IRS Update: Executive Compensation Tax Proposed Regs, Donor Disclosure Final Regs, Silos & NOLs FAQs, and Group Exemptions

A combination of end-of-term responsibilities and coronavirus fatigue have led to slow blogging recently, so here is the first in a series of updates to catch us up.

First is the Internal Revenue Service, which over the past month or so has been relatively productive even given remote working and COVID-19 related responsibilities:

• IRC 4960 (Tax on Excess Tax-Exempt Organization Executive Compensation) Proposed Regulations: Earlier this month the Service issued much-anticipated proposed regulations relating to this new tax. enacted by Congress in 2017. For the most part the regulations are consistent with earlier Notice 2019-19 that provided interim guidance for this section. This includes with respect to the tax not reaching many government-related entities, including most notably public universities and colleges, as Ellen Aprill has detailed. The most significant aspect of the proposed regulations is that they create a couple of exceptions to help related taxable organizations avoid being subject to the tax if their employees provide limited services to a covered tax-exempt organization but without any compensation being paid, directly or indirectly, by the tax-exempt organization. For more coverage, see The National Law Review  and the numerous accounting and law firm summaries that can be found through a Google search.

• IRC 6033 Donor Disclosure Final Regulations: To probably no one's surprise, late last month the IRS issued final regulations relating to disclosure to the IRS of donor identifying information on Schedule B to the Form 990 & 990-EZ with no substantive changes from the proposed regulations. While the regulations address a variety of disclosure issues, the most (only) controversial issue was the elimination of the requirement that tax-exempt organizations other than 501(c)(3) and 527 entities report the names and addresses of their substantial donors to the IRS. For more coverage, see The Hill, The National Law Review, and The NonProfit Times.

• IRC 512(a)(6) Silos and Net Operating Losses FAQs: The CARES Act provision that temporarily allows the carrying back of net operating losses (NOLs) to earlier tax years raised a question for tax-exempt organizations with NOLs from their unrelated business activities - how does this provision interact with the siloing requirement of Section 512(a)(6), which going forward limits the use of NOLs generated in one unrelated business silo to future taxable income generated in that silo? The IRS has now answered the question in a series of FAQs: carried back NOLs can be applied against aggregate unrelated business taxable income (UBTI) in taxable years beginning before January 1, 2018, but for later years can only be applied against UBTI from the same silo that generated the NOL.

• Group Exemptions Proposed Revenue Procedure: In Notice 2020-36, the IRS provided a proposed revenue procedure that would modify and supersede Revenue Procedure 80-27 (as modified by Revenue Procedure 96-40 with respect to where group annual reports should be filed). The new revenue procedure is intended to be a comprehensive resource for the more than 440,000 organizations currently subject to the more than 4,000 outstanding group exemption letters, as well as future central and subordinate organizations. It reflects recent statutory changes, specifically the automatic revocation requirement for failure to file required annual returns and the section 501(c)(4) organization notice requirement. It also adds a number of new requirements, including that a new group exemption letter will be issued only if there are a least five subordinate organizations and will be maintained only if there is at least one subordinate organization, that subordinate organizations must both all be under the same 501(c) paragraph (which can be different from the central organization's classification) and if 501(c)(3)s must all be public charities, not private foundations, and that subordinate organizations must have both the same or similar purposes and a uniform governing instrument. Some of these requirements will not apply to existing subordinate organizations, but will apply to any future ones (including under existing group exemption letters). Comments are due by August 16, 2020.

Lloyd Mayer