Friday, March 15, 2019
In today's Chronicle of Philanthropy, Lloyd Hitoshi Mayer (Notre Dame) authored an opinion piece questioning whether a better funded IRS could have discovered and ended sooner the college admissions scandal discussed in several prior blog entries this week (here, here and here). Here are some highlights of the opinion:
- There were certainly enough yellow flags in IRS filings of the nonprofit at the center of the scam to signal something was wrong. The Internal Revenue Service would have needed the capacity to review those filings carefully and to pursue those flags.
- In addition to more funding for the IRS oversight of nonprofits, Congress could consider possibly moving that oversight out of the IRS.
- One significant red flag: In its tax-exempt application, the Key Worldwide Foundation articulated that it would be using materials developed by a for-profit company owned by one of the organization’s directors, which also employed the foundation’s chief financial officer and treasurer.
- In its annual Form 990 returns, the Foundation reported it had three directors and none of them met the IRS’s definition of “independence,” indicating they all had financial ties to the foundation or related entities.
- The Foundation also stated in its annual returns that none of the grant recipients were tax-exempt charities. While charities can make grants to businesses and governments in limited cases, the complete lack of charity recipients raises the issue of how KWF ensured that its grants would be used only for charitable purposes.
- The Foundation's organizers and maybe some of the parents participating in the admissions scam knew that the IRS is mostly asleep at the switch with respect to audits.
- There is only so much that technology and public disclosure of information can do to uncover such misdeeds without more funding of IRS oversight.
- It is, therefore, not surprising that an apparently unrelated FBI investigation led to the discovery of this scheme instead of an IRS investigation, given this lack of resources and resulting low audit coverage.
Thursday, February 28, 2019
While the media and public understandably focused mostly on other aspects of Michael Cohen's testimony before Congress yesterday, the information he provided raised two significant issues relating to the soon-to-be-dissolved Donald J. Trump Foundation.
First, in his opening statement Cohen mentioned (on pages 3 and 12) that the Foundation had been involved in the purchase of a third portrait of Mr. Trump from a charity auction, this time through reimbursing the winning bidder the $60,000 purchase price, which portrait was then hung in one of Mr. Trump's country clubs. If these statements are true, this is a clear case of self-dealing in violation of Internal Revenue Code section 4941 (and comparable state law requirements as well), as was the case with the previously reported charity auction purchases of two other portraits that also ended up hanging in Trump business properties. It should be noted that the Foundation's annual IRS return for 2013 (available from GuideStar) does not show such a reimbursement and the only $60,000 payment it includes is to the American Cancer Society, although the Foundation has inaccurately reported distributions before. For coverage of this aspect of Cohen's testimony, see CNN, The Guardian, and this Surly Subgroup post by Ellen Aprill.
Second, he confirmed previous reports that Mr. Trump had steered a $150,000 payment from a Ukrainian billionaire, Victor Pinchuk to the Foundation in lieu of it being paid to Mr. Trump as a speaking fee. As Ellen Aprill and I discussed back in 2016, such arrangements raise a possible assignment of income issue in that depending on the exact circumstances Mr. Trump may have been required to include that fee in his gross income for both federal and state income tax purposes (although there may have been a full or partial offsetting charitable contribution deduction to reflect the transfer of those funds to the Foundation). Of course without seeing Mr. Trump's personal federal and state income tax returns, we can't be sure whether he included this amount in his income or not. For coverage of this aspect of Cohen's testimony, see Time.
Friday, February 1, 2019
The Tax-Exempt and Government Entities (TE/GE) Division of the Internal Revenue Service released its accomplishments for Fiscal Year 2018 (see here). Here are a few highlights:
- Exempt Organizations (EO) implemented several changes to better serve EO customers and assist employees with processing applications more efficiently for tax-exempt status.
- Employee Plans (EP) implemented several program and processing changes to better serve its customers and assist TE/GE’s employees with their cases.
- Indian Tribal Governments (ITG) assists Indian tribes with addressing their federal tax matters, while Tax Exempt Bonds (TEB) administers federal tax laws applicable to tax-advantaged bonds. ITG/TEB implemented several program and procedural improvements.
- TE/GE employed its Compliance Units to address potential noncompliance, primarily using correspondence contacts known as “compliance checks,” which limited the burden of each taxpayer contacted and allowed TE/GE to establish a presence in the taxpayer community in a manner that reduced the cost to the IRS.
