Monday, May 27, 2024

On this Memorial Day: An Introduction to the USO

As I sat to write a blog post on this Memorial Day, I was Googling recommendations for charities that support current service members, veterans, and their families.  As the USO repeatedly appeared as the first entry on a numbers of searches, I realized that I actually know very little about it.  I think we’ve all probably seen pictures of movie stars and famous singers visiting the troops out in the field from time to time (there’s a great collection of vintage photos here), but I never really thought about the organization that made that happen.

Until now. 

“USO” stands for the United Service Organizations, which reflects its origins as a collaboration among a variety of existing charities that were serving military members and families during World War II.  The USO is not part of the Department of Defense; rather it is one of a handful of federally chartered corporations in existence (see 36 USC 2201 et. seq.) – although its statute provides “the Corporation shall maintain its status as a corporation incorporated under the laws of New York, another State, or the District of Columbia.”  The 2022 Form 990 reports its state of legal domicile as the District of Columbia.

Per its organizing statute, the USO was designed, in party, to   

accept the cooperation of, and provide an organization and means through which, the National Board of Young Men's Christian Associations, the National Board of Young Women's Christian Associations, the National Catholic Community Service, the Salvation Army, the National Jewish Welfare Board, the Travelers Aid-International Social Service of America, and other civilian agencies experienced in specialized types of related work, which may be needed adequately to meet the particular needs of the members of the Armed Forces, may carry on their historic work of serving the religious, spiritual, social, welfare, educational, and entertainment needs of men and women in the Armed Forces and be afforded an appropriate means of participation and financial assistance,

According to its 2022 Form 990, the USO is a private organization that is tax-exempt under Code Section 501(c)(3) and a public charity under Code Section 170(b)(1)(a)(vi).

By statute, the USO is a membership organization overseen by a Board of Governors.  The Board consists of six members appointed by the President, the Secretary of Defense (or designed), and representatives of the organizations listed above (or the public at large) that have the power to appoint the board of directors.  It is a membership organization, but the voting members are the six appointees of the President. According to its 2022 Form 990, it has a 38-person board, of which 37 are reported as independent (the one person who is not independent is the current President & CEO – he is also the only compensated member of the Board of Directors).

It’s hard to summarize all that the USO does for our military service members and their families. In addition to the well-known entertainment tours, the organization provides care packages for service members, transition services for soldiers re-entering private life, and various support services for military spouses, among other things.  It operates in a number of foreign countries as well in order to provide services to our military service members stationed overseas.   I strongly recommend visiting its website or, for the tax nerds among us, reading the details of its program services on Form 990 Schedule O.

There is a separate USO Foundation, which the USO lists on its Form 990 as a directly controlled entity within the meaning of Code Section 512(b)(13).  It was formed in 2007 as a fundraising arm.  The USO Foundation’s Form 990 indicates that it is a Type I supporting organization of the USO and covered under the USO’s group exemption letter.

If you wish to read more: uso.org

To review the USO’s Forms 990 and financial statements, see here:  https://www.uso.org/about/financial-statements

If you wish to donate, link is here.

Thankfully and in remembrance,

eww

May 27, 2024 in Current Affairs, Federal – Executive, In the News | Permalink | Comments (0)

Friday, May 24, 2024

IRS EO Statistics & Compliance Priorities Update

Download (24)Recent months have seen the usual steady flow of IRS data releases and compliance updates that reflect both the continuation of past trends (e.g., very limited enforcement, continued growth of giving to DAFs) and new developments (e.g., scrutiny of tax-exempt NIL collectives). Here are some highlights:

  • The 2023 IRS Data Book (for the fiscal year ended 9/30/23) reports:
    • Of 109,482 applications for tax-exempt status under section 501 closed, the IRS approved 103,069 (86.3%), disapproved 88 (0.07%), and otherwise disposed of 16,325 (13.7%). As usual, the bulk of these applications were under section 501(c)(3) (114,073 closed, 98,417 approved, 62 disapproved, 15,594 otherwise disposed), with only 501(c)(4), (c)(6), and (c)(7) have more than 1,000 applications each (and less than 2,000 each). (Table 12)
    • There were 3,025 notices of intent to operate under section 501(c)(4) received and 587 rejected. The Data Book notes "[e]xamples of notices that would be rejected include notices from organizations not required to file Form 8976 (e.g., organizations that filed [a Form 990 series return] or Form 1024 on or before July 8, 2016, or organizations already exempt under other Internal Revenue Code subsections) or where the IRS cannot confirm an organization’s Employer Identification Number." (Table 13)
    • There were 1,999,457 tax-exempt organizations, nonexempt charitable trusts, and split-interest trusts, of which 1,847,501 were tax-exempt under section 501(c) and 1,514,558 under section 501(c)(3). (Table 14)
    • The IRS examined 1,029 Forms 990, 990-EZ, and 990-N (Table 21). Since these are past year returns there is not a directly comparable number of such forms filed provided in the Data Book, but it likely fair to say this figure reflects a continuing examination rate of less than 0.2% and probably closer to 0.1%.
    • Chief Counsel reported receiving 1,000 new tax law enforcement and litigation cases in TEGE Division Counsel, as well as closing 1,128 cases and having 845 cases pending as of 9/30/23. (Table 30)
  • The EO Tax Journal reported (subscription required) that as 1/26/24 the average processing time for closed Form 1023s was 105 days, for closed Form 1023-EZs 22 days, and for closed Form 1024s 178 days. For Fiscal Year 2024 as of the same date, the 637 closed exams had a 74.4% change rate.
  • The current TEGE Compliance Strategies now include tax-exempt NIL collectives with this explanation: "The focus of this strategy is to ensure that exempt organizations identified as supporting athletes through the use of their name, image, or likeness, for compensation, disclosed their activities in their application for exempt status and that those activities are in full compliance with the existing legal requirements under Internal Revenue Code Section 501(a). The treatment stream for this strategy is examinations."
  • Last but not least, the current IRS Dirty Dozen list now includes art donation deductions, CRATs, and fake charities.

Lloyd Mayer

May 24, 2024 in Federal – Executive | Permalink | Comments (0)

Thursday, May 9, 2024

Potential Self-Dealing in the Conservative Partnership Institute

Last week my co-blogger posted about a recent New York Times article by David Farenthold about the Conservative Partnership Institute (“CPI”), a 501(c)(3) charity. In my view, Farenthold does a remarkable job of reporting on the nonprofit sector, but the article illustrates the limits of public knowledge on nonprofit spending. He reports on numerous insider transactions at CPI, involving millions of dollars flowing to for-profit entities formed by CPI leaders. Farenthold correctly notes that, “[w]hile hiring insiders is permitted when certain safeguards are in place, the payments moved money out of daylight and into opaque entities that the nonprofit’s leaders helped control.”

