Thursday, February 25, 2021
Last week, the Treasury Inspector General issued a report, Obstacles Exist in Detecting Noncompliance of Tax-Exempt Organizations. From the summary:
Information reported on tax-exempt organizations’ returns does not always indicate noncompliance; therefore, the IRS relies heavily on referrals to identify abusive schemes. However, TIGTA found that although referrals may help detect tax schemes, they do not always lead to productive cases. In addition, the chances of examination for tax-exempt organizations is lower when compared to examination rates of businesses and individuals. For Fiscal Year (FY) 2019, the chance of examination for exempt organizations was one in 742, compared to one in 156 for businesses and one in 226 for individual taxpayers. Further, churches and certain other religious organizations are not required to file annual information returns making it difficult to track the activities of these organizations to identify noncompliance. For FY 2019, the chance of examination for churches was about one in 5,000.
Tuesday, February 2, 2021
The Office of the Chief Counsel of the IRS recently issued a memorandum describing when nonprofits seeking charitable tax exempt status under section 501(c)(3) might receive relief from failing to file their application in a timely manner. For counsel meeting this problem, this memo is likely a very useful tool for considering options.
It's a long memo, but the basics are:
1. Under what circumstances, if any, should Exempt Organizations, Determinations (EOD) provide Treas. Reg. § 301.9100-3 relief to IRC section 501(c)(3) applicants?
2. What is the proper process for denying relief requests under § 301.9100-3? (i.e., does taxpayer have section 7428 Declaratory judgment rights?)
- Section 501(c)(3) organizations who are eligible to self-declare, like non-(c)(3) self-declarers, are not eligible for § 301.9100-3 relief because they did not fail to make a required regulatory election. Further, organizations that fail to file the necessary information returns holding themselves out as exempt organizations are not eligible for § 301.9100-3 relief because they would not otherwise be exempt for the period for which they are requesting relief. In addition, the Internal Revenue Service (“Service”) is justified under the applicable standard of review to deny such relief on the grounds that the organizations did not act in reasonable good faith. Finally, organizations that have filed the necessary information returns are not eligible for relief beyond the date of which the statute of limitations on assessment of tax has expired, which is typically three years after the due date of the return.
- Denial of § 301.9100-3 relief by EOD does not separately provide a right to petition the Tax Court under section 7428 because § 301.9100-3 relief is purely a function of administrative grace, is not a justiciable controversy described in section 7428, and is reviewed under a completely separate standard than the de novo standard used in section 7428 actions. However, section 7428 jurisdiction over the denial of exempt status for periods prior to the postmark date of the
application appears to be a matter of first impression."
Saturday, January 9, 2021
And the Atlanta Journal-Constitution reports the latest major development relating to conservation easement deductions. Two accountants have plead guilty to conspiracy to defraud the United States through promoting syndicated land conservation easements. The scheme they promoted allegedly resulted in more than $1.2 billion in fraudulent charitable deductions. It will be interesting to see whether in exchange for sentencing leniency (the charge carries a sentence of up to 5 years in prison) the accountants provide important evidence relating to their clients and other promoters.
Even as the Trump Administration comes to an end, news continues to come out about alleged scandals involving those associated with him and nonprofits they control or have controlled in the past. This may not be surprising given the well known problems with the President's own foundation, but these scandals highlight continuing concerns not only about the ethics of those in his circle but also about oversight of nonprofits more generally.
For example, this week the District Columbia Attorney General filed suit against Public Media Lab (PML) and Manifold Productions, Inc., alleging that PML CEO and Manifold founder Michael Pack used the nonprofit PML to funnel millions of dollars to for-profit Manifold. Park is currently the presidentially appointed head of the U.S. Agency for Global Media, and concerns about how he operated PML arose during Senate consideration of his nomination. And the DC Attorney General continues to investigate the activities of the Trump Inaugural Committee, with the deposition of Ivanka Trump last month. These examples are on top of reports from last fall and summer relating to federal charges against former Trump senior advisor Steve Bannon and others arising out of their control of the 501(c)(4) We Build the Wall, Inc. and a related nonprofit, and a ProPublica report that 501(c)(3) nonprofit Turning Point USA, run by Trump supporter Charlie Kirk, may have engaged in questionable financial arrangements with insiders.
Finally, buried among the President's many recent pardons was the commutation of the sentence for former Texas congressman Steve Stockman. Stockman had been serving since 2018 a 10-year sentence for nearly two-dozen felonies arising out of misuse of charitable contributions from political donors. Some of his former congressional colleagues had called for his release, particularly given his age and health conditions that placed him at heightened risk from the pandemic.