- TE/GE made a significant hiring push in FY18, partnering with the Human Capital Office to select a total of 111 employees, including new hires, promotions, and laterals.
The letter also describes the Fiscal Year 2018 Compliance Program, which was divided into six portfolio programs:
- Compliance Strategies
- Data-Driven Approaches
- Referrals, Claims & Other Casework
- Compliance Contacts
- Voluntary Compliance & Other Technical Programs
Thursday, January 31, 2019
John Tyler (Ewing Marion Kauffman Foundation), Hillary Bounds, and Edward Diener posted to SSRN an article published in the September/October 2018 edition of Taxation of Exempts entitled Identifying and Navigating Impermissible Private Benefit in Practice. Here is the abstract:
Organizations and people from within the charitable sector are increasingly engaging in historically non-traditional activities and with other than 501(c)(3) organizations in their efforts to generate revenue and investment/donations and to more aggressively pursue their charitable mission objectives. Examples include ventures with or from other than charitable-oriented businesses and investors, combined public-private fund arrangements, pay-for-success, impact investing, opportunity zones, micro-lending for business, and other finance-oriented relationships. These efforts are changing the ways in which 501(c)(3) organizations must identify and manage against impermissible private benefit.
One aspect of many of these activities is intentional awareness that the brand and reputation of many 501(c)(3) organizations can have independent value on which others might want to trade, with or without providing commensurate value. Another area in which private benefit problems arise is within more garden-variety, day-to-day operations. Consider operation-oriented pursuits such as contracting for delivery of goods and services, which might require increased attention to the financial and non-monetary values of data collected and the tools used to collect, store, secure, and analyze that data. Finally, “new” philanthropists and social change actors are engaging in historically non-traditional activities by structuring these activities without regard to (or at least with much less regard for) the incentives of tax deductions and exemptions.
All of these implicate and require thoughtful consideration of and management to protect against impermissible private benefit while still allowing for enthusiastic pursuit of mission objectives.
Philip Hackney (Pittsburgh) posted to SSRN his Written Testimony for the Hearing on Oversight of Nonprofit Organizations: A Case Study on the Clinton Foundation (House Committee on Oversight, December 13, 2018). Here is the abstract:
This is written testimony offered to the House Committee on Oversight's Subcommittee on Government Operations on December 13, 2018: Our nation has tasked the IRS with the large and complex responsibility for regulating the nonprofit sector, but has failed to provide the IRS with resources commensurate with that task. This is important work. Nonprofits constitute a large and growing part of our economy, and they are granted a highly preferential tax status. An organization that abuses that preferential status will obtain a significant and unfair advantage over the organizations and individuals who play by the rules. If we are to grant such a substantial advantage to nonprofits, and if we are going to rely on the IRS to oversee regulation of these entities, it is essential that the IRS have the resources it needs to ensure that this preferential status is not abused.
Lloyd Mayer previously discussed the hearing on this blog (here).
Monday, January 28, 2019
Allison M. Whelan (Covington & Burling, Washington D.C), Denying Tax-Exempt Status to Discriminatory Private Adoption Agencies, 8 UC Irvine L. Rev. 711 (2018):
This Article ... argues that the established public policy at issue here is the best interests of the child, which includes the importance of ensuring that children have safe, permanent homes. In light of this established public policy, which all three branches of the federal government have recognized and support, this Article ultimately argues that, consistent with the holding in Bob Jones, private adoption agencies that refuse to facilitate adoptions by same-sex parents, thereby narrowing the pool of qualified prospective parents and reducing the number of children who are adopted, act contrary to the established public policy of acting in the best interests of the child.
This Article proceeds in five Parts. Part I first provides general information about the child welfare system, adoption, private adoption agencies, and the “best interests of the child” standard. Part II describes the emergence of state laws that allow private agencies to refuse to facilitate adoption by same-sex couples. Part III provides an overview of federal income tax exemptions and then summarizes the Supreme Court’s decision in Bob Jones University v. United States. Part IV applies the analysis and holdings of Bob Jones to private adoption agencies that discriminate against same-sex couples, and ultimately argues that such policies are contrary to the established public policy of the best interests of the child. As a result, this Article argues that the IRS should conclude that these agencies do not qualify for exemption from federal income tax. Part V concludes by offering a potential compromise and additional policies the government should consider.
