Nonprofit Law Prof Blog

I.R. 2020-23: New Tax Law Effect on Tax-Exempt Orgs

IR-2020-23, January 28, 2020

WASHINGTON – The Internal Revenue Service wants tax-exempt organizations to know about recent tax law changes that might affect them. The Taxpayer Certainty and Disaster Tax Relief Act, passed on December 20, 2019, includes several provisions that may apply to tax-exempt organizations' current and previous tax years.

Repeal of "parking lot tax" on exempt employers

This legislation retroactively repealed the increase in unrelated business taxable income by amounts paid or incurred for certain fringe benefits for which a deduction is not allowed, most notably qualified transportation fringes such as employer-provided parking. Previously, Congress had enacted this provision as part of the Tax Cuts and Jobs Act, effective for amounts paid or incurred after December 31, 2017.

Tax-exempt organizations that paid unrelated business income tax on expenses for qualified transportation fringe benefits, including employee parking, may claim a refund. To do so, they should file an amended Form 990-T within the time allowed for refunds. More information on this process can be found at IRS.gov.

Tax simplification for private foundations

The legislation reduced the 2% excise tax on net investment income of private foundations to 1.39%. At the same time, the legislation repealed the 1% special rate that applied if the private foundation met certain distribution requirements.

The changes are effective for taxable years beginning after December 20, 2019.

Exclusion of certain government grants by exempt utility co-ops

Generally, a section 501(c)(12) organization must receive 85% or more of its income from members to maintain exemption.

Under changes enacted as part of the Tax Cuts and Jobs Act, government grants are usually considered income and would otherwise be treated as non-member income for telephone and electric cooperatives. Under prior law, government grants were generally not treated as income, but as contributions to capital.

The 2019 legislation provided that certain government grants made to tax-exempt 501(c)(12) telephone or electric cooperatives for purposes of disaster relief, or for utility facilities or services, are not considered when applying the 85%-member income test. Since these government grants are excluded from the income test, exempt telephone or electric co-ops may accept these grants without the grant impacting their tax-exemption.

This legislation is retroactive to taxable years beginning after 2017.

 

Nicholas Mirkay

CRS: The Charitable Deduction for Individuals

The Congressional Research Service recently published The Charitable Deduction for Individuals:  A Brief Legislative History.  Here is a short summary of the publication:

This report provides a brief history of the major legislative changes to the charitable deduction that have occurred over the past 100 years, focusing on changes to the amount that taxpayers could deduct. Over the past 100 years, Congress has generally increased the amount that eligible taxpayers can deduct for their charitable donations. These changes are summarized in the below table.

As Congress has expanded the amount that can be deducted by those who claim the deduction, policymakers have debated the deduction’s effectiveness at increasing charitable giving and the broader role of government subsidies for the philanthropic sector—a discussion that continues to this day

 

Nicholas Mirkay

Aprill: The Private Foundation Excise Tax on Self-Dealing

Ellen Aprill (Loyola-LA) posted The Private Foundation Excise Tax on Self-Dealing:  Contours, Comparisons, and Character (forthcoming, Pittsburgh Tax Review) to SSRN.  Here is the abstract:

This paper considers section 4941, the private foundation excise tax on self-dealing, on the occasion of its fiftieth anniversary. Part I gives background on section 4941. Part II compares the rules of section 4941 to the parallel ones applicable to public charities, including the special rules for supporting organizations and donor advised funds. The fiftieth anniversary of the private foundation excises taxes is also an appropriate time to confront two foundational questions, and Part III does so. It first asks whether we can view the private foundation taxes in general and section 4941 in particular as constitutional exercises of Congress’s taxing power under the tests announced in National Federation of Independent Businesses v. Sibelius. Second, it considers whether we should characterize the section 4941 excise tax as a Pigouvian tax – a hot category among economists but less familiar to lawyers. It answers “maybe not” to the first and “yes but” to the second.

Inconsistent Congressional treatment of self-dealing by section 501(c)(3) organizations and the low level of enforcement lead me to question the effectiveness of our current self-dealing rules. Thus, this examination concludes by suggesting a number of possible changes to the excise taxes applicable to tax-exempt organizations. The conclusion not only considers in detail a relatively small but potentially significant change – expanding abatement rules for first-tier excise taxes to section 4941, but also endorses a large one – the suggestion that approaches outside of the Internal Revenue Service be considered for regulating the charitable sector.