Wednesday, January 6, 2021
The Treasury Inspector General for Tax Administration (TIGTA) has released a report entitled Consolidation of Examination Case Selection and Assignment in the Tax Exempt and Government Entities Division Created Benefits, but Additional Improvements Are Needed (Report Number 2021-10-005). Here are the highlights:
What TIGTA Found
The creation of the CP&C [Compliance Planning and Classification] function centralized how noncompliance issues are identified, developed, approved, classified, and monitored for all five TE/GE [Tax Exempt and Government Entities] Division functions. This reorganization changed how the TE/GE Division identifies examination projects, processes referrals, and tracks examinations results. However, because management did not develop performance metrics to measure progress towards achieving reorganization goals, TE/GE Division leadership cannot determine if the CP&C function improved the effectiveness and efficiency of identifying, planning, classifying, and monitoring examination workload.
Further, TE/GE Division management did not establish reorganization goals and outcomes, have a dedicated implementation team in place for the duration of the reorganization, involve all key stakeholders, effectively communicate with affected employees, or provide adequate project management oversight to ensure timely implementation of all necessary actions. This resulted in employee confusion and compromised the initial success of the reorganization. Finally, TIGTA’s analysis showed that the CP&C function has had mixed results reducing the number of unnecessary contacts with compliant taxpayers and identifying more productive examinations. Specifically, between Fiscal Years 2016 and 2019, the number of examinations closed without any changes favorably decreased for two of the five TE/GE functions, but increased by 36, 40, and 31 percent for the other three functions. Further, the overall number of cases closed without full examination (surveyed) favorably decreased by 5 percent, but increased by 468 percent for the Indian Tribal Government function.
The reorganization helped create additional benefits, such as reducing the potential for bias in case selection. In addition, the CP&C function implemented processing changes that decreased processing time for Exempt Organization function referrals by 37 percent, and began implementing a tracking system for all assigned inventory in September 2020.
What TIGTA Recommended
TIGTA made six recommendations, including the Director, CP&C, should develop performance metrics and explore process improvements for validating identified cases to ensure that they include the identified issues prior to assignment. In addition, the Commissioner, TE/GE Division, should determine the feasibility of reassigning resources from compliance functions to improve the efficiency of identifying, classifying, and monitoring productive examination workloads. Management agreed or partially agreed with five of the recommendations, but disagreed to explore process improvements to ensure that selected cases include identified issues prior to issuance. TIGTA believes this action could help reduce the number of assigned cases that employees close without examination.
IRS Moves Forward With Required Electronic Filing: Form 1024-A Now Set, Forms 990-EZ, 4720, and 990-T Pending
The IRS continues to move forward with requiring electronic filing of tax-exempt organization forms. The latest addition is Form 1024-A (Application for Recognition of Exemption Under Section 501(c)(4) of the Internal Revenue Code). As detailed in Revenue Procedure 2021-08, electronic filing is now required for this form, subject to a 90-day transition relief period from the effective date of January 5, 2021 during which the IRS will still accept paper copies.
Form 1024-A joins annual information returns Form 990 and Form 990-PF, as well as Form 1023 (Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code). for which electronic filing is already generally required. (And Form 990-N and Form 1023-EZ, which have always had to be filed electronically.) It will also soon be joined by Form 990-EZ, which is currently subject to transition relief for tax years beginning before July 2, 2020, Form 4720 (Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code), for which the IRS announced in Notice 2021-01 that mandatory electronic filing would be delayed until the electronic version of the form is available (expected in early 2021), and Form 990-T (Exempt Organization Business Income Tax Return), for which the IRS has said an electronic version is also expected in 2021.
Thursday, November 26, 2020
As previously blogged, the National Rifle Association and its executives continue to be under fire for excess personal benefit. The Washington Post reported yesterday: "After years of denying allegations of lax financial oversight, the National Rifle Association has made a stunning declaration in a new tax filing: Current and former executives used the nonprofit group’s money for personal benefit and enrichment." In its 2019 Form 990 (not yet publicly available), the NRA confirmed its ongoing internal review of alleged "excess benefits" being paid to its chief executive Wayne LaPierre and five other former executives. According to the Post article, the NRA disclosed in the tax filing that it “became aware during 2019 of a significant diversion of its assets.” In its Form 990, the NRA estimates it paid nearly $300,000 in travel expenses on behalf of LaPierre between 2015 and 2019 and treats the payments as automatic excess benefits under Treasury Regulations section 53.4959-4(C). In addition, the NRA states that LaPierre has repaid this excess benefit plus interest to the organization, concluding that the excess benefit has been corrected.
This new revelation comes four months after the attorney general of New York state filed a lawsuit accusing LaPierre and other NRA executives of misappropriating organization funds for decades, resulting in them receiving inflated salaries and large expense accounts.