(Hat tip: TaxProfBlog )
Tuesday, December 18, 2018
Earlier this month the U.S. Department of Justice announced that Actelion Pharmaceuticals US, Inc., a subsidiary of Johnson & Johnson, had "agreed to pay $360 million to resolve claims that it illegally used a [section 501(c)(3) charitable] foundation as a conduit to pay the copays of thousands of Medicare patients taking Actelion's pulmonary arterial hypertension drugs, in violation of the False Claims Act." More specifically, the DOJ alleged that Actelion only donated enough to the foundation to cover the copays of patients prescribed its drugs in an effort to generate revenue from Medicare and induce purchases of its drugs. The announcement also noted that Johnson & Johnson acquired Actelion after the alleged misconduct occurred.
An analysis by HealthLeaders states that this is the third time in the past year that a drugmaker has settled a similar claim, joining a $24 million settlement by Pfizer last April and a $210 million settlement by United Therapeutics Corp. a year ago. The same analysis identified the foundation in the Actelion case as Caring Voice Coalition, Inc. (CVC), and noted that CVC both objected to providing information requested by Actelion and ultimately withdrew from providing financial assistance for drug copays (in part because of the withdrawal of an Advisory Letter from the U.S. Department of Health and Human Services Office of Inspector General that presumably related to providing such assistance). The DOJ settlement agreement in the United Therapeutics case states that CVC was also the charity involved in that case, while the DOJ settlement agreement in the Pfizer case states it was the Patient Access Network Foundation (PANF) in that case. There is no public indication that IRS has raised any issues regarding the tax-exempt status of either CVC or PANF in the wake of these developments.
While paling in comparison to other recent developments related to President Trump, the drumbeat of negative news relating to nonprofits associated with him has also continued. The three most recent developments involve a federal investigation into the President's inaugural committee, the revelation that in "an abundance of caution" the President's foundation was reimbursed for six questionable transactions (presumably either by Mr. Trump personally or his companies), and today's announcement that President Trump has agreed with the NY Attorney General to shut down his foundation and give away its remaining money.
The Wall Street Journal broke the story that federal prosecutors are conducting a criminal investigation of the President's inaugural committee, a section 501(c)(4) nonprofit organization formally named the 58th Presidential Inaugural Committee. The investigation is out of the U.S. Attorney's office for the Southern District of New York, which not coincidentally also handled the investigation of Donald Trump's former attorney Michael Cohen; it was a recording seized as part of the Cohen investigation that triggered the investigation of the committee. The latter investigation focuses both on whether the committee misspent any of the $107 million in funds it raised and on whether any donors received improper access or policy concessions in return for their donations. While not formally part of the Mueller investigation, it may be relevant to that investigation if any foreign money flowed to the committee, which would have been illegal. The investigation of the committee is reportedly still at a relatively early stage. Additional coverage: CNN, NPR, N.Y. Times, The Hill.
As for the Donald J. Trump Foundation, its latest IRS annual return showed $271,356 in "REIMBURSEMENTS" (Part I, Line 11 and Statement 2), but the only explanation provided in the return (Statement 5) tied the reimbursement to the auction of a membership to the Trump National Golf Club in 2012. What is odd about this explanation is that the amount relating to this auction was only $158,000 (as first reported by David Fahrenthold at the Washington Post), so even with interest it should have totalled significantly less than the amount reported. The more complete explanation may instead be that there was more than just this one reimbursement: in the November 23, 2018 decision in the state case involving the Trump Foundation, the court noted that the Foundation and the other respondents "point out that the Foundation has already been reimbursed for six individual donations" and in a footnote further noted that "Respondents aver that 'in an abundance of caution,' the Foundation was reimbursed with interest for the following donations: (1) the [$100,000] Fisher House Transaction; (2) the [$158,000] Greenberg Transaction [relating to the auction]; (3) a [$5.000] 2013 DC Preservation League donation; (4) a [$25,000] 2013 "And Justice for All" payment; (5) a [$10,000] 2014 Unicorn Children's Foundation donation; and (6) a [$32,000] 2015 North American Land Trust donation." The links are to the news stories that report more details about these transactions. These amounts total more than what was reported on the 2017 IRS return, which may be because some of them were repaid either before or after 2017. Regardless, they reflect quite a trail of questionable expenditures by the Foundation.