The obvious question, of course, is whether those “safeguards” were in place in CPI's case; safeguards that would presumably be described in a robust conflict-of-interest policy. Farenthold was at the mercy of CPI, which declined to provide details about its processes. There are many legitimate charities that legitimately pay for services from companies that their founders or directors own or control. There is no law against that; nor should there be in my opinion. But, of course, such payments produce risk. Farenthold quotes non-profit law scholar Linda Sugin, who correctly notes that CPI “could have reduced its risk by soliciting bids from competing firms to gauge whether insiders were charging market rates [and it] could have asked its leaders to recuse themselves from the decision to hire their own companies[.]” But because CPI refused to comment, we just don’t know whether they did. I’m guessing that they had good enough lawyers that they probably did have those procedural safeguards in place and make use of them. That doesn’t mean that they didn’t manage to overpay the companies that are connected to insiders anyway; it also doesn’t mean that they did pay too much. That’s a question that we the public are extremely unlikely to be able to judge accurately.

So, who should police whether payments from charities to insiders are excessive? That burden falls on the IRS and state charity regulators. It’s important for two different reasons. First, donors receive a tax deduction for charitable contributions, and that tax deduction is not warranted when the money is diverted from its charitable use. But even more important is that charitable donors generally rely on the regulation of nonprofits to enable them to trust that their donations will be used for their intended purpose. The one donor who would talk to Farenthold explained that he didn’t need that legal protection because of his personal relationship with the leaders of CPI, saying, “I’ve known them a long time …. They’re good people.” But most charitable donors don’t have that luxury, and the charitable sector would be much smaller (and able to do much less good) if every donor had to personally know the directors of every charity they want to support. And, obviously, the donor who talked to Farenthold could be wrong in his trust of CPI.

--Benjamin Leff

May 9, 2024 in Federal – Executive, In the News | Permalink | Comments (0)

Wednesday, May 8, 2024

Illegality Doctrine and Cannabis Advocacy Organizations

Last week, my co-blogger posted about PLR 202417022, which revoked tax-exempt status from an organization that apparently hosts street festivals that promote cannabis businesses and educate participants about cannabis use. The IRS held that this organization does not qualify for tax-exempt status for numerous reasons, one of which is that it “advocate[s] and engage[s] in activities that contravene federal law[.]” In holding that this activity is inconsistent with tax-exempt status, the IRS relied on a 1975 Revenue Ruling that held that an organization could not qualify for tax-exempt status if its primary activity was encouraging its members to engage in civil disobedience acts contrary to local law. As my co-blogger points out, this position – that an organization that advocates for or engages in civil disobedience cannot qualify for tax-exempt status – has the potential to be applied in nefarious ways.

In 2014, I wrote an article criticizing the use of the illegality doctrine in the cannabis context, especially for 501(c)(4) organizations. In 2016, I expanded the analysis to state and local government entities, arguing that the illegality doctrine does not apply to them. The history of the IRS’s use of the illegality doctrine makes it clear how dangerous the doctrine can be when an organization has the purpose of educating the public that something that is currently illegal is nonetheless good. The organization NORML fought for years with the IRS about the line between advocating illegal cannabis use (which the IRS argued would cause their tax-exempt status to be revoked) and advocating use of cannabis if and when it is made legal (which would not). When an organization is educating the public that an illegal substance is actually good for you, the line can be blurry.

The IRS’s attempts to apply the rule to organizations “serving homosexuals” makes it even more clear how problematic this line-drawing is. For example, a 1971 General Counsel Memorandum addressed an organization that sought to educate the public about homosexuality with the goal of attaining “complete public acceptance of homosexuals as one type of normal human[] being[].” The IRS denied tax-exempt status because of state laws criminalizing sodomy. In 1973, the IRS granted tax-exempt status to an organization that provided social services to the gay community, but noted that the organization qualified for tax exempt status at least partially because, “[t]he organization expressly disavows … seeking to alter the community’s attitudes toward homosexuals” and noting that “[t]he maladaptive and at least potentially offensive nature of homosexual activities is also borne out by the continuing prohibition of substantially all forms of sodomy by the criminal laws of the District of Columbia and all but three of the several states.” Even as late as 1977, in a GCM that reversed the IRS’s position denying tax-exempt status to organizations that seek to change the public’s perception of homosexuality, the IRS cautioned that “[i]f an organization directly fostered or promoted homosexual practices, it would not be entitled to exemption [at least in part because] in many jurisdictions homosexual practices are illegal.” I bring this all up not only to remind us all how long ago the nineteen-seventies were, and how bad they were in some respects, but to illustrate how hard it is to draw the line between advocating for something that is illegal (like same-sex love, cannabis, or civil rights) and having a purpose that is illegal.

The 2024 PLR about the organization hosting a cannabis street festival simply does not provide enough facts to know where that line is drawn or whether it is appropriate in that case. It should have relied instead on other reasons the organization did not qualify for tax-exempt status, like the fact that it failed to provide financial records or file an informational return.  

 

--Benjamin Leff

May 8, 2024 in Federal – Executive | Permalink | Comments (0)

Monday, April 1, 2024

Nonprofit NIL Collectives are All Over the Place - Literally and Figuratively...

I'm updating some of the prior reporting by my co-bloggers, Benjamin Leff and Darryll Jones, on the issue of the exempt status of nonprofit NIL collectives - see Darryl's posts here and here, and Benjamin's response here.   I'm going to shamelessly block quote Benjamin's description here:

NIL is the acronym for “name, image, and likeness.” In 2021, NCAA issued rules that permit student athletes to contract with investors to exploit the value of their NIL rights. Groups of investors, often fans of specific schools’ teams, joined together to form NIL collectives to contract with student athletes at particular schools. Most of these collectives are operated on a for-profit basis, but some are organized as nonprofits, in which supporters made tax-deductible contributions, and the nonprofit NIL collective makes NIL payments to student athletes from the contributions.

Last May, the IRS issued a Chief Counsel Memorandum that described NIL collectives that paid 80 to 100 percent of all contributions to students in the form of NIL payments. The Memorandum argues that NIL payments to student athletes creates a private benefit to student athletes that is not a “byproduct of the exempt activities,” and that this private benefit to student athletes will “in most cases, be more than incidental both qualitatively and quantitatively.” In other words, paying student athletes for their NIL rights is not itself a charitable purpose, and therefore the organization cannot qualify for tax-exempt status if the private benefit it provides to students through the NIL payments is too substantial.