Friday, November 20, 2020
DAFs: Surge in Giving Amid Concerns, Proposals for Change at Federal & State Levels, Maybe New Regs Soon
There has been a lot of news recently relating to the quickly growing universe of donor-advised funds. A recent analysis by the Chronicle of Philanthropy reports that eight of the nation's largest community foundations have seen giving from DAFs they oversee increase by 42% from March to April of this year. And a recent study by the Lilly Family School of Philanthropy (pictured) finds that seven of ten nonprofits surveyed have received DAF grants, even as many nonprofit leaders expressed concerns relating to seeking and processing DAF gifts, especially relating to communicating with donors who give through a DAF.
Not surprisingly, the growth and spread of DAFs continues to attract proposals for increasing oversight of and rules for them. Last month the Chronicle of Philanthropy reported that billionaire John Arnold and law professor Ray Madoff have joined forces as part of their Initiative to Accelerate Charitable Giving to propose a set of federal tax law changes that would, among other goals, accelerate giving from DAFs. Push back was quick, including from the Philanthropy Roundtable.
At the same time, proposals related to DAFs are also being made at the state level. For example, members of the California legislature continue to pursue possible DAF-related bills, as detailed by Gene Takagi earlier this year. And a recent attempt in California to pass a bill (AB 2936) that would have established a state-law category of DAF sponsoring organizations failed in August, according to CalNonprofits. In Minnesota, a new report by the Minnesota Council of Nonprofits recommends that state law there be changed to "require charitable trusts transferring funds to a donor advised fund (DAF) to include in their annual trust filing with the office of the attorney general an itemized list of all grants and contributions made or approved for future payment during the year from that DAF."
Regardless of whether any of these proposals advance, we do know that Treasury is working on regulations relating to DAFs. As tweeted by Gene Takagi, Cindy Lott said at the NAAG/NASCO conference to expect some sort of DAF regulations in the next few months.
Finally, the Stanford Law School Policy Lab on Donor Advised Funds published Are Donor Advised Funds Good for Nonprofits? in the Stanford Social Innovation Review (SSIR). That article follows an earlier SSIR podcast on How Nonprofits Are Leveraging Donor-Advised Funds.
There is some much continuing activity relating to to conservation easements that it is difficult to keep track of everything. Fortunately, fellow blogger Nancy McLaughlin (Utah) has recently updated her comprehensive summary of court decisions, Trying Times: Conservation Easements and Federal Tax law (Sept. 2020). It undoubtedly will need to be updated for many years, as just last month taxpayers filed at least 27 Tax Court petitions relating to claimed conservation easement deductions according to Tax Notes (subscription required).
The Department of Justice has also provided more information in its lawsuit against promoters of syndicated conservation easements, including identifying 42 additional such deals, again according to Tax Notes. The Internal Revenue Service this week issued a memo emphasizing the use of summons and summons enforcement in syndicated conservation easement cases, among others, and Chief Counsel recently issued a Notice providing further guidance about the settlement of such cases. Finally, Senators Grassley, Daines, and Roberts recently reintroduced the Charitable Conservation Easement Program Integrity Act targeting abusive conservation easement arrangements.
Additional Coverage: Washington Post ("Wealth investors seem to be exploiting land-conservation breaks, and the Senate is taking notice").
The IRS yesterday issued final regulations under Internal Revenue Code section 512(a)(6) relating to the 2017 statutory requirement that exempt organizations silo their unrelated trades or businesses for various purposes, including the use of the net operating loss (NOL) deduction. The final regulations for the most part track the proposed regulations, including by:
- Continuing to use the first two digits of the North American Industry Classification System (NAICS) code to identify separate trade or businesses, without the additional option of a facts and circumstances test. The final regulations do add some additional guidance regarding how to identify the appropriate NAICS code for a particular trade or business, including use of the descriptions provided by more specific NAICS codes, and they also now permit changing NAICS codes, subject to reporting that change to the IRS.
- Continuing to reject a de minimis exception as outside the authority granted under the statute and inconsistent with congressional intent.
- Continuing to require allocation of deductions between unrelated trades or business on a reasonable basis standard, with some further guidance provided relating to allocation.
- Continuing to treat investment activities that are subject to the unrelated business income tax as a separate unrelated trade or business, with some minor clarifications and modifications relating to partnership and S corporation interests .
In response to comments received, the final regulations do make some technical modifications relating to the use of NOLs and to how UBTI is calculated for purposes of the public support tests under Internal Revenue Code sections 509(a)(1)/170(b)(1)(A)(vi) and 509(a)(2).