That undoubtedly is part of what led to today's announcement by the New York Attorney General that the Trump Foundation has agreed to resolve under judicial supervision. Coverage: CNN; Washington Post.
Monday, December 3, 2018
In the first ever #AccountabilityMonday, which took place before Giving Tuesday, a group of scholars and journalists initiated a conversation (covered by Nonprofit Times) about nonprofit accountability and transparency. Using the hashtag #AccountabilityMonday, people posed questions and offered ideas on nonprofit topics ranging from DAFs to reading a Form 990. One of the most interesting exchanges was prompted by Phillip Hackney, who asked "What would you add to (or remove from) the Form 990 that charities file with the IRS to make it a more useful document for holding charities accountable?"
<blockquote class="twitter-tweet" data-lang="en"><p lang="en" dir="ltr">What would you add to (or remove from) the Form 990 that charities file with the IRS to make it a more useful document for holding charities accountable? <a href="https://twitter.com/hashtag/AccountabilityMonday?src=hash&ref_src=twsrc%5Etfw">#AccountabilityMonday</a> <a href="https://twitter.com/CountingCharity?ref_src=twsrc%5Etfw">@CountingCharity</a> <a href="https://twitter.com/BenSoskis?ref_src=twsrc%5Etfw">@BenSoskis</a> <a href="https://twitter.com/EllenAprill?ref_src=twsrc%5Etfw">@EllenAprill</a> <a href="https://twitter.com/BDGesq?ref_src=twsrc%5Etfw">@BDGesq</a> <a href="https://twitter.com/joshnathankazis?ref_src=twsrc%5Etfw">@joshnathankazis</a> <a href="https://twitter.com/JosephWMead?ref_src=twsrc%5Etfw">@JosephWMead</a></p>— Philip Hackney (@EOTaxProf) <a href="https://twitter.com/EOTaxProf/status/1067215438436884480?ref_src=twsrc%5Etfw">November 27, 2018</a></blockquote>
<script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
Lots of great ideas in the replies. What would you like to see changed?
Monday, November 26, 2018
Earlier this month, the Department of Treasury and IRS released the 2018-2019 Priority Guidance Plan. The plan contains numerous initiatives related to the 2017 Tax Cuts and Jobs Act ("TCJA"), including the following related to exempt organizations:
- Guidance on computation of unrelated business taxable income for separate trades or businesses under new §512(a)(6), as added by section 13702 of the TCJA.
- PUBLISHED 09/04/18 in IRB 2018-36 as NOT. 2018-67 (RELEASED 08/21/18).
- Guidance on the excise tax on excess remuneration paid by “applicable tax-exempt organizations” under new §4960, as added by section 13602 of the TCJA.
- Regulations on the excise tax on net investment income of certain private colleges and universities under new §4968, as added by section 13701 of the TCJA.
- Regulations under §170 providing rules governing the availability of the charitable contribution deduction when a taxpayer receives or expects to receive a state or local tax credit.
- Guidance under §274 concerning qualified transportation fringe benefits, including the application of new § 512(a)(7).
In addition, the Priority Guidance Plan identifies the following non-TCJA initiatives for exempt organizations:
1. Final regulations on §506 as added by the PATH Act of 2015. Temporary and proposed regulations were published on 7/12/16.
2. Final regulations on §509(a)(3) supporting organizations. Proposed regulations were published on February 19, 2016.
3. Guidance under §512 regarding methods of allocating expenses relating to dual use facilities.
4. Regulations under §529A on Qualified ABLE Programs as added by section 102 of the ABLE Act of 2014. Proposed regulations were published on June 22, 2015.
5. Guidance under §4941 regarding a private foundation's investment in a partnership in which disqualified persons are also partners.
6. Guidance regarding the excise taxes on donor advised funds and fund management.
7. Guidance under §6033 on reporting donor contributions.
• PUBLISHED 07/30/18 in IRB 2018-31 as REV. PROC. 2018-38 (RELEASED 07/16/18).
8. Final regulations under §6104(c). Proposed regulations were published on March 15, 2011.
9. Final regulations designating an appropriate high-level Treasury official under §7611. Proposed regulations were published on August 5, 2009.