With the Men's and Women's college basketball tournaments in full swing,  NIL collectives are again all over the place - literally, in the news.   A March 27 article in The New York Times has a full run down on the collectives of the men's Sweet Sixteen teams.  In it's breakdown, the Times noted that a number of these teams are nonprofit, or maybe are partially nonprofit, or maybe used to be nonprofit.   As I said in the title, they seem to be legally all over the place:

  • Illinois ICON Collective is "a nonprofit, which says it gives 90% of donations to athletes for performing charity work."
  • Alabama has "both a for-profit and nonprofit side."   The article then quotes a nonprofit board member on how it spends it funds, which the board member later walked back as      it appears to violate NCAA rules.   Oops. 
  • Clemson "used to have a large nonprofit collective" which is has now shut down.  The Times goes on to say that  the IRS' position that pay athletes isn't charity, noting that position is "a warning many collectives have seemed to ignore."
  • While it is unclear whether Purdue's collective is nonprofit, it has "lined up agreements with three Canadian charities" to work with its center, Zach Edey, who is Canadian.
  • Gonzaga and Arizona are fun:  "Gonzaga’s collective is run by the B.P.S. Foundation, a tax-exempt charity that puts donor money at the disposal of for-profit collectives, letting the for-profit entities determine how money is given out. (Arizona also has a collective run by the B.P.S. Foundation.)"

The BPS Foundation angle was new to me, so I tried to look up more information on their website, here,  which says about as close to absolutely nothing as you can while still having a Donate Now button.   Here's a great article/expose from January (quoting another Nonprofit Law Prof Blogger, Phil Hackney) on BPS Foundation, describing it as "[i]n effect... serve[ing] as a donor advised fund for college sports boosters..."  BPS is affiliated with Blueprint Sports and Entertainment, a for profit organization that receives "around" a 10% service fee from the Foundation.  According to that article, BPS Foundation's exemption is from July, 2022 - I note that the Chief Counsel Memorandum discussed above is from May, 2023. (As an aside, can we look at that commercially-related DAF ruling again... ?  I'm not sure the proposed regs cover it.  It's still bad.)

From The New York Times' brief rundown, it seems clear that colleges just don't know what to do with these things, although they seem loathe to give them up (kudos to Clemson on that, I guess).  I have to say that I'm in the Darryll Jones camp in that I can't see how most of these aren't private benefit violations (I can't define it but I know it when I see it - Justice Stewart, or something...).   Back in my practice days, anytime we had private benefit or unrelated income or lobbying approaching double digits, I'd worry about the exclusively test and start talking to clients about remedial action.   I can't think of any other precedent for allowing much over that amount in non-charitable stuff before exemption becomes an issue - there's no good reason why NIL Collectives should be any different.   

With madness, outside of March, eww

  

 

April 1, 2024 in Current Affairs, Federal – Executive, In the News, Sports | Permalink | Comments (0)

Nonprofit NIL Collectives are All Over the Place - Literally and Figuratively...

I'm updating some of the prior reporting by my co-bloggers, Benjamin Leff and Darryll Jones, on the issue of the exempt status of nonprofit NIL collectives - see Darryl's posts here and here, and Benjamin's response here.    I'm going to shamelessly block quote Benjamin's description here:

NIL is the acronym for “name, image, and likeness.” In 2021, NCAA issued rules that permit student athletes to contract with investors to exploit the value of their NIL rights. Groups of investors, often fans of specific schools’ teams, joined together to form NIL collectives to contract with student athletes at particular schools. Most of these collectives are operated on a for-profit basis, but some are organized as nonprofits, in which supporters made tax-deductible contributions, and the nonprofit NIL collective makes NIL payments to student athletes from the contributions.

Last May, the IRS issued a Chief Counsel Memorandum that described NIL collectives that paid 80 to 100 percent of all contributions to students in the form of NIL payments. The Memorandum argues that NIL payments to student athletes creates a private benefit to student athletes that is not a “byproduct of the exempt activities,” and that this private benefit to student athletes will “in most cases, be more than incidental both qualitatively and quantitatively.” In other words, paying student athletes for their NIL rights is not itself a charitable purpose, and therefore the organization cannot qualify for tax-exempt status if the private benefit it provides to students through the NIL payments is too substantial.

With th Men's and Women's college basketball tournaments in full swing,  NIL collectives are again all over the place - literally, in the news.   A March 27 article in The New York Times has a full run down on the collectives of the men's Sweet Sixteen teams.  In it's breakdown, the Times noted that a number of these teams are nonprofit, or maybe are partially nonprofit, or maybe used to be nonprofit.   As I said in the title, they seem to be legally all over the place:

  • Illinois ICON Collective is "a nonprofit, which says it gives 90% of donations to athletes for performing charity work."
  • Alabama has "both a for-profit and nonprofit side."   The article then quotes a nonprofit board member on how it spends it funds, which the board member later walked back as      it appears to violate NCAA rules.   Oops. 
  • Clemson "used to have a large nonprofit collective" which is has now shut down.  The Times goes on to say that  the IRS' position that pay athletes isn't charity, noting that position is "a warning many collectives have seemed to ignore."
  • While it is unclear whether Purdue's collective is nonprofit, it has "lined up agreements with three Canadian charities" to work with its center, Zach Edey, who is Canadian.
  • Gonzaga and Arizona are fun:  "Gonzaga’s collective is run by the B.P.S. Foundation, a tax-exempt charity that puts donor money at the disposal of for-profit collectives, letting the for-profit entities determine how money is given out. (Arizona also has a collective run by the B.P.S. Foundation.)"

The BPS Foundation angle was new to me, so I tried to look up more information on their website, here,  which says about as close to absolutely nothing as you can while still having a Donate Now button.   Here's a great article/expose from January (quoting another Nonprofit Law Prof Blogger, Phil Hackney) on BPS Foundation, describing it as "[i]n effect... serve[ing] as a donor advised fund for college sports boosters..."  BPS is affiliated with Blueprint Sports and Entertainment, a for profit organization that receives "around" a 10% service fee from the Foundation.  According to that article, BPS Foundation's exemption is from July, 2022 - I note that the Chief Counsel Memorandum discussed above is from May, 2023. (As an aside, can we look at that commercially-related DAF ruling again... ?  I'm not sure the proposed regs cover it.  It's still bad.)

From The New York Times' brief rundown, it seems clear that colleges just don't know what to do with these things, although they seem loathe to give them up (kudos to Clemson on that, I guess).  I have to say that I'm in the Darryll Jones camp in that I can't see how most of these aren't private benefit violations (I can't define it but I know it when I see it - Justice Stewart, or something...).   Back in my practice days, anytime we had private benefit or unrelated income or lobbying approaching double digits, I'd worry about the exclusively test and start talking to clients about remedial action.   I can't think of any other precedent for allowing much over that amount in non-charitable stuff before exemption becomes an issue - there's no good reason why NIL Collectives should be any different.   

With madness, outside of March, eww

  

 

April 1, 2024 in Current Affairs, Federal – Executive, In the News, Sports | Permalink | Comments (0)

Monday, March 25, 2024

Finally, a Johnson Amendment Case in Tax Court!

Well, my fellow bogger reported it on Friday, but I’ve got to say I’m pretty excited that this has finally happened: A 501(c)(3) organization has gotten into court to argue that the Johnson Amendment is unconstitutional. Why am I so excited?