Also tracking the proposed regulations, the final regulations leave two significant issues outstanding but with future guidance promised to address them:
- The allocation of expenses, depreciation, and similar items shared between an exempt activity and one or more unrelated trades or businesses or between more than one unrelated trade or business.
- Application of the changes made to the Internal Revenue Code section 172 NOL deduction by the CARES Act.
The new regulations are effective as of the date of publication in the Federal Register.
Wednesday, November 18, 2020
Yesterday the Department of the Treasury, the IRS, and the Chief Counsel's office released the 2020-2021 Priority Guidance Plan, listing the guidance projects that will be the focus of those offices' efforts from July 1, 2020 through June 30, 2021. There are no big surprises for those who have been tracking such items.
Here are the items most relevant to tax-exempt organizations, other than routine or ministerial guidance that is generally published each year, divided into (1) Tax Cuts and Jobs Act guidance, (2) items specifically listed under "Exempt Organizations," and (3) items from other headings that are relevant to tax-exempt organizations:
Implementation of Tax Cuts and Jobs Act (TCJA)
- Regulations on computation of unrelated business taxable income for separate trades or businesses under § 512(a)(6), as added by section 13702 of the TCJA, and allocation of certain expenses by exempt organizations with more than one unrelated trade or business. Proposed regulations were published on April 24, 2020.
- Final regulations under § 4960 [excise tax on annual compensation over $1 million and certain parachute payments paid by applicable tax-exempt organizations], as added by section 13602 of the TCJA. Proposed regulations were published on June 11, 2020.
- Final regulations on the excise tax on net investment income of certain private colleges and universities under § 4968, as added by section 13701 of the TCJA. Proposed regulations were published on July 3, 2019. RELEASED 09/18/20 on IRS.gov as TD 9917.
- Guidance revising Rev. Proc. 80-27 regarding group exemption letters. Notice 2020-36 was published on May 18, 2020.
- Guidance on circumstances under which an LLC can qualify for recognition under § 501(c)(3).
- Guidance on additional deadline relief in response to the COVID-19 pandemic for applicable hospital organizations that are required to meet the community health needs assessment (CHNA) requirements under § 501(r)(3) of the Code. PUBLISHED 08/03/20 in IRB 2020-32 as NOT. 2020-56 (RELEASED 07/14/20).
- Final regulations on § 509(a)(3) supporting organizations. Proposed regulations were published on February 19, 2016.
- Guidance under § 4941 regarding a private foundation's investment in a partnership in which disqualified persons are also partners.
- Regulations regarding the excise taxes on donor advised funds and fund management.
- Final regulations under § 6104(c). Proposed regulations were published on March 15, 2011.
- Final regulations designating an appropriate high-level Treasury official under § 7611. Proposed regulations were published on August 5, 2009.
- Guidance under § 170(e)(3) regarding charitable contributions of inventory. [Listed under Burden Reduction.]
- Regulations and other guidance under §§ 419A and 501(c)(9) relating to welfare benefit funds, including voluntary beneficiary associations (VEBAs). [Listed under Employee Benefits.]
- Final regulations on the fractions rule under § 514(c)(9)(E). Proposed regulations were published on November 23, 2016. [Listed under Partnerships.]
- Regulations under § 704(d) regarding charitable contributions and foreign taxes in determining limitation on allowance of partner’s share of loss. [Listed under Partnerships.]
- Guidance updating electronic filing requirements for exempt organizations [under §§ 6011(h), 6033(n)] . . . to reflect changes made by the Taxpayer First Act. [Listed under Taxpayer First Act Guidance.]
Thursday, October 22, 2020
Democrats sent a letter to the IRS recently inquiring about the fact that the IRS seems to have automatically revoked the tax exempt status of 10s of thousands of charities based on the normal filing date of those charities on May 15, rather than the extended date of July 15.
Forbes has the story: "More than 30,000 nonprofit organizations in the U.S. have had their tax-exempt status automatically revoked by the Internal Revenue Service since May, Democratic lawmakers wrote in a letter to Treasury Secretary Steven Mnuchin, after an “apparent error” by the IRS may have erroneously revoked thousands of organizations’ tax-exempt status."
It almost surely is an error on the IRS's part, that will likely take some real work to fix, unfortunately.
Friday, September 18, 2020
Today the IRS released the anticipated final regulations interpreting Internal Revenue Code section 4968. That section, which Congress passed in 2017, imposes a 1.4 percent excise tax on the net investment income of colleges, universities, and other applicable educational institutions that have assets equal to or exceeding $500,000 per student, not counting assets used directly in carrying out the institution's exempt purpose.
