Section (specifically including David Chertoff, formerly of the MacArthur Foundation and Rob Wexler from Adler & Colvin in San Fransico) had worked tirelessly with the IRS for years to obtain an update from the IRS on the PRI regulations. The comments themselves are summarized as follows:
The Tax Section requested that the preamble to the Proposed Regulations, which summarizes the types of transactions that the new PRI examples cover, be included in the Regulations themselves.
The comments further request that the IRS issue additional examples in certain subtantive areas, such as mixed-income housing and nonprofit newspapers. In its prior submissions to the IRS, the Tax Section proposed such examples. I understand that one of the objections that the IRS raised was that it wanted the examples to describe activities that were clearly already charitable under existing law. Examples in some of these new areas might have raised issues under Section 501(c)(3)/Section 170, and not just under Section 4944.
Finally, the Tax Section raised specific comments on some of the examples (example 11, regarding the for-profit subsidiary that developed vaccines; example 15, regarding international disaster relief, and example 16, regarding LLC investments.)
Congratulations to everyone at the ABA Tax Section - Exempt Orgs group for their success so far in getting *actual* proposed regulations on the books! We look forward to seeing how those final regs turn out.
Monday, August 27, 2012
For a while now, many of us have thought that a donor should get a charitable deduction for a gift made directly to a single member LLC (SMLLC) that is wholly owned by an organization eligible to receive deductible contributions. After all, the tax law treats the SMLLC as a disregarded entity and attributes its tax attributes up to the single member. Why shouldn't the contribution be deemed made to the parent?
While this is the logical result, the IRS has heretofore been hesistant to confirm it in writing. This has been a source of some consternation for charities, especially those faced with the prospect of high value commercial real estate gifts. Those charities certainly would love to take those gifts directly into a SMLLC and stay out of the chain of title, but donors are understandibly hesitant when their tax advisors say, "Well, you ought to get a deduction... but we can't be sure."
Happily, we now have IRS Notice 2012-52 (July 31, 2012), which states that a gift to a domestic SMLLC will be treated as "a charitable contribution to a branch or division of the U.S. charity." In an extra present, the IRS indicates that the Notice is effective for "charitable contributions made on or after July 31, 2012. However, taxpayers may rely on this notice prior to its effective date for taxable years for which the period of limitation on refund or credit under § 6511 has not expired."
One note of interest in the Notice is the discussion of substantiation. The charity/member is treated as the donee organization for purposes of the substantiation rules under Section 170(f), including the written acknowledgement rules. This means that the charity/member is supposed to send the "you've received no goods or services" letter to the donor. The IRS goes on to state: "[t]o avoid unnecessary inquiries by the Service, the charity is encouraged to disclose, in the acknowledgment or another statement, that the SMLLC is wholly owned by the U.S. charity and treated by the U.S. charity as a disregarded entity." This got me to thinking - part of the reason for using the SMLLC in the first place is to get the charity itself out of the chain of title for liability protection purposes. Would the IRS accept the following acknowledgement on the letterhead of the SMLLC?
Thank you for your donation of expensive commercial real estate that formerly held a dry cleaner and a gas station. You've received no goods and services in return for your donation. Please note that for federal income tax purposes, your donation is treated as having been made directly to Charity. LLC is a a single member limited liability company that is wholly owned by Charity and is treated as a disregarded entity for federal tax purposes. Consult your tax advisor for further details.
Charity, in its capacity as the sole member of LLC
From the language of the Notice, I'm not sure that would acceptable - would it need to be on the Charity's letterhead? Signed by Charity in its individual capacity? I'd be curious to know how others would handle this.
Thursday, August 9, 2012
Earlier this year, the IRS issued denial letter 201224036 rejecting an application filed by a medical marijuana dispensary for exemption under section 501(c)(3). The interesting but ultimately not surprising aspect of the denial letter is that the IRS flatly held federal not state law controlled in determining the legality of the organization's activities for purposes of section 501(c)(3): "The fact that State legalized distribution of cannabis to a limited extent is not determinative because under federal law, distribution of cannabis is illegal." The IRS therefore concluded the organization furthered a substantial nonexempt purpose (the IRS also found prohibited private benefit because the group was organized as a cooperative with only members having access to the medical marijuana). This IRS position, combined with the fact that the IRS and, more recently, the Tax Court deny business expense deductions for taxable medical marijuana organizations under Internal Revenue Code section 280E, may spell the tax death of medical marijuana dispensaries.
According to a document posted by the Medical Cannabis Resource Center in Oregon, it is the subject of this denial letter. The letter suggests the group may try to limit its activities in ways that push right up against the legality envelope but do not cross into (IRS) forbidden territory.
Tuesday, August 7, 2012
Led by Senator Orrin Hatch (R-Utah), ten GOP senators sent a letter to the IRS yesterday urging it not to revisit its regulations governing section 501(c)(4) organizations in response to outside political pressure without careful (and time-consuming) deliberation. More specifically, they stated "public confidence in the non-partisan integrity of the agency demands that you issue no sub-regulatory guidance nor engage in any similar efforts that would effectuate immediate changes without a lengthy period of review, separated in time from the current heated political environment." The Senators were writing in response to a letter the IRS sent last month to two groups supporting campaign finance reform stating:
I am responding to your letter dated March 22, 2012, which supplemented you [sic] letter dated July 27, 2011, urging the IRS to institute a rulemaking proceeding to address the rules related to political activity by organizations exempt under section 501(c)(4) of the Internal Revenue Code.
The IRS is aware of the current public interest in this issue. These regulations have been in place since 1959. We will consider proposed changes in this area as we work with the IRS Office of Chief Counsel and the Treasury Department's Office of Tax Policy to identify tax issues that should be addressed through regulations and other published guidance.
This letter underlines the political tightrope that the IRS is walking in this area, especially with countervailing pressure coming from the Democratic side of the congressional aisle. Whether the Service can successfully walk this tightrope - and where it leads - remains to be seen.