Nicholas Mirkay

Hawaii AG Issues Controversial Subpoena for Nonprofit's Bank Records

As reported in the Honolulu Civil Beat, in late November 2019, the Hawaii Attorney General issued a subpoena seeking a nonprofit organization’s bank records for nearly three years (2017 through most of 2019), including monthly statements, deposit tickets and ATM surveillance photos.  What might seem like a routine exercise of AG oversight over a charitable organization within its jurisdiction, the history between the AG and the nonprofit, KAHEA: The Hawaiian Environmental Alliance, presents a different optic.  KAHEA has been at the center of the fight against the Thirty Meter Telescope on Mauna Kea on Hawaii's Big Island, including adversarial court proceedings between the two parties.  Shrugging off any claims that its subpoena action constitutes "retaliation and harassment," the AG argues that it is fulfilling its responsibility of regulating charitable organizations and presents two primary justifications for its investigation: (1) the use of tax-deductible donations for activities of civil disobedience are not permitted under the tax laws (specifically, federal tax law); and (2) KAHEA’s purported non-filing of the Attorney General’s annual disclosure form (Federal Form 990) for several years. 

In response to KAHEA's motion to quash the subpoena, the AG asserts that donations to KAHEA have supported "non-violent direct actions"--namely, the "five-month-long illegal blockade of Mauna Kea Access road in protest of the construction of the thirty-meter telescope.”  In support of its argument that nonprofits are not permitted to engage in civil disobedience activity, the AG cited an IRS ruling [Rev. Rul. 75-384] that denied federal tax-exempt status to a charitable organization that sponsored protests to promote world peace with illegal actions including blocking vehicle traffic and disrupting government work and the movement of supplies.

The Hawaii Alliance of Nonprofit Organizations recently weighed in on the controversy in support of KAHEA:

Neither of [the AG's] reasons justifies this kind of overreach. 

Contrary to the AG's assertions, there is no prohibition on a charitable organizations' participation in nonviolent protest, including acts of civil disobedience. 

Although the IRS has occasionally denied tax exemption for organizations whose sole or primary activities have been to violate the law, the IRS has never revoked an organization's tax-exempt status merely because it (or its members) occasionally took part in acts of civil disobedience or constitutionally protected Free Expression.  KAHEA also engages in a variety of legitimate activities that qualify it as a 501(c)(3) organization.

The suggestion that these activities are not permitted is therefore dangerous and misleading, not only to nonprofits, but also to the social change they seek. 

Moreover, it is not the role of the AG to enforce IRS requirements; that is a federal responsibility.

In today's hearing on the subpoena, according to the Honolulu Star Advertiser, a Hawaii Circuit Court judge stated that he was "inclined to allow . . . the subpoena" but articulated concerns regarding the subpoena's scope; specifically, the AG's request for surveillance photos taken from ATM machines.  Postponing a ruling on the motion to quash the subpoena, the judge gave the AG and KAHEA until Feburary 7, 2020, to reach an agreement about the extent to which KAHEA's financial information should be disclosed.

According to the Civil Beat article, the KAHEA subpoena isn’t the first AG subpeona related to the Mauna Kea protests.  In September 2019, the AG issued a subpoena to the Office of Hawaiian Affairs for information related to that public agency's financial support of the Mauna Kea protest movement.

[For more information on the Mauna Kea protests, see here].

 

Nicholas Mirkay

TIGTA Claims Many Orgs not notifying IRS of 501(c)(4) status

The Treasury Inspector for Tax Administration issued a report on January 6, 2020 raising concerns that organizations are not properly filing notice with the IRS of their plans to operate as a section 501(c)(4) social welfare organization. TIGTA said as many as 9,774 organizations should have filed this notice but did not. The IRS disputes the problem is as significant as alleged by TIGTA, and generally did not believe it ought to pursue TIGTA's remedy of the IRS working with states to find out organizations that needed to file.

Congress promulgated new law in 2015 under section 506 of the Internal Revenue Code that requires a section 501(c)(4) organization to notify the IRS within 60 days after it has been established. Organizations must file a Form 8726 to give this notice.

A number of outlets have discussed this report so I don't want to spend much time on this. But it's hard to read these reports without thinking about TIGTA reports past. TIGTA tells IRS where it is failing. IRS admits to some, but disagrees with much, including some complex solutions that it could not possibly carry out. This is because the underlying failure has to do with a vastly underfunded IRS. The IRS must make terrible choices about where to utilize its resources. The budget simply does not allow it to operate at anywhere near an ideal level. TIGTA is an important organization, but it has blinders put on it that make it impossible for it to identify the true culprit - a Congress that will not provide the IRS the funds it needs to fairly enforce the tax laws.