Back in 2016, I wrote a blog post called “If Churches Really Want to Vindicate Their Right to Endorse a Candidate, It’s Easy to Get Their Case into Court,” in which I proposed forming a new 501(c)(3) organization and checking the “wrong” box on Form 1023 that asks whether the organization will “support or oppose candidates in political campaigns in any way?” That wrong box should get the IRS to deny the application, and when it does, or if it does nothing for 270 days, the organization can seek declaratory judgment in the tax court that it qualifies for tax-exempt status under section 501(c)(3). After years of writing that the IRS’s interpretation of the Johnson Amendment is unconstitutional (see here and here), I was planning with Sam Brunson (see here) to create our own organization to test the theory in this election cycle.

But, it turns out that more than 270 days ago, Ilya Shapiro (with Alex Reid’s help) beat us to it, filing a Form 1023 for an organization called SAFE SPACE that plans to endorse candidates on its website. The IRS never acted on their application, and so Presto, they’re in court! (I have been told over the years that some organizations have tried this tactic, but had their exemption applications approved, so the IRS’s inaction in this case is notable.) SAFE SPACE’s constitutional argument is obviously not very fleshed out in the Petition, but the key to it appears to be their claim that, “[t]he unconstitutionality of section 501(c)(3)’s political speech and lobbying restrictions is even more apparent with respect to SAFE SPACE because the low- to no-cost of SAFE SPACE’s political speech and lobbying activities means the government, simply by recognizing SAFE SPACE’s tax exemption, could never be viewed as subsidizing those activities.” This focus on the government subsidy embedded in the deduction for charitable contributions is directly related to the Supreme Court’s leading case on the constitutionality of lobbying restrictions for charities, Taxation with Representation of Washington v. Regan, and the DC Circuit’s leading case on the constitutionality of the Johnson Amendment, Branch Ministries v. Rossotti, both of which relied on the existence of a government subsidy as an essential component of their holdings.

Sam and I were planning a similar approach, but with a slightly more conservative approach to avoiding any cost in our charity’s endorsement. We were going to use an affiliated 501(c)(4) organization to assume all the costs of operating a website that was going to post the 501(c)(3) organization’s endorsement. SAFE SPACE claims that its endorsement costs are “zero” even though it admits that it will pay a flat fee for its website (which will have lots of other content). It then argues that the solution we planned to use, creating an affiliated 501(c)(4) organization, would impose significant administrative burdens,” and that “these administrative burdens are insurmountable.” This may seem like a difference without a distinction, but it is probably quite significant for reasons that are beyond the scope of this post. Whatever the next step in this case, we may be witnessing some interesting times for the Johnson Amendment in the runup to the 2024 presidential election.

-Benjamin Leff

March 25, 2024 in Church and State, Current Affairs, Federal – Executive, Federal – Judicial | Permalink | Comments (0)

Friday, February 9, 2024

Feeding Our Future Continuing Fallout: A Guilty Plea, More Indictments, and New Counterclaims

6a00d8341bfae553ef0278806cd3f2200d-320wiThe U.S. Attorney's Office for the District of Minnesota announced last month that the executive director of House of Refuge Twin Cities pleaded guilty to one count of wire fraud in the $250 million fraud scheme centering on the nonprofit Feeding Our Future. The charge related to her redirection of millions of dollars in federal funds to pay personal expenses and family members. According to the press release, she is the seventeenth defendant to plead guilty to charges arising from this fraud scheme. Coverage: CBS News; Sahan Journal; Star Tribune.

And she is unlikely to be the last, as this week the same U.S. Attorney office announced federal criminal charges against 10 additional defendants arising from the same fraud (on top of approximately 60 already charged). Those defendants included six members from the same family who allegedly used a variety of legal entities to receive and launder the stolen federal funds, as well as four others who allegedly falsely claimed to have provided meals to children. Coverage: MPR News.

Not all the action is on the government's side, however. According to an MPR News article, the founder of Feeding Our Future and alleged leader of the fraud conspiracy is pushing back. She is asserting that Minnesota Department of Education officials who oversaw the hunger relief funds intentionally mislabeled document and used burner phones to improperly thwart a 2020 lawsuit brought by the nonprofit challenging the Department's treatment of Feeding Our Future. Her attorney stated that she plans to raise these allegations as part of her defense against federal wire fraud and bribery charges.

Lloyd Mayer

 

February 9, 2024 in Federal – Executive, Federal – Judicial, In the News | Permalink | Comments (0)

NCAA Update: NLRB Employee Ruling and NIL Rules & Disputes

DownloadThe Associated Press reports a National Labor Relations Board (NLRB) Regional Director has ruled that Dartmouth basketball players are employees, which would allow them to create a labor union. The decision is particularly significant because the players, in common with other Ivy League athletes, do not receive athletic scholarships  As the story notes, this holding is consistent with the NLRB General Counsel's 2021 memo concluding that certain college athletes should be considered employees. The decision is subject to review by the NLRB. Additional coverage: Inside Higher Ed; N.Y. Times; Slate; Washington Post.

Separately, in the rapidly developing name, image,  and likeness (NIL) area the Division I Council of the NCAA approved new rules relating to disclosure and transparency. The press release highlights "four elements of student-athlete protections": voluntary registration for NIL service providers; required disclosure by student-athletes to their schools of more than nominal NIL agreements; development of a template contract and recommended contract terms; and development of an education plan for student-athletes and other stakeholders. The Council also introduced new proposals for consideration relating to school involvement and recruiting in NIL activities, including ones that would remove certain restrictions on school support for such activities.

At the same time, disputes between the NCAA and schools relating to NIL arrangements are heating up. Last month the NCAA announced an agreement relating to a violation of NCAA rules by a Florida State assistant football coach, including various recruiting-related restrictions. Coverage: ESPN; Washington Post. And earlier this month USA Today reported a federal judge refused to issue a temporary restraining order relating to the NCAA's NIL rules in an antitrust lawsuit brought by Tennessee and Virginia. A preliminary injunction hearing in that case is set for next week.  Additional coverage: Law360 (subscription required). 

Lloyd Mayer

 

 

 

February 9, 2024 in Federal – Executive, Federal – Judicial, In the News | Permalink | Comments (0)

Tuesday, February 6, 2024

IRS TE/GE Releases FY2023 Accomplishments Letter Including EO Exam & Application Statistics

53478002The Tax Exempt and Government Entities division recently released its Fiscal Year 2023 Accomplishments Letter. Topics of particular relevance to tax-exempt organizations include:

  • Several new tools to increase exam efficiency (and can we hope volume?), including an Exempt Organizations Graph Exploration Tool ("an interactive graph tool designed to help EO examiners and classifiers conduct risk analysis and identify potential insider abuse among tax exempt organizations") and a soon-to-be-published TE/GE Consolidated Examination Internal Revenue Manual.
  • The launch of the Tax Exempt Organization Search Modernization project, which will include "a dataset guide, data dictionary, indices, annotated tax forms, schemas, FAQs and regular updates."