Friday, November 9, 2018
The Internal Revenue Service, Department of Labor, and Department of Health and Human Services issued final regulations on November 7 pertaining to the exemptions based on sincerely held religious beliefs from the Affordable Care Act's requirement that certain entities provide coverage for contraceptive services. Here is the summary:
The primary purpose of this rule is to finalize, with changes in response to public comments, the interim final regulations with requests for comments (IFCs) published in the Federal Register on October 13, 2017 (82 FR 47792), “Religious Exemptions and Accommodations for Coverage of Certain Preventive Services Under the Affordable Care Act” (the Religious IFC). The rules are necessary to expand the protections for the sincerely held religious objections of certain entities and individuals. The rules, thus, minimize the burdens imposed on their exercise of religious beliefs, with regard to the discretionary requirement that health plans cover certain contraceptive services with no cost-sharing, a requirement that was created by HHS through guidance promulgated by the Health Resources and Services Administration (HRSA) (hereinafter “Guidelines”), pursuant to authority granted by the ACA in section 2713(a)(4) of the Public Health Service Act. In addition, the rules maintain a previously created accommodation process that permits entities with certain religious objections voluntarily to continue to object while the persons covered in their plans receive contraceptive coverage or payments arranged by their health insurance issuers or third party administrators. The rules do not remove the contraceptive coverage requirement generally from HRSA's Guidelines. The changes being finalized to these rules will ensure that proper respect is afforded to sincerely held religious objections in rules governing this area of health insurance and coverage, with minimal impact on HRSA's decision to otherwise require contraceptive coverage.
The final regulations are about 95 pages (single spaced). Here is some of what the preamble says about nonprofit organizations:
F. Nonprofit Organizations (45 CFR 147.132(a)(1)(i)(B))
The exemption under previous regulations did not encompass nonprofit religious organizations beyond one that is organized and operates as a nonprofit entity and is referred to in section 6033(a)(3)(A)(i) or (iii) of the Code. The Religious IFC expanded the exemption to include plans sponsored by any other “nonprofit organization,” §147.132(a)(1)(i)(B), if it has the requisite religious objection under §147.132(a)(2) (see §147.132(a)(1)(i) introductory text). The Religious IFC also specified in §147.132(a)(1)(i)(A), as under the prior exemption, that the exemption covers “a group health plan established or maintained by … [a] church, the integrated auxiliary of a church, a convention or association of churches, or a religious order.” (Hereinafter “houses of worship and integrated auxiliaries.”) These rules finalize, without change, the text of §147.132(a)(1)(i)(A) and (B). The Departments received comments in support of, and in opposition to, this expansion. Some commenters supported the expansion of the exemptions beyond houses of worship and integrated auxiliaries to other nonprofit organizations with religious objections (referred to herein as “religious nonprofit” organizations, groups or employers). They said that religious belief and exercise in American law has not been limited to worship, that religious people engage in service and social engagement as part of their religious exercise, and, therefore, that the Departments should respect the religiosity of nonprofit groups even when they are not houses of worship and integrated auxiliaries. Some public commenters and litigants have indicated that various religious nonprofit groups possess deep religious commitments even if they are not houses of worship or their integrated auxiliaries. Other commenters did not support the expansion of exemptions to nonprofit organizations. Some of them described churches as having a special status that should not be extended to religious nonprofit groups. Some others contended that women at nonprofit religious organizations may support or wish to use contraceptives and that if the exemptions are expanded, it would deprive all or most of the employees of various religious nonprofit organizations of contraceptive coverage.