The final regulations include a number of important modifications based on comments received. Three important changes relate to what assets are treated as being used directly in carrying out an institution's exempt purpose. With respect to intangible assets, the final regulations provide that to the extent royalty income generated by those assets would be excluded from net investment income (see below) they will be considered as used directly for carrying out exempt purposes. With respect to the reasonable cash balance that is included in assets treated as being used directly to carry out exempt purposes, the IRS dropped the 1.5 percent safe harbor from the proposed regulations in favor of allowing any reasonable method to be used to determine the reasonable cash balance amount. The final regulations also provide that one such method would be to use three months of operating expenses allocable to program services. And with respect to assets held by a related organization, the final regulations now provide that those assets can qualify as used directly to further the institution's exempt purposes if either they further the institution's exempt purposes or the related organization is a section 501(c)(3) organization and the assets are used directly to further the related organization's exempt purpose.
The IRS also dropped the requirement that institutions calculate their net investment income based on the rules under section 4940(c). The final regulations instead provide section 4968-specific rules for making this calculation. While drawing heavily from the section 4940(c) rules, the section 4968-specific rules now generally exclude from net investment income student loan interest income, student housing rental income, certain faculty and staff housing rental income, and royalty income from faculty or student generated intangible assets. However, net investment income still includes income from trademarks on the institution's logo or name and from donated or sold intangible assets. Finally, the IRS modified the final regulations to exclude from net investment income both any appreciation in net value of donated property that occurred prior to the date of donation to the institution and any gain attributable to the sale or exchange of exempt use property to the extent that property is used for the exempt purpose.
Another significant change, at least for one college, is that the IRS decided a student should not be considered "tuition-paying" both if their tuition is fully covered by grants from the institution (as was the case in the proposed regulations) but also if their tuition is fully covered by a combination of institution grants and government grants, including Pell grants and other forms of Federal and state student financial aid. This important change may help Berea College avoid application of the excise tax, which Senator Majority Leader Mitch McConnell will appreciate, although grants from other, nongovernmental parties would still render a student tuition-paying.
The IRS also modified the definition of student to require being enrolled and attending a course for academic credit from the institution and being charged tuition at a a rate that is commensurate with the tuition rate charged to students enrolled for a degree. The proposed definition had limited the definition to persons enrolled in a degree, certification, or other program leading to a recognized educational credential. In addition, the IRS clarified that to determine whether a student is "located in the United States," meaning they resided in the United States for any portion of time during which they attended the institution, may be made by the institution using any reasonable method.
There were a number of other more technical modifications that in the interest of space I will not attempt to summarize here. Also, the IRS did reject some comments on the proposed regulations. This included rejected comments that asked that institutions under common control be aggregated for purposes of applying the $500,000 per student threshold and other changes relating to the definition of applicable educational institution. The IRS also rejected comments asking to expand the definition of "assets used directly in carrying out the institution's exempt purposes" by including assets "held for use" to carry out such purposes and asking to use the concept of functionally related business to determine if certain assets fell within this definition.
The Missing IRS: States (NRA, Bremer Trustees, Outreach Calling) and DOJ (We Build the Wall, Teva) Step Up
I do not have data to back this up, but my impression is that in the past it was common to see state authorities and, more rarely, U.S. Attorney offices working closely with the IRS when investigating the activities of a tax-exempt nonprofit organization. However, it appears that recently the IRS is almost always absent from such investigations.
State Investigations: The New York Attorney General's lawsuit against the National Rifle Association and the District of Columbia Attorney General's lawsuit against the NRA Foundation are prominent examples of this apparent trend. While the N.Y. AG cited among the NRA's alleged failures a lack of compliance with IRS requirements, there is no indication that she coordinated her investigation or the filing of the lawsuit with that agency. But these are not the only recent examples.
The Minnesota Attorney General has moved to replace the trustees of the Otto Bremer Trust, a charitable trust and private foundation that owns bank Bremer Financial Corp. The basis for this move is alleged violations of the duty of loyalty by the current trustees. Presumably such violations would also be of interest to the IRS, especially since at least some of them also allegedly constituted violations of the self-dealing prohibition, but there is no indication in the news reports of the AG's actions or the lengthy memorandum filed by the AG in court that the IRS is involved. (And if the IRS had been involved, you would hope they would have corrected the AG's repeated use of "IRS Code" in that memorandum.)
It is perhaps more typical to see the IRS absent when the actions of for-profit telemarketers are at issue, as the Federal Trade Commission tends to take the lead for the federal government in such matters. This is illustrated by the recent case brought by the FTC and several state attorneys general to shut down Outreach Calling, Inc. and several other companies for having "allegedly scammed consumers out of millions of dollars." It should be noted that the Center for Public Integrity highlighted the questionable activities of Outreach Calling and individuals associated with it more than two and a-half years ago. But the involvement of the FTC when matters within its jurisdiction arise only emphasizes the IRS absence in matters squarely implicating federal tax laws as well as state charity laws.
