Long List of Needed IRS Guidance: DAFs, Tax Reform, Church Tax Inquiries, and More

There is a lot of urgently needed guidance relating to tax-exempt organizations. Fortunately there are plenty of opportunities for organizations and their representatives to tell the IRS and Treasury what is needed, including by submitting recommendations for the 2018-2019 Priority Guidance Plan as requested in Notice 2018-43. Here is an overview of the most pressing issues:

Donor-Advised Funds

Late last year the IRS released Notice 2017-73, requesting comments on issues relating to the issuance of regulations under Code section 4967. Those comments are now flowing in, including from the ABA Section of Taxation, the Council on Foundations, Fidelity Charitable, and the New York Bar Association Tax Section. Issues that were of particular interest to the IRS are the treatment of  recommended distributions from a DAF to support a charitable event or fundraiser, or to pay membership fees, especially when benefits received in return by a donor advisor are more than incidental, the treatment of recommended distributions that satisfy a pledge by the donor advisor, and also how distributions from a DAF interact with the public support tests for a recipient public charity.

Tax Reform

Many others are exploring in detail the uncertain application of tax reform provisions relating to tax-exempt organizations. See, for example, the Exempt Organizations Committee schedule for the ABA Section of Taxation May Meeting, and the numerous summaries of relevant provisions prepared by both accounting firms (e.g., KPMG) and law firms (e.g., Ropes & Gray). That said, the most pressing issues appear to relate to the "basketing" of unrelated trades or businesses such that the losses from one such trade or business cannot offset the income of another such trade or business (Code section 512(a)(6)), the UBIT exposure of certain fringe benefits (Code section 512(a)(7)), the new excise tax on $1 million+ compensation paid by tax-exempt organizations (Code section 4960), and the new excise tax on the net investment income of private colleges and universities with relatively large endowments (Code section 4968). 

Not that the lack of guidance has prevented speculation about possible issues and workarounds. For example, one workaround for the new UBIT basketing rule might be to place all unrelated trades or businesses in a single taxable subsidiary (perhaps further divided into single-member limited liability companies owned by the subsidiary for liability siloing purposes). And there has already been speculation regarding whether the excise tax on compensation applies to compensation paid by public colleges and universities as well.

Church Tax Audits

The still pending nature of proposed regulations (issued 8/5/09) regarding what specific official within the IRS has the authority to begin a church tax inquiry under Code section 7611 has now arisen with a vengeance. In United States v. Bible Study Time, Inc., a federal district court recently concluded that such an inquiry (and therefore the subsequent church tax examination) had not been properly initiated because it was not approved by a sufficiently highly ranked IRS official. The decision also throws into doubt whether the proposed regulations are correct in giving this authority to the Director, Exempt Organizations, as the court found that position is not of sufficient rank under the relevant provision of section 7611.

And There's More

The February 2018 Update to the 2017-2018 Priority Guidance Plan included not only many of the above issues but also the following:

• Charitable contributions of inventory (Code section 170(e)(3)) as part of reducing regulatory burdens.

• Final regulations under Code section 170 relating to substantiation and reporting requirements for charitable contributions (proposed regulations issued 8/7/08).

• Updating revenue procedures on grantor and contributor reliance under Code sections 170 and 509, including updating Revenue Procedure 2011-33 (relating to EO Select Check).

• Final regulations on Code section 509(a)(3) supporting organizations (proposed regs issued 2/19/16).

• Final regulations under Code section 512 relating to computations for Code section 501(c)(9) voluntary employees' beneficiary associations (proposed regs issued 2/6/14).

• Also under Code section 512, allocation of expenses relating to dual use facilities.
  
  
• Final regulations on the fractions rule under Code section 514(c)(9)(E).

• Investments by private foundations in partnerships in which disqualified persons are also partners under Code section 4941 (relating to self-dealing).

• Updating Revenue Procedure 92-94, relating to grants by private foundations to foreign grantees under Code sections 4942 and 4945.

• Final regulations relating to disclosure of information to state officials under Code section 6104(c) (proposed regulations issued 3/15/11).

• Unspecified guidance relating to church plans.

And I am ignoring planned or needed guidance on issues that have a more indirect effect on tax-exempt organizations, such as guidance relating to tax-exempt bonds. Things should be busy at Treasury - even with the new IRS Commissioner (Charles Rettig) and new IRS Chief Counsel (Michael Desmond) nominees still awaiting Senate confirmation.

Lloyd Mayer