After evaluating the comments, the Departments continue to believe that an expanded exemption is the appropriate administrative response to the substantial burdens on sincere religious beliefs imposed by the contraceptive Mandate, as well as to the litigation objecting to the same. We agree with the comments that religious exercise in this country has long been understood to encompass actions outside of houses of worship and their integrated auxiliaries. The Departments' previous assertion that the exemptions were intended to respect a certain sphere of church autonomy (80 FR 41325) is not, in itself, grounds to refuse to extend the exemptions to other nonprofit entities with religious objections. Respect for churches does not preclude respect for other religious entities. Among religious nonprofit organizations, the Departments no longer adhere to our previous assertion that “[h]ouses of worship and their integrated auxiliaries that object to contraceptive coverage onreligious grounds are more likely than other employers to employ people of the same faith who share the same objection.” (78 FR 39874.) It is not clear to the Departments that the percentage of women who work at churches that oppose contraception, but who support contraception, is lower than the percentage of woman who work at nonprofit religious organizations that oppose contraception on religious grounds, but who support contraception. In addition, public comments and litigation reflect that many nonprofit religious organizations publicly describe their religiosity. Government records and those groups' websites also often reflect those groups' religious character. If a person who desires contraceptive coverage works at a nonprofit religious organization, the Departments believe it is sufficiently likely that the person would know, or would know to ask, whether the organization offers such coverage. The Departments are not aware of federal laws that would require a nonprofit religious organization that opposes contraceptive coverage to hire a person who the organization knows disagrees with the organization's view on contraceptive coverage. Instead, nonprofit organizations generally have access to a First Amendment right of expressive association and religious free exercise to choose to hire persons (or, in the case of students, to admit them) based on whether they share, or at least will be respectful of, their beliefs. In addition, it is not at all clear to the Departments that expanding the exemptions would, as some commenters asserted, remove contraceptive coverage from employees of many large religious nonprofit organizations. Many large religious nonprofit employers, including but not limited to some Catholic hospitals, notified the Department under the last Administration that they had opted into the accommodation and expressed no objections to doing so. We also received public comments from organizations of similar nonprofit employers indicating that the accommodation satisfied their religious objections. These final rules leave the accommodation in place as an optional process. Thus, it is not clear to the Departments that all or most of such large nonprofit employers will choose to use the expanded exemption instead of the accommodation. If they continue to use the accommodation, their insurers or third party administrators would continue to be required to provide contraceptive coverage to the plan sponsors' employees through such accommodation. Given the sincerely held religious beliefs of many nonprofit religious organizations, some commenters also contended that continuing to impose the contraceptive Mandate on certain nonprofit religious objectors might also undermine the Government's broader interests in ensuring health coverage by causing some entities to stop providing health coverage entirely. Although the Departments do not know the extent to which that effect would result from not extending exemptions, we wish to avoid that potential obstacle to the general expansion of health coverage.
Thursday, November 8, 2018
I had the pleasure of speaking to a reporter this morning. He wanted to know if the picture above, a sign posted on the front lawn of the Grace of God Church in New Port Richey, Florida on election day violated the 501(c)(3) prohibition against campaign intervention. The Church, by the way, was also a polling place so the Pastor who placed the sign was careful that it was not within 100 feet of the church, proper. Still, it was on the Church ground, posted on election day even, and the Pastor told the reporter that if he changed the mind of at least one voter, he would be satisfied. The sign was also posted, and then removed after voter outcry, from the Church' Facebook page.
The reporter and I spoke by phone as he told me where to look online for a picture of the sign. As I pulled it up, I couldn't help howling in laughter. We talked a bit about the Service's general reluctance to enforce the prohibition against houses of worship because of obvious First Amendment concerns but I concluded that this is probably the easiest case since Branch Ministries took out a full page advertisement in USA Today (I wish I had a picture of that advertisement) exhorting Christians not to vote for Bill Clinton. I allowed that when Pastors preach about particular issues on any given Sunday (farther in time from election day the better) and perhaps even condemn politicians who support or oppose positions implicating spiritual teachings, they can probably count on some degree of protection from the First Amendment. But the sign above is an easy case. The Pastor seems to know this now because in the aftermath of election day he has tried to explain that the sign conveys a purely spiritual message, a verbal tap dance that evoked another round of laughter from me. In a Tampa Bay Times article yesterday, the Pastor is quoted thusly:
Tuesday, November 6, 2018
It's appropriate on Election Day to provide some updates on recent FEC and IRS actions relating to political activity, as well as new about reduced NRA political spending and a CREW complaint against a politically active 501(c)(4).
On the election law/FEC side of things, in the wake of a federal District Court order vacating a disclosure regulation (and higher courts not staying the decision), the FEC has issued guidance providing that entities making independent expenditures (i.e., express advocacy not coordinated with a candidate or political party) after Sept. 18, 2018 must publicly disclosure the identities of donors who contributed more than $200 in the calendar year (in aggregate) if the contributions were received after August 4, 2018 and were made for the purpose of furthering any independent expenditure. For more details, see the published guidance. Coverage: Washington Post.