Department of Justice Investigations: The IRS also appears absent from two recent investigations by the Department of Justice. The most prominent one involves criminal charges against former senior advisor to President Trump Steve Bannon and others associated with an Internal Revenue Code section 501(c)(4) nonprofit We Build the Wall, Inc., formed to fund the building of a border wall between the United States and Mexico. The investigation was pursued by the U.S. Attorney's Office for for the Southern District of New York. While the allegations relate to alleged lies made to donors about the use of the funds raised, some of the actual uses of those funds - compensation and payment for personal expenses - may have tax ramifications for both the organization and the individuals involved. Yet there is no indication in the indictment or otherwise that the IRS is involved. This is despite the fact that the U.S. Postal Inspection Service was involved in the arrest of Bannon, presumably because one of the charges is mail fraud.
In a case a bit more removed from federal tax law, the Department of Justice's civil division has filed a False Claims Act complaint against two affiliated pharmaceutical companies, Teva Pharmaceutical USA Inc. and Teva Neuroscience Inc. relating to donations to charitable foundations. The allegations are that Teva used the foundations "as conduits to funnel kickbacks to Medicare patients." The announcement of the filing does not indicate any involvement by the IRS, including with respect to investigating the foundations involved. Coverage: Wall Street Journal. An earlier news story involving allegations of similar arrangements with other companies reported multi-million dollar payments to the federal government by the charities involved to resolve the claims against them, but again did not mention IRS involvement, nor did the DOJ announcement of that settlement.
Thursday, September 17, 2020
IRS Update: Draft Form 990-T, Form 990-PF, and Form 990 Schedules, More COVID-19 Accommodations, and Waiting on Final Regs
It appears that a combination of the pervasive coronavirus fatigue and pressing tax matters in others areas has slowed down the flow of new IRS developments for tax-exempt organizations. That said, here are some recent items:
- Draft Form 990-T and Form 990 Schedules: The IRS has released an early release draft of the 2020 Form 990-T and the draft Schedule A for that form. While there are not draft instructions available yet, it appears that each filer will need to complete a separate schedule A for each separate trade or business, given the siloing requirement of Internal Revenue Code section 512(a)(6). Hat tip: EO Tax Journal. I also noticed that there are now draft versions of the 2020 Form 990-PF (with instructions) and most if not all of the 2020 schedules for the Form 990 available on the IRS Draft Tax Forms webpage.
- COVID-19 Accommodations: While the extended deadlines for Form 990 and many other filings have now expired, the IRS has put in place other, less broad pandemic-related accommodations. For example, Notice 2020-56 extends the deadlines for tax-exempt hospitals to conduct community health needs assessments and implement strategies to meet those needs, as requried by IRC section 501(r). The IRS also continues to follow modified procedures relating to exams, including information document requests. And under Revenue Procedure 2020-29, the IRS is generally allowing the electronic submission of requests for letter rulings, closing agreements, and other documents.
- Anticipating Final Regs: The Office of Management and Budget last week completed its review of the IRC section 4968 investment income tax final regulations (see proposed regulations and comments), so public release of those regulations is imminent. No reports yet on the status of the IRC section 4960 compensation tax final regulations (see proposed regulations and comments). But if you are bored, you can always take a look at the final regulations under IRC section 170 relating to the SALT deduction limit, which school choice groups report will hurt their ability to use state tax credit programs to stimulate fundraising.
Thursday, August 20, 2020
I posted a new article on SSRN today that will be published in the Pitt Tax Review soon. This is an introduction to the symposium Pitt Law hosted back in November 2019 before the Covidian times on the 1969 Tax Act and Charities. I will post the link to the issue as soon as it goes live. It includes contributions from Ellen Aprill, Jim Fishman, Dana Brakman Reiser, Ray Madoff, and Khrista McCarden.
"Fifty years ago, Congress enacted the Tax Reform Act of 1969 to regulate charitable activity of the rich. Congress constricted the influence of the wealthy on private foundations and hindered the abuse of dollars put into charitable solution through income tax rules. Concerned that the likes of the Mellons, the Rockefellers, and the Fords were putting substantial wealth into foundations for huge tax breaks while continuing to control those funds for their own private ends, Congress revamped the tax rules to force charitable foundations created and controlled by the wealthy to pay out charitable dollars annually and avoid self-dealing. Today, with concerns of similar misuse of philanthropic institutions to further wealthy interests, it is worthwhile to reconsider this significant legislation fifty years later.