Philip Hackney

 

Nonprofit "church" Parking Tax Ended by Congress: IRS Guidance on Refunds?

In a tax package agreed to on December 17, 2019, last year, Congress repealed a provision of the code widely known as the church parking tax. I wrote about it on Surly Sub Group when it was enacted in 2017 concerned about its massive probably unintended effect on nonprofits. It caused massive havoc in that world, and nonprofits, led by churches mounted a massive effort to get the provision repealed. It took two years, but they were successful. 

In P. L. 116-94 (found in section 302 at the bottom of that Act) Congress repealed the offending provision section 512(a)(7) retroactively.

Thus, even though the IRS spent significant time providing guidance on how to comply, and presumably large nonprofits around the country adjusted their parking situation dramatically, nonprofits and the IRS must now act as if none of that ever happened. Many nonprofits like universities and hospitals likely paid large 21% rate taxes on parking fringe benefits that they continued to provide to their employees.

What now? IRS needs to figure out how to expeditiously issue refunds.

Congress members just issued a letter to the IRS asking it to issue guidance as quickly as possible to let nonprofits know how to obtain these refunds. 

Philip Hackney

 

Bill Gates, Philanthropist, Calls for Higher Taxes

Right before New Years day, Bill Gates issued some perhaps surprising end of the year reflections. Instead of focusing on the achievements he made with the Bill & Melinda Gates Foundation, he called for a need to raise taxes to manage increasing inequality. 

His answer to the following question I think is important even for those, such as Gates, who clearly support charitable organizations as one solution to the world's ills. When considering why he does not just give more in taxes himself, he states: "The answer is that simply leaving it up to people to give more than the government asks for is not a scalable solution." In other words, he takes the position that voluntary organizations are not a solution to societal ills.

He still sees a role for philanthropy as a place for risk taking. He states: "managing high-risk projects that governments can’t take on and corporations won’t—for example, trying out new approaches to eradicating malaria, which is something our foundation is working on. If a government tries an idea for improving global health that fails, someone wasn’t doing their job." 

Philip Hackney

 

AALS2020 in DC Nonprofit & Philanthropy Law Section Panel

The Section on Nonprofit and Philanthropy Law of the AALS hosted a panel at #AALS2020 on Sunday January 5 entitled Charitable Giving and the 1969 Act: 50 Years Later. Roger Colinvaux of the Catholic University of America, Columbus School of Law moderated the session. Professor Colinvaux provided an excellent synopsis of the Act and the historical milieu in which it took place. He also did a nice job of presenting the stakes involved then and now.

Dana Brakman Reiser of Brooklyn Law School presented her article in progress Charity Regulation in the Age of Impact. It considers the ways in which the 1969 Tax Reform Act hinders types of investing that Professor Brakman believes are natural fits for private foundations. She explores novel ways of modifying the Act in order to allow private foundations to make more mission related investments (MRIs) and program related investments (PRIs).

Khrista McCarden of Tulane University Law School presented her article in progress on Private Operating Foundation Reform & J. Paul Getty. She argues that private operating foundations that operate as art museums are too often providing little in the way of public benefits because they tend to systematically exclude lower income and minority populations. She also believes these private operating foundations are particularly subject to self-dealing abuses that neither the IRS nor states attorney general respond to in an appropriate way.  

Finally, Ray D. Madoff, of Boston College Law School, presented her article in progress The Five Percent Fig Leaf examines some of what she perceives as the failure of the private foundation regime to ensure an appropriate payout amount of five percent from private foundations. She argues the allowance of three types of expenditures to count towards payout is too lenient: administrative expenses (that allow donor children to be paid well into the future for often little work), payments to donor advised funds, and PRIs. 

There was active questioning and participation from the audience. These issues clearly resonate at a high level of society. These papers will be published in the Pittsburgh Tax Review in Spring 2020 along with two other papers by Ellen P. Aprill and James J. Fishman  The five papers were presented at the University of Pittsburgh on November 1, 2020 as part of a symposium.

Next years AALS will be in San Francisco. I will be the chair this coming year and would be interested in any thoughts on panel ideas for next years session. The theme of the general conference is the Power of Words. Also very interested in highlighting new professors in the field. Would love to put together a new voices panel in addition to a regular panel. 

Philip Hackney