While the Letter also highlighted the hiring of 197 employees, it later reveals that because of attrition and other adjustments TE/GE only had a net increase of seven permanent staff for the fiscal year.

As of the end of the year, there were 541 employees assigned to the Exempt Organizations function. Those employees started 2,529 examinations and closed 2,464 examinations. One of the results of the examinations were proposed revocations of 141 tax-exempt entities. This compares with the closure of 119,491 determination applications, including 103,073 approvals (98,417 under 501(c)(3)).

Lloyd Mayer

 

February 6, 2024 in Federal – Executive | Permalink | Comments (0)

Wednesday, January 17, 2024

More Thoughts on NIL Collectives

Sometimes I like to share my own perspective on issues previously covered well by my colleague bloggers. In this case, I’m following up two posts (this one and this one) by my colleague Darryll Jones on IRS guidance issued last May about the possibility of tax-exempt status for so-called NIL collectives.  I also like to take the opportunity to recommend podcasts when they are informative, and in this case there are excellent episodes of The Daily and Taxes for the Masses (discussion of tax-exemption begins at minute 12:50).

NIL is the acronym for “name, image, and likeness.” In 2021, NCAA issued rules that permit student athletes to contract with investors to exploit the value of their NIL rights. Groups of investors, often fans of specific schools’ teams, joined together to form NIL collectives to contract with student athletes at particular schools. Most of these collectives are operated on a for-profit basis, but some are organized as nonprofits, in which supporters made tax-deductible contributions, and the nonprofit NIL collective makes NIL payments to student athletes from the contributions.

Last May, the IRS issued a Chief Counsel Memorandum that described NIL collectives that paid 80 to 100 percent of all contributions to students in the form of NIL payments. The Memorandum argues that NIL payments to student athletes creates a private benefit to student athletes that is not a “byproduct of the exempt activities,” and that this private benefit to student athletes will “in most cases, be more than incidental both qualitatively and quantitatively.” In other words, paying student athletes for their NIL rights is not itself a charitable purpose, and therefore the organization cannot qualify for tax-exempt status if the private benefit it provides to students through the NIL payments is too substantial.

In my view, the weakest part of the Memorandum is that it doesn’t really explain why NIL payments to student athletes do not potentially serve the charitable purpose of advancing education or amateur sports competitions, even though athletic scholarships presumably would. Instead of distinguishing between merit-based athletic scholarships (that presumably do not create an impermissible private benefit) and NIL payments (that do), it discusses need-based scholarships, which would clearly be permissible because mitigating poverty is a well-established charitable purpose. The comparison between need-based scholarships and NIL payments is kind of a red herring, since it’s so obvious how those two kinds of payments are different from each other. But I know of no authority to support the idea that scholarships based on athletic ability rather than need fail to advance a charitable purpose because they are not need-based. Obviously, NIL payments and athletic scholarships are different from each other, and so this weakness of the Memorandum does not mean that it is wrong. It just fails to explain what is materially different between NIL payments and athletic scholarships when evaluating private benefit to student athletes.

But the fact that NIL payments do not themselves constitute a charitable purpose does not mean that NIL Collectives that pay them necessarily fail to qualify for tax-exempt status. Once a noncharitable purpose (NIL payments) is identified, the collective must determine if its noncharitable activities constitute a private benefit to the student athletes that is too substantial, either quantitatively or qualitatively. Professor Jones’s January 10 post cites a Chronicle of Philanthropy article that describes a new charitable NIL collective (“Hail! Impact”) that purports to qualify for tax-exempt status even though it makes NIL payments to student athletes. The organization’s theory is that so long as 70% of its funds are used for a proper charitable purpose, the 30% of its funds that are used for NIL fees do not create a substantial private benefit, either quantitatively or qualitatively. The article also states that the organization, “worked with the IRS and believes it is the first NIL collective to be designated a charity since the agency issued its guidance about donations.” In other words, the IRS appears to have blessed this 70/30 split as the proper way to structure an NIL collective. Given that donating money in general support of athletic programs at a tax-exempt college or university has always been treated as a tax-exempt purpose, NIL Collectives could be formed to transfer 70% of all contributions to the university in support of its athletic programs (and presumably could be spent on merit-based athletic scholarships) and the remaining 30% could be spent on NIL payments to student athletes. It remains to be seen how many NIL collectives will choose this path and how many will simply organize as profit-making ventures for their investors, taking as much profit as they can from exploiting the NIL rights of student athletes.

The podcasts I recommended take the position that charitable NIL collectives are an abuse of the Tax Code. But the fact is that under current law, there is nothing impermissible about an NIL Collective making NIL payments to athletes, as long as that activity is insubstantial in relation to its charitable activities. That’s why charities can engage in lobbying activities, for example, or enter into a joint venture with for-profit partners, or pay relatively high (but reasonable!) fees to fundraising firms, or engage in any number of other activities. As many of the Nonprofit Law Professor Blog posts point out, there are areas in which the law of private benefit probably fails to sufficiently protect the nonprofit sector. I definitely agree that a more coherent framework would be preferable to the one we have. But I’m not sure I am persuaded that I should be outraged by tax-exempt NIL collectives. If donors want to give to universities’ athletic programs and “on the side” provide NIL payments to student athletes, I’m OK with that. I think these NIL payments are less likely to undermine the educational objectives of the schools than those made by ordinary for-profit investors, and I even (perhaps naively) think they might be less exploitative of the athletes. If fans want to donate to make payments to student athletes, don’t we imagine, at least as a starting point, that they are might care more about those student athletes than investors who are simply trying to make a buck off a teenagers’ NIL value? Or do I need to go back and re-read my Milton Freidman?

--Benjamin Leff

January 17, 2024 in Current Affairs, Federal – Executive, In the News, Sports | Permalink | Comments (1)

Tuesday, January 16, 2024

Donor Disclosure Cognitive Dissonance

Frantz Fanon on Cognitive Dissonance // Plant Based Bride

The whole dark money issue creates cognitive dissonance in all of us, I think.  "Hooray NAACP  v. Alabama ex rel. Patterson, way to go Supremes!"  But then "Boo Americans for Prosperity Foundation v. Bonta, you suck, Supremes!"  The Daily Beast reports on the latest example.  The headline screams Republicans Are Making ‘Dark Money’ Even Darker for 2024. Yep, those evil Republicans are at it again.  But, well, the story is about Protect Our Winters,  a "left-leaning" nonprofit thumbing its nose at the FEC on the strength of the position asserted by the Republican Commissioners in the minority on the FEC.  I love a story that allows me to take both sides, don't you?

For years, dark money groups have enjoyed certain advantages that offer donors anonymity—putting the proverbial “dark” in “dark money.”  But late last month, one small outside group quietly told election law regulators to shove off when watchdogs demanded to see the group’s donors, a move that legal experts say could signal a profound shift in campaign finance disclosure laws, making dark money even darker just in time for the 2024 election.

