Nonprofit Law Prof Blog

IRS Issues 2018 Work Plan for Tax Exempt Organizations

    In this article, Laura Kalick, discusses the IRS’ Fiscal Year 2018 work plan for tax exempt organizations. She begins the article by explaining that the work plan builds upon the IRS’ mission to refine, realign, and improve their education and examination methods. Last year, the IRS implemented data analytics and knowledge management strategies to target organizations with a high likelihood of noncompliance. In 2018, the work plan outlines three incentives: Examine entities that state they are supporting organizations and filed the Form 990-N, examine organizations that have operated as for-profit entities in the past, but now operate at 501(c)(3) organizations, and examine organizations that show signs of providing private benefit to individuals or private entities through contracts with individuals or other arrangements such as partnership agreements. She then discusses key tax gap issues for 2018, such as, unrelated business income and employment tax issues. She closes the article by examining what the best practices for tax exempt organizations would be to prepare for the possibility of an audit. To learn more about the 2018 work plan, click here: https://www.bdo.com/blogs/nonprofit-standard/october-2017/irs-issues-2018-work-plan

 

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Tax Abuse Rampant in Nonprofits, IRS Says

In his article Albert Crenshaw discusses tax abuse in nonprofit organizations. He explains that the IRS is finding problems with every type of nonprofit organization, from charities to pension plans. He also says that the IRS has no precise way to gauge the revenue impact of these problems. He explains that localities and transit systems were collecting fees for allowing corporations to benefit from tax shelters to help finance public works. Another problem that has been identified are nonprofits and charities committing abuse and fraud themselves. This can occur when a charity is established to benefit their primary donor, or when the nonprofit organization acts as a tax shelter. To learn more about nonprofit tax abuse, click here:  http://www.washingtonpost.com/wp-dyn/articles/A26388-2005Apr4.htm

 

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Charities and Political Activity-Steering Clear of Risks in an Election Year

In this article, Joan Renner discusses how charities can engage in political activity while maintaining tax-exempt status. She first explains that board members and CEOs of nonprofits must speak as individuals and not as the nonprofit itself. She explains that board members and CEOs are permitted to support individual candidates, but they must do so individually. She says that if a nonprofit holds an event that includes political candidates they must refrain from fundraising at the event. She then discusses that when advocating for issues that are important to your nonprofit not to mention the upcoming election. She explains that nonprofits are permitted to advocate their positions on certain legislative issues if it’s not a substantial part of their activities. However, if that issue becomes prominent in the election, tying their positions on those issues to the election becomes prohibited political activity. She finishes the article by discussing that making campaign statements on the nonprofit’s website is prohibited. To learn more about to protect nonprofit tax-exempt status while engaging in political activity, click here: https://www.nonprofitaccountingbasics.org/federal-tax-issues/charities-political-activity—steering-clear-risks-election-year

 

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Key Tax Reform Issues for Nonprofit Membership Organizations

In this article, Robert Logan discusses the new Tax Cuts and Jobs Act recently signed by President Trump. He begins by explaining that the new act contains features that adversely affect many nonprofit organizations. He first discusses how the act now requires separate computation of unrelated business income for multiple businesses. The act eliminates the ability of nonprofits to offset income from one unrelated business with the losses from another. He then discusses the new tax on nonprofits that compensate their executives excessively. The act imposes a 21% excise tax on the sum of annual remuneration above $1 million, plus certain separation payments that exceed three times an average base salary measure. Finally, he discusses how nonprofits must now include fringe benefits from unrelated business income. To learn more about the adverse effects of the new Tax Cuts and Jobs Act, click here:  https://www.pillsburylaw.com/en/news-and-insights/key-tax-reform-issues-for-nonprofit-membership-organizations-associations.html

 

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The Rise of 501(c)(4) Organizations: A prediction for Nonprofits in 2018

Gene Takagi writes this article about his belief that 2018 will see an increase in the number of 501(c)(4) organizations being formed and receiving contributions. He argues that with the increased standard deduction more people will take that instead of itemizing their deductions. This means that 501(c)(3) charity organizations will see a drop in the amount of contributions they receive because people cannot deduct their contributions. He argues that because of this more people will decide to donate to 501(c)(4) organizations since neither type of nonprofits are deductible. His second argument is that people will want to donate to an organization that can engage in unlimited lobbying to further their social agenda. To learn about the rise of 501(c)(4) organizations, click here: https://www.linkedin.com/pulse/prediction-nonprofits-2018-gene-takagi/?trackingId=G5dMq4bRbaBltSbr371lig%3D%3D

 

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Common Nonprofit Deals with Complex Tax Consequences