Natural questions arise. What was the goal of Congress with respect to charity and with respect to tax? Did it accomplish these goals? Are those goals still relevant? What goals might suggest themselves today? Do we have the ability to modify the law to support those new goals? On November 1, 2019, the Pittsburgh Tax Review hosted a symposium to examine the 1969 Tax Act."
The conclusion is kind of the kicker:
"As I reflect on this symposium that took place in 2019 before the origination of COVID-19 and the racial justice revolution ignited by the killing of Mr. George Floyd in Minneapolis, I think about the great potential of well-democratically-harnessed philanthropy and seriously doubt that can be accomplished within the space of “private” philanthropy. I lean strongly
towards eliminating tax benefits for this private “philanthropy” by denying tax exempt status to those organizations that are not public charities.
Why do I say this? Fundamentally, I believe the effort of philanthropy should not be publicly supported if it is not collectively determined. To me, Professor McCarden makes the beginnings of a persuasive case that the values inculcated and supported through the private foundation system are likely predominately exclusive ones rather than public ones. I think that lack of a public nature should matter. Oddly, the private foundation tax architecture not only supports these wealthy exclusive preferences, but as Professor McCarden points out, it forces the private foundation to spend a lot of money every year into the future furthering those preferences of the wealthy. To be clear, the problem with this form of philanthropy is not that it might support abstruse interests such as senators complained about with respect to the Mellons, but that it works to provide significant and lasting governmental benefits to the private, perhaps well meaning interests, of people simply because they happen to be wealthy. The private foundation tax architecture provides this support, lifts these efforts up, in the name of supporting collective efforts, but they are far from collectively led.
I believe deeply in the power of a fiercely independent and courageous civil society that empowers the voices of all in our communities, particularly those voices that have been and continue to be disempowered. But, the private foundation tax architecture even at its best likely can never really support such a vision because it is defined privately. And, as Professor Aprill shows, the lack of IRS enforcement capability likely makes this architecture weak anyway and unlikely to be able to ever ensure such a democratically based vision. The private foundation community is imbued with some important social justice voices such as Darren Walker of the Ford Foundation and Elizabeth Alexander of the Mellon Foundation.
Still, I believe its predominate ethic is that of Carnegie from The Gospel of Wealth: that the wealthy man is the savior of the rest of us, both in terms of their ability to invest their dollars and to spend them in ways that improve all lives. I think that wrong and harmful. That vision is not just antithetical to democracy, but it is antithetical to racial, gender, sexual orientation, and social justice. Given this, I think we ought to eliminate tax benefits for the private foundation form."
Appreciate comments good and bad on this one.
By: Philip Hackney
Tuesday, August 18, 2020
A few weeks ago a federal grand jury indicted the Speaker of the House of Representatives of the State of Ohio, Larry Householder, along with 4 other individuals and a social welfare organization called Generation Now, exempt under section 501(c)(4) of the Internal Revenue Code, for engaging in a bribery scheme to pass legislation regarding nuclear energy that was worth about $1 billion. It involved approximately $60 million in bribes.
I was not blogging at the time, so writing this up after the announcement, but in my opinion this was a major indictment of the decision of the IRS to eliminate donor disclosure for dark money organizations like 501(c)(4) and (6) organizations. Disclosure of these dollars that the indictment alleges to be bribes could have very well alerted the IRS to a potentially problematic scheme. Additionally, there would have been the potential of asserting a false statement on the Form 990 filed by the social welfare organization.
The evidence is particularly indicative that unscrupulous folk may see dark money organizations as an easy method of laundering money now: "In March 2017, Householder began receiving quarterly $250,000 payments from the related-energy companies into the bank account of Generation Now. The defendants allegedly spent millions of the company’s dollars to support Householder’s political bid to become Speaker, to support House candidates they believed would back Householder, and for their own personal benefit. When asked how much money was in Generation Now, Clark said, “it’s unlimited.”"
In the Criminal Complaint, U.S. v. Matthew Borges, Case No. 1:20-MJ-00526 (July 16, 2020) on page 15 there is the following evidence: “Clark discussed with Householder, the use of a 501(c)(4), controlled by Householder, to receive payments: “what’s interesting is that there’s a newer solution that didn’t occur in, 13 years ago, is that they can give as much or more to the (c)(4) and nobody would ever know. So you don’t have to be afraid of anyone because there’s a mechanism to change it.”
This one is worth following and contemplating as we conceive of better policy to govern our nonprofit tax exempt sector.