The group, a left-leaning climate change advocacy organization called “Protect Our Winters Action Fund,” was standing its ground after a notice from the Federal Election Commission flagged the group’s failure to disclose contributors, as the law requires.  In response, POWAF—a 501(c)(4) nonprofit—simply declined to disclose its donors. And as a justification, the group cited a policy statement from the FEC’s three Republican commissioners released in June 2022, signaling they would not enforce “dark money” disclosure rules as courts had previously decided.

That policy statement does not carry the force of law. And legal experts told The Daily Beast that the commissioners’ memo—written in response to two federal court rulings that had interpreted the law the opposite way—undercuts judicial decisions favoring transparency.  Instead, these experts said, GOP commissioners are apparently signaling they will unilaterally refuse to enforce the law as courts have defined it. With all FEC enforcement decisions requiring support from four of the six commissioners, this three-commissioner Republican contingent could block any action.

While the mechanisms involved may seem highly technical and obscure, the potential consequences are broad and easy to understand.  In short, transparency advocates say, if outside groups like POWAF take advantage of the GOP commissioners’ posture, those groups could continue to keep their donors secret—even though the courts have ruled otherwise—without risking penalties. The upshot, experts worry, could be a murky operational environment for some of the most powerful and well-funded outside spending groups in the country, during an election cycle that is, once again, shaping up to be the most critical in recent history.

Brendan Fischer, a campaign finance lawyer and deputy executive director of the watchdog group Documented, said that half of the commissioners are undercutting the rulings of two federal courts, allowing dark money groups to “continue hiding their donors.”  “A D.C. District Court and the D.C. Circuit have both held that nonprofits which spend money on independent expenditures must disclose their political contributors,” Fischer told The Daily Beast. “But just half of the FEC’s commissioners are aiming to protect dark money and render those decisions meaningless.”

What’s more, the crux of the GOP’s interpretation—that the federal courts hadn’t stipulated a replacement for the regulation they vacated, and that the agency they run has still failed to, in their view, provide “definitive guidance” for reporting and enforcement—raises the question of whether dark money groups are required to disclose any donations at all.

darryll k. jones

January 16, 2024 in Federal – Executive | Permalink | Comments (0)

Tuesday, December 19, 2023

NASCO Reiterates Criticism of IRS Form 1023-EZ

Download (16)In response to a general request from the Internal Revenue Service for comments on its forms for tax-exempt organizations, the National Association of State Charity Officials (NASCO) sent a letter repeating its longstanding concerns regarding Form 1023-EZ.  Here is NASCO's summary of that letter:

In the letter, we underscore NASCO’s longstanding position that the 1023-EZ should be revisited and reiterate the need for timely availability of Forms 990. We highlight how the use of the Form 1023-EZ combined with the IRS’s retroactive reinstatement procedures under section 4 of Rev. Proc. 2014-11 can harm the public interest and enable scam charities to fly under the radar with serious consequences for donors, public funds, and confidence in the charitable sector.

Lloyd Mayer

December 19, 2023 in Federal – Executive, State – Executive | Permalink | Comments (0)

Federal Grand Jury Indicts Former Sacramento Goodwill CEO for Allegedly Diverting $1.4 Million

Logo-400x88The Sacramento Bee reports that a federal grand jury indictment unsealed last week charges the former chief executive officer of Goodwill Industries of Sacramento Valley & Northern Nevada for wire fraud and identity theft charges arising from his alleged diversion of $1.4 million in funds from the charity for his own benefit. More specifically, the indictment contains "nine counts of wire fraud, aggravated identity theft and three counts of monetary transactions with proceeds of specified unlawful activity." The article reports that the charity, which is not named in the indictment, fired the CEO in July 2021 after a routine audit discovered a series of questionable transactions, which triggered an internal investigation by the Board of Directors. The DOJ also issued a press release, with a link to the indictment.

While we do not have all the details, it is refreshing to see that a charity's internal controls caught up to the alleged wrongdoing despite the CEO's reported extensive attempts to hide them. And it is reassuring to see a charity's board act promptly and thoroughly to address the discovered irregularities.

Additional coverage: CBS News Sacramento; KCRA.

Lloyd Mayer

December 19, 2023 in Federal – Executive, In the News | Permalink | Comments (0)

IRS Releases 2020 Form 990 Statistics & Updates Process for Requesting EO Docs

DownloadThe Internal Revenue Service has provided two important updates recently.

First, it posted on the SOI Tax Stats - Charities & Other Tax-Exempt Organizations Statistics webpage the tables summarizing data from 2020 Forms 990. Highlights include:

  • Section 501(c)(3) organizations reported total assets of $5.5 trillion, including $2.6 trillion in investments, and net assets of $3.5 trillion. This compares with $920 billion in total assets for section 501(c)(4) to (9) organizations, including $590 billion in investments, and net assets of $563 billion in net assets.
  • Section 501(c)(3) organizations reported total revenue of $2.7 trillion, including $696 billion in contributions, gifts, and grants. Total revenue for section 501(c)(4) to (9) organizations was $390 billion, of which only $30 billion was contributions, gifts, and grants.
  • Section 501(c)(3) organizations reported total expenses of $2.4 trillion, including $2.1 trillion for program services. Total expenses for section 501(c)(4) to (9) organizations was $362 billion. Section 501(c)(4)s reported $105 billion in program service expenses, as compared to total expenses of $115 billion; program services expenses are not required to be separately reported for section 501(c)(5) to (9) organizations.

Second, the IRS updated the procedures for obtaining copies from the Service of not only annual returns (Form 990 series) but also determination letters and exemption applications. I tried out the Form 4506-B process to request exemption applications for several organizations for a research project. The form was easy to complete, and clicking on a button at the bottom of the form automatically created an email from my gmail account to the IRS, submitting the form. Now I am waiting to see if and when I actually receive a copy of the application from the IRS.

Lloyd Mayer

December 19, 2023 in Federal – Executive | Permalink | Comments (0)

Wednesday, December 6, 2023

Is the OpenAI Kerfuffle the Nonprofit Law Story of the Decade?

I’ve been stewing over the power struggle at OpenAI for a couple of weeks, not sure what to think about it. It is either the biggest nonprofit law story of the decade, or not. And, unfortunately, we may never know which it is.