On the tax law/IRS side of things, the Chief Counsel to the IRS concluded that an Internal Revenue Code section 501(c)(4) social welfare organization that made admitted making expenditures in support of a candidate for elective public office was a "political party" under section 271 and so a taxpayer who made a loan to the 501(c)(4) that was not repaid was unable to take a worthless debt deduction under section 166. The taxpayer loaned money to the 501(c)(4) in one year, only to have the 501(c)(4) dissolve in the next year without repaying the loan. The 501(c)(4) reported on its annual information return that it was engaged in political campaign activity in connection with a certain candidate, which Chief Counsel held was sufficient to make the organization a "political party" within the meaning of section 271 (regardless of the organization's classification under any other Code section). Coverage: Thomson Reuters.
In other news about loans to 501(c)(4)s, Bloomberg reports that the NRA is facing a cash crunch that has led to both reduced political spending this election cycle and borrowing funds from numerous sources, including $5 million from its section 501(c)(3) charitable affiliate (at a presumably market interest rate of seven percent).
And in a complaint filed with the IRS, CREW asserts that section 501(c)(4) America's Renewable Future, Inc. failed to file annual information returns (Form 990) for 2015 and 2016 even though it filed such a return for 2014 and had extensive issue advocacy activities in both later years. This is only the latest CREW complaint along these lines, as it has previously filed such complaints against other 501(c)(4)s, including the American Policy Coalition and Freedom Frontier. Hat tip: EO Tax Journal.
Monday, November 5, 2018
The SALT/170 Proposed Regulations issued on August 27, 2018 had their day in the court of public opinion today – that being the public hearing held at 10:00 A.M. today at the IRS. I am still trying to find video or a transcript of the hearing (I will update the post with a link should I find one or if any kind reader passes one my way.)
If you aren’t familiar with these Regulations, they were described in this post (which includes many, many links to commentary by lots of smart people). An additional post highlights further commentary by Andy Grewal regarding the significant flaws in the Proposed Regulations (both posts by my co-blogger, Lloyd Mayer.)
Richard Rubin of the Wall Street Journal did live tweet the hearing (his Twitter feed can be found here, which you should follow anyway if you are tax type.) According to him, there were 24 speakers signed up, including an 8th grader talking about the benefits of private school. From Rubin's description, many of the speakers were specifically objecting to the treatment of state level education credit programs. In addition, it appears that 7,749 comments were received on the www.regulations.gov website.
Rubin noted that at the end of the hearings, Scott Dinwiddie of the IRS was quoted as saying, “We have our work cut out for us.” If you believe the underlying theory advanced by the IRS, then I’m not sure what work needs to be done, as they did take a pretty straightforward stance on it all. I’ll be curious to see what direction the final regs take…
UPDATE: Thanks to Mr. Linville in the comments, who provided a link for the hearing transcript, so please see below.
Thursday, November 1, 2018
The IRS recently released draft instructions for Form 990-T that provide some insights into how the Service is planning to apply new unrelated business income tax provisions 512(a)(6) (siloing of unrelated trades and businesses) and 512(a)(7) (taxation of costs incurred for certain fringe benefits). With respect to 512(a)(6), the instructions relate to the new Schedule M (not yet released), which organizations are instructed to use if they have reportable income from more than one unrelated trade or business. They are further instructed to follow the instructions for reporting a single trade or business provided for Parts I and II of the main form, and also to attach statements as necessary to replicate the information provided on Schedules A through K for each separately reported trade or business (see page 11 of the draft instructions). While not stated in the instructions, presumably tax-exempt organizations should rely upon IRS Notice 2018-67 to determine what constitutes a separate trade or business for these purposes, which we blogged about previously.
As for 512(a)(7), the instructions provide (on page 19) the following relating to Line 34 of the draft Form 990-T for 2018:
Line 34. Enter the amount paid or incurred for disallowed fringes (as defined in section 132(f)), or any parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C)), for which a deduction is not allowable by reason of section 274. Do not include amounts directly connected with an unrelated trade or business which is regularly carried on.
The also provide the following (on page 5) for organizations only required to file Form 990-T because of 512(a)(7):
Organizations that are required to file Form 990-T only because they have UBTI in excess of $1,000 under section 512(a) (7) for expenses for certain qualified transportation fringe benefits must complete the following.
• The heading (above Part I) except C, E, H, and I;
• Part III and IV (complete only the relevant lines); and
• Signature area.