    In this article, Laura Kalick explores the tax consequences surrounding common business transactions, such as a merger or acquisition. She first discusses the tax consequences of merging two nonprofits. When merging two nonprofits, the two organizations will combine via state law, ending with one entity surviving and the other no longer existing. If either of the nonprofits had any outstanding tax liability before the merger, those liabilities do not disappear and could be transferred to the new organization. Also, both nonprofits must report the merger on their Form 990. The nonprofit that dissolves must file their Form 990 five months and 15 days after it has been terminated. To learn more about what happens in joint ventures of nonprofits, conversion between nonprofit and for profit organizations, click here: https://www.bdo.com/blogs/nonprofit-standard/september-2015/five-common-nonprofit-deals-with-complex-tax-conse

 

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The Key to Maintaining Public Charity Status

    In this article, Michael Sorrells explains how 501(c)(3)s maintain their public charity status. Many charities must undergo an annual public support test to maintain their public charity and tax exempt status. The test is completed annually on Schedule A. Organizations like churches, schools, hospitals, etc. must only complete part I of the test, which identifies the type of organization because they are exempt from parts II and III. Other 501(c)(3) organizations must complete one of two support schedules, either part II or part III depending on what type of organization the charity is. Part II organizations normally receive a substantial part of support from a governmental unit or from the general public. Part III organizations normally receive (1) more than 33.33% of its support from contributions, membership fees, and gross receipts, and (2) no more than 33.33% of its support from gross investment income and unrelated business expenses. Each of these tests looks at the cumulative support for the year reported and the prior four years. For more information of how to maintain public charity status, click here: https://www.nonprofitaccountingbasics.org/federal-tax-issues/schedule-key-maintaining-public-charity-status

 

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The IRS and Their Interest in 501(c)(4) Organizations with Political Agendas

    In this article, Michael Sorrells discusses why the IRS is so interested in 501 (c)(4) organizations with political agendas. He first explains what a 501(c)(4) organization is and how it differs from charitable organizations. 501(c)(4) organizations are defined as civic leagues or organizations not organized for profit, but operated exclusively for the promotion of social welfare. Some differences between 501(c)(4) organizations and 501(c)(3) charities is that donations to 501(c)(4) organizations are not deductible as charitable contributions, 501(c)(4)s can engage in unlimited lobbying, if the lobbying is not the primary purpose of the organization. 501(c)(4)s can engage in political activity so long as it is not the primary purpose of the organization. He then explains the Citizen’s United case and how after it was decided many 501(c)(4) organizations began to sprout up – raising concerns for the IRS. The IRS was concerned about whether “political activity” was the primary purpose of these organizations and whether the organizations were organized to primarily benefit a private party (such as a political candidate). To learn more about why the IRS is concerned about 501(c)(4) organizations with a political agenda, click here:  https://www.nonprofitaccountingbasics.org/federal-tax-issues/501c4-organizations-irs-little-background-controversy

 

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Bruckner on Terminating Tenure in Bankruptcy

Matthew A. Bruckner (Howard University School of Law) recently posted "Terminating Tenure: Rejecting Tenure Contracts in Bankruptcy" to SSRN. Here is the abstract:

Many institutions of higher education are in dire financial straits and will close, merge, or file for bankruptcy in the near future. This Article considers the effect of bankruptcy laws on the ability of higher education institutions to restructure their workforces and, in particular, the impact that a bankruptcy filing may have on tenured professors. It also addresses how some tenured professors may be able to complicate their employer’s reorganization to their own strategic advantage.

In this excellent article, Bruckner considers how the crisis in legal education may affect the obligations of law schools facing bankruptcy to their tenured faculty, as well as how tenured faculty members at those institutions may respond to the threat of restructuring. Currently, colleges and universities are unusually vulnerable to financial crises, because they cannot be reorganized in bankruptcy. A bankrupt school loses accreditation and with it the ability to receive federal loan money, effectively a death sentence. But if Congress amends the Higher Education Act to allow schools to reorganize in bankruptcy, it will inevitably present a range of issues, including the bankruptcy treatment of tenure contracts. Bruckner argues that law schools can probably abrogate tenure contracts in bankruptcy, but observes that the bankruptcy process may enable tenured faculty members to delay or frustrate that abrogation in order to increase their leverage with the institution.

The 2018 Revealed-Preferences Ranking of Law Schools

CJ Ryan (Roger Williams University School of Law) and I recently posted to SSRN a draft article titled The 2018 Revealed-Preferences Ranking of Law Schools. It is an update of our article A Revealed-Preferences Ranking of Law Schools, 69 Alabama Law Review 495 (2017) Here is the abstract:

In 2017, we published A Revealed-Preferences Ranking of Law Schools, which presented the first (intentionally) subjective ranking of law schools. Other law school rankings are objective because their purpose is to tell prospective law students where to matriculate. Our “revealed-preferences” ranking is subjective because its purpose is to ask where prospective law students choose to matriculate. In other words, objective rankings tell students what they should want, but our subjective ranking asks what students actually want.

In this article, we present a law school ranking based exclusively on the combined scores of the students in a school’s 2017 incoming class. We also compare this ranking to our previous ranking, as well as other objective ranking systems, and provide regional rankings of law schools.

Of course, comments and suggestions are most welcome.

Brian L. Frye