For those not in the know, OpenAI is the company that release ChatGPT about a year ago, revolutionizing the public perception of how far advanced AI technology is, and deeply freaking out professors who give open-internet exams. I didn’t know before a couple of weeks ago that OpenAI is a nonprofit/for-profit joint venture, and therefore a subject of academic interest to me, even if it doesn’t end up creating the robot overlords I will one day serve.  OpenAI, Inc. was created as a 501(c)(3) organization in 2015 “to advance digital intelligence in the way that is most likely to benefit humanity as a whole, unconstrained by the need to generate financial return.” (That’s quoted from OpenAI Inc.’s first Form 990). OpenAI, Inc. raised over $130 million in tax-deductible contributions for that mission. However, according to OpenAI’s website, “[i]t became increasingly clear that donations alone would not scale with the cost of computational power and talent required to push core research forward, jeopardizing our mission.” So, in 2019, OpenAI Inc. formed a joint venture with for-profit providers of equity capital (almost exclusively Microsoft), which is naturally called “OpenAI.” (They then began referring to the original OpenAI Inc. as “Nonprofit OpenAI,” not to be confused with a wholly owned subsidiary of Nonprofit OpenAI that serves as the “manager” of OpenAI called OpenAI GP LLC). A couple of weeks ago, OpenAI’s board fired its founder Sam Altman for undisclosed reasons. Altman was immediately hired by Microsoft, many employees and key figures in OpenAI threatened to leave (possibly to go to Microsoft) unless the board re-hired Altman, which it immediately did as part of an agreement under which most of the board would be replaced by new board members.

If this is the nonprofit law story of the decade, it’s because of the federal law of nonprofit joint ventures. First it is important to distinguish between inurement (the possibility of nonprofit insiders benefiting themselves) and private benefit (the basis of the IRS’s rules about nonprofit joint ventures). My fellow blogger posted some thoughts on the risk of inurement in the OpenAI story, an issue I have worried about in general as well. But the OpenAI story is probably not primarily an inurement story; it is more likely a story about “private benefit.” The law on private benefit deals not primarily with the risk of insiders providing themselves with financial benefits, but rather with the risk that a charity could be diverted from its core charitable mission for other reasons, including benefiting outsiders. The worry is that, even without insiders financially benefiting themselves, the charity might abandon its mission. The law of joint ventures is derived from this doctrine, and at the risk of wild simplification, that doctrine can be summed up in a single word – control. In a string of revenue rulings and court cases in the late 1990s and early 2000s, the defining characteristic of a joint venture was determined to be whether the nonprofit controlled the joint venture. If a nonprofit and a for-profit formed a joint venture to carry out the nonprofit’s charitable mission and also provide profits to other members of the venture, it is permissible so long as the nonprofit effectively controls the venture and impermissible if the for-profit partners effectively control it. There was frustratingly indeterminate litigation about what exactly constitutes effective control on the margin, but it is clear that the nonprofit has sufficient control (as a legal matter) if a majority of the board of the venture is constituted by directors who are “independent,” meaning they have no financial interest in the venture. The control question is even more clear when the day-to-day management of the venture is controlled by a company controlled by the nonprofit rather than a company controlled by the for-profit partners. The embedded assumption is that so long as the venture is controlled by disinterested board members with a fiduciary duty to the charitable mission of the nonprofit, they serve as an adequate check on the nonprofit being diverted from its charitable mission to maximize the financial gains of the partners.

The OpenAI website states proudly that, “[w]hile our partnership with Microsoft includes a multibillion dollar investment, OpenAI remains an entirely independent company governed by the OpenAI Nonprofit. Microsoft has no board seat and no control.” At least formally, OpenAI’s independent board members did not have a financial interest in OpenAI and so were unconflicted in their duty to pursue OpenAI’s charitable mission. If this is the nonprofit story of the decade, it would go like this: OpenAI was created as a nonprofit joint venture, with 130 million dollars of charitable contributions. But, when there was a conflict between the guardians of its charitable mission and Microsoft, Microsoft won. Microsoft's champion, Sam Altman, returned to continue leading the venture, and the nonprofit board members stepped down, leaving the field open to the real goal of maximizing profit. In other words, the joint venture doctrine’s reliance on formal control just doesn’t work. If we care about protecting the integrity of the nonprofit sector, we need to find another legal doctrine to do so.

The key question about the OpenAI kerfuffle then is whether that story is true. I know extremely little about what actually is happening, and the best analysis I’ve found is a podcast by Ezra Klein. The actual best coverage I’ve found is this, but because I have been a fan of Klein and his work for a long time, I care about the fact that Klein says he is not convinced by the depressing nonprofit story I just. For example, he very briefly discusses this issue (at minute 38:18) and takes seriously the idea that Altman’s return is not a concession by the nonprofit board, but instead a victory for the nonprofit in which, after the conflict, “maybe they have a stronger board that is better able to stand up to Altman.” (at 39:20). So, who knows. I assume someone is writing a book about this that will appear in a few minutes and then several minutes after that, we’ll get to watch a pretty exciting movie about it, hopefully starring Jonah Hill (who, by the way, I also think should play Sam Bankman Fried).

In addition to the question of what The Law should do about nonprofit joint ventures in the future, there is an equally intriguing question to me about what for-profit investors will do. We know that Microsoft is the primary for-profit investor in the OpenAI joint venture, and we could be tempted to think about why Microsoft agreed to make a “multibillion dollar investment” in a venture that is expressly devoted to charitable purposes rather than maximizing Microsoft’s profits. I’m guessing Microsoft rarely makes naïve or stupid multibillion dollar investments. Maybe they thought that when push came to shove, their investment gave them sufficient functional control that it would all work out, and maybe their takeaway from the kerfuffle is that they were right. If other investors conclude the same, then I think we may see a significant strain on the credibility of the nonprofit signal. (See my post yesterday if you don’t know what I mean). But what if investors take away the lesson that the kerfuffle was a loss for Microsoft, and they decide to avoid partnerships with nonprofits unless they too deeply value the charitable purpose more than their financial returns? That would be a win for the nonprofit sector.

Then, of course, the most interesting question is why OpenAI was formed as a charitable nonprofit in the first place. I’m hesitant to question Sam Altman’s charitable bona fides, but another founder of OpenAI was Elon Musk, who has very conveniently become an easily recognizable villain in the years since OpenAI’s founding. We don’t know who contributed the 130 million dollars of charitable funds that the OpenAI Nonprofit raised over the years, but one wonders what exactly these contributors were thinking. Why did Elon Musk, for example, think that a charity was a better “investment” in the future of AI technology than a for-profit company, given that he’s had some success with for-profit companies? The media coverage has a lot of speculation on that score, but I’m still unsure which of it is true and which is not. I’m looking to you, Jonah Hill, to get to the bottom of this.

Benjamin Leff

December 6, 2023 in Federal – Executive, In the News, Web/Tech | Permalink | Comments (0)

Monday, December 4, 2023

More on the Proposed DAF Regulations

A few weeks ago, the Treasury released proposed regulations that apply to so-called “taxable distributions” of donor-advised funds (DAFs). (Previous Nonprofit Law Prof coverage here).  For those of you who like Internal Revenue Code sections, these regulations interpret section 4966 of the Internal Revenue Code, which was enacted as a part of Congress’s 2006 attempt to explicitly regulate DAFs.