By: Philip Hackney
Sunday, August 2, 2020
A little more than three weeks ago, President Donald Trump tweeted that the Treasury Department should investigate the tax-exempt status of universities as a result of their "Radical Left Indoctrination." Then Friday, TIGTA told Rep. Richard Neal that Treasury Secretary Mnuchin intends to follow through on some sort of investigation of the tax-exempt status of universities.
I'm not going to reiterate our entire analysis here, but Treasury and the IRS face three significant problems in investigating universities. The first is that, even if you assume that universities are politically biased--and even if you assume they teach that bias to students--that doesn't mean they can't be exempt. Tax-exempt educational institutions can endorse particular viewpoints.
Moreover, Treasury and the IRS run into two legal impediments in following through on this investigation. The first is section 7217, which prohibits the President from requesting that the IRS audit a particular taxpayer. The second is the Consolidated Appropriations Act, 2020 which, like the 2018 Act, prohibits the IRS from targeting groups for regulatory scrutiny on the basis of their ideological beliefs.
Samuel D. Brunson
Friday, June 26, 2020
The TEGE Council has submitted comments on the proposed UBIT siloing rules under section 512(a)(6).
"We are pleased to announce that on June 23, 2020, the TEGE Exempt Organizations Council submitted comments to the IRS and Treasury in response to proposed regulations under Section 512(a)(6), commonly known as the UBIT Silo regulations. The comments were 101 pages, with exhibits, and represent a herculean effort on the part of the group below to spot issues, identify potential solutions, propose examples, and collaborate, coordinate, draft, and edit—all within the short window of time to submit comments for official consideration. Thanks to the committee for the generous gift of time, thought, and leadership. Thanks also to Alexander L. Reid (Regulatory Affairs Chair) and Chelsea Rubin for their leadership."
Here are some of the bottom line comments from the executive summary describing the 101 pages of comments:
"This section provides an outline of our recommendations, each of which is further explained below.
1. Taxpayers should be allowed to identify separate trades or businesses based on all applicable facts and circumstances, consistent with the other aspects of tax-exempt organization tax law. The NAICS codes should operate as a safe harbor for purposes of identifying separate trades or businesses.
2. Taxpayers should be permitted to change the identification of a trade or business (i.e. change the NAICS code assigned to its “silo”) within the first two years of operating a new trade or business regardless of the presence of any mistake in identifying the most appropriate NAICS code. There should be additional flexibility in revising the use of DB1/ 114583248.3 3 NAICS codes that, due to further experience with the rules and accounting for the activities, become better defined over time.
3. Investment activity is not an unrelated trade or business and should not be treated as an unrelated trade or business subject to 512(a)(6).
4. If the IRS and Treasury treat investment activity as an unrelated trade or business, then we recommend the following to make the regulations more administrable and less burdensome: a. Jettison the de minimis and control tests outlined in the proposed regulations for
purposes of determining when a partnership is an investment or an operating business and use applicable accounting standards instead. b. ERISA-covered trusts should be permitted to aggregate all unrelated trade or business activities together, including UBTI arising from a partnership, because ERISA oversight rules ensure that such plans do not engage in a trade or business through partnership activity.
c. Investments managed by registered investment advisors should be treated as qualifying investment activities that may be aggregated together."
There are 13 total executive summary points.
Tuesday, June 23, 2020
Back in March I missed this article in HistPhil by Ellen Aprill related to her work looking at federal charities that I think would be of interest to our readers. It is entitled Trump Donated His Salary to HHS. Is that Kosher?
"On March 3, President Trump’s Press Secretary, Stephanie Grisham, announced on Twitter that, consistent with his commitment to donate his salary while in office, President Trump was giving his 2019 fourth quarter salary to the Department of Health and Human Services “to support efforts being undertaken to confront, contain, and combat #Coronavirus.” The announcement prompted questions about whether such an earmarked donation to a federal agency is possible. The answer in this case is yes, but getting to that answer requires several statutory steps and implicates a set of issues I just happened to have begun to research."
For taxpayers who itemize rather than take the standard deduction, section 170(c)(1) of the Internal Revenue Code permits a charitable contribution deduction for “a contribution or gift to or for the use of . . . the United States or the District of Columbia . . . if the contribution or gift is made for exclusively public purposes.” In general, gifts to the federal government must go to the general fund of the Treasury; agencies cannot augment Congressional appropriations. To that end, the miscellaneous receipts statute provides that “an official or agent of the Government receiving money for the Government from any source shall deposit the money in the Treasury as soon as practicable without deduction for any charge or claim.” Governmental agencies, however, can be given specific statutory authority to accept and retain donations. It turns out that the Department of Health and Human Services is one of the federal agencies with statutory authority to accept gifts for its benefit “or for carrying out any of its functions.” Thus, Trump’s gift is kosher."
I also recommend HistPhil to our readers.