First, it’s important to mention that these regulations do not provide answers to what I think are the most pressing questions about DAFs. As I have mentioned before, for most of the nonprofitlaw-osphere, the most pressing question about DAFs is whether they should be required to distribute their assets in a timely way. Because Congress has not said anything about this issue (yet?), the Regulations do not address it.  As I have also mentioned before, I’m most concerned about DAF “abuses,” especially those that involve distributions to a “conduit” charity. These regulations do not address that issue either, although it is on the IRS’s priority guidance plan. They also do not address the other important parts of the 2006 legislation: sections 4967 of the Code and the amendments to section 4958 of the Code, both of which are also on the priority guidance plan. Therefore, most of what I care about will (hopefully) be addressed in regulations that are still forthcoming.

What do these regulations cover? If you are interested in them generally, many law and accounting firms have published detailed online explanations, including this one from Morgan Lewis that was co-authored by the brilliant Chelsea Rubin, who happens to be a former student of mine (go Eagles!). Generally, “taxable distributions” are distributions from a DAF to any individual or organization that is not a public charity. Section 4966 requires (i) that these distributions be made for a charitable purpose, and (ii) that the DAF sponsoring organization use procedures (called “expenditure responsibility”) to make sure that the funds are used for those charitable purposes. Therefore, to take just one example, taxable distributions under 4966 include distributions used for “lobbying.” The regulations make it clear that DAFs cannot make distributions for the purpose of affecting legislation, and if they make distributions to (non-public charity) organizations for charitable purposes, they must use expenditure responsibility to make sure that none of the funds are used for lobbying.

There is one small part of these regulations that has implications for preventing the use of “conduit” charities. A distribution from a DAF to a public charity is not covered by these requirements, and, of course, once a distribution has been made to a public charity, it can engage in lobbying activity. To mitigate this possible loophole, the proposed regulations include an “special” anti-abuse rule in section 53.4966-5(a)(3). If a distribution is made to a public charity as an intermediary “pursuant to a plan” to avoid the rules, the rules ignore that intermediate step and treat it as “a single distribution.” In other words, if a donor tries to make a distribution from their DAF to a public charity as a step to make a distribution for a noncharitable purpose (like lobbying), then that distribution will be treated as if it was made directly from the DAF for the noncharitable purpose, triggering the penalty excise tax under section 4966. The intermediate distribution to the charity will be ignored. This “special rule” is extremely relevant in the context of section 4966 because it attempts to close a loophole that could permit DAF funds to be used for lobbying. But it also might have implications for closing the “conduit” charity loophole more generally in forthcoming regulations.  

On the one hand, closing the conduit charity loophole is an important regulatory goal. On the other hand, this particular rule might be a hard rule to apply. It might be hard for a DAF sponsor trying to make rules to prevent it from happening, especially because so many public charities engage in lobbying activities. What exactly should the DAF sponsoring organization do to make sure that a distribution from a DAF to a public charity is not made “pursuant to a plan” to use the money for lobbying, when the recipient is engaged in lobbying activities? How should the DAF sponsor make sure that the donor does not “arrange[] for Charity X to use the funds to make [taxable] distributions.” Nor is it obvious what evidence the IRS would need to successfully prove that the donor has made a “plan” or “arranged” for the charity to use the funds for an impermissible purpose. DAF sponsors could reasonably want some guidance from the Treasury about what kind and how much diligence they should perform to avoid the risk of penalties.

Benjamin Leff

December 4, 2023 in Federal – Executive | Permalink | Comments (0)

Thursday, November 9, 2023

IRS Advisory Council Recommendations for Improving IRS/EO Engagement

Download (14)In its 2023 Annual Report, the IRS Advisory Council has one set of recommendations specifically relating to tax-exempt organizations (other than employee plans and government entities). More specifically, the Council made the following recommendations in response to request from the IRS for input on how the IRS could better engage with exempt organizations:

  1. Prominently promote and highlight available nonprofit resources in outreach materials and websites that target all levels of individuals at various nonprofit organizations . . . .
  2. Review and improve current resources [including keeping the Tax-Exempt Organization Search updated in a timely fashion].
  3. Develop additional resources on the following topics of potential interest to exempt organizations: a. Electronic filing requirements b. Information tax return filing deadlines c. Form 8940 d. Public disclosure obligations e. IRS audits of exempt organizations
  4. Develop new resources on the following topics of potential interest to exempt organizations: a. Annotated Form 990 b. Getting Things Done with the IRS c. Plain English Glossary
  5. Update the charities section of irs.gov to reflect separate, focused pages of resources for small, mid-size and large exempt organizations . . . .
  6. Make change of address cards available to exempt organizations . . . .
  7. Require exempt organizations to have an e-mail address for more efficient and effective communications. Require exempt organizations to include the e-mail address on Form 990 and expand the EO Business Master File to include an e-mail column.
  8. Update IRS documentation to recommend . . . that small exempt organizations obtain an “organization e-mail” that can be passed down to future volunteer Board members.
  9. Consider increasing accessibility to Form 990-EZ for self-preparation by exempt organizations.
  10. Develop training sessions . . . to match the level of the audience in attendance to ensure understanding of the material, highlighting the exempt organization resources available at irs.gov for attendees seeking more detailed information. . . . .
  11. Increase communication via partnerships with states, community foundations and nonprofit associations to expand communication channels through participation and/or inclusion of IRS materials in their outreach/engagement efforts. . . . .

Lloyd Mayer

November 9, 2023 in Federal – Executive | Permalink | Comments (0)

Monday, November 6, 2023

IRS: "Beware of fake charities; check before donating"

DownloadIt what has become a regular occurrence, the Internal Revenue Service recently issued another warning about fake charities. The announcement does not mention any specific high-profile disaster likely to attract substantial donations or other event that triggered this particular warning, although there are certainly enough such events recently to choose among. This is in contrast with last year's warning, which stated it was timed to coincide with international Charity Fraud Awareness Week (which started October 17th in 2022 but will not start until November 27th this year), the fall 2021 warning, which stated it coincided with Giving Tuesday (November 28th this year), and an earlier 2021 warning, which was part of the IRS' annual Dirty Dozen campaign.

This year's warning repeats common sense precautions, including using the IRS Tax-Exempt Organization Search (TEOS) function to verify that the requesting organization is in fact a charity for federal income tax purposes and being wary of common scam techniques such as being pressured to make an immediate payment. 

Lloyd Mayer

November 6, 2023 in Federal – Executive | Permalink | Comments (0)

Friday, October 13, 2023

IRS Issues Final Supporting Organization Regulations

DownloadThe IRS has issued final regulations (T.D. 9981) relating to supporting organizations and amendments by the Pension Protection Act of 2006 (yes, 2006) to Internal Revenue Code section 509(a). As compared to the proposed regulations, the final regulations clarify the definition of "control" for persons who are restricted with respect to donating to the supporting organization because they control the governing body of the supported organization. The final regulations also modify certain requirements for Type III supporting organizations and make some non-substantive, technical corrections.

Coverage: Bloomberg Law (subscription may be required).

Lloyd Mayer

October 13, 2023 in Federal – Executive, In the News | Permalink | Comments (0)