For all organizations, the instructions (on page 1) clarify that they only have to file a Form 990-T "[i]f the sum of gross income from a regularly conducted unrelated trade or business . . . and unrelated business taxable income under section 512(a)(7) attributable to expenses for certain qualified transportation fringe benefits is $1,000 or more."
Thursday, October 25, 2018
A recent Forbes article encapsulated the nearly 10-month discussion of how the Tax Cuts & Jobs Act of 2017 (TCJA) will affect charitable giving and thus the finances of nonprofit entities. Although the TCJA did not make major changes to the tax law regarding charitable contributions, the increase in the standard deduction is estimated to significantly reduce the number of households that itemize deductions. The article references the Tax Policy Center's forecast at the beginning of the year that the TCJA could reduce donations by approximately 5 percent, and reduce the number of households taking an itemized deduction for charitable contributions from 21 percent in 2017 to 8 percent in 2018. The article summarizes the concerns of various players in the nonprofit sector (organizations, researchers, government officials):
- The TCJA likely will accelerate a growing shift from low- and moderate-income contributors to a relatively small number of mega-donors, a trend that makes many in the non-profit sector very uncomfortable.
- That shift will create winners and losers among non-profits. Religious and social service agencies may see contributions drop while bigger colleges, hospitals, and high-end arts organizations are largely unscathed.
- The benefits of the charitable giving deduction may go well beyond its ability to reduce the after-tax cost of giving. The signal it sends—that charitable giving is a good thing—may be as important as the dollars donors save.
- There is a lot unknown about what motivates givers, especially younger donors.
Tuesday, October 23, 2018
As discussed in a previous post, the Treasury and IRS issued proposed regulations to address the attempts by states to create a way for their residents to get around the recently enacted cap on the state and local tax (SALT) deductions by facilitating charitable contributions that would qualify the donors for state tax credits. The proposed regulations would treat the state tax credits as return benefits, thereby requiring a reduction in any otherwise available charitable contribution deduction. Andy Grewal (Iowa), who has been at the center of this debate, has published another article on this topic in the Iowa Law Review Online (103 Iowa Law Review Online 75 (2018)) entitled The Proposed SALT Regulations May Be Doomed. Here is a description of the article:
The IRS recently followed through on its promise to address state strategies designed to avoid the new state & local tax deduction limits. Although programs adopted by blue states sparked the IRS’s interest, the proposed regulations address both blue and red state programs. This has, predictably, led to IRS criticism from all sides. But the IRS was right to step in here. Revenue and policy concerns easily justify administrative guidance on the state strategies.
Unfortunately, the proposed regulations suffer from some significant technical and conceptual flaws. Those flaws, if left unaddressed, may jeopardize the validity of any final regulations, especially as they apply to red state programs. This essay discusses the flaws in the proposed regulations and offers recommendations for improvement.
Friday, September 28, 2018
According to the Center for Responsive Politics, one emerging issue for both the 2018 midterm elections and the Kavanaugh confirmation battle is the flow of funds from so-called "dark money" groups - generally tax-exempt nonprofits that are not required to publicly disclose their donors. This issue has also been in the news recently because of both recent action by the IRS and a couple of significant court decisions.
In July the IRS issued Revenue Procedure 2018-38, which dropped the requirement that section 501(c) organizations report the names and addresses of substantial contributors to the IRS. This reporting had been done on Schedule B to the annual Form 990, 990-EZ, or 990-PF, with the information only available to the IRS and not subject to public disclosure (unlike the rest of Form 990/990-EZ/990-PF). This change is effective for tax years ending on or after December 31, 2018. The reporting requirement still applies to section 501(c)(3) organizations, however, as for those organizations there is a statutory requirement (found in section 6033(b)(5)) of such reporting. The stated reason for the change was:
The IRS does not need personally identifiable information of donors to be reported on Schedule B of Form 990 or Form 990-EZ in order for it to carry out its responsibilities. The requirement to report such information increases compliance costs for some private parties, consumes IRS resources in connection with the redaction of such information, and poses a risk of inadvertent disclosure of information that is not open to public inspection.
Some commentators saw a political motive in the change, however, as it relieves politically active "dark money" nonprofits from having to disclose their substantial donors to the IRS. Coverage: NPR; Politico; ProPublica. And Montana Governor Steve Bullock sued to challenge the change, asserting that Treasury failed to follow required processes under the Administrative Procedure Act. Coverage: N.Y. Times.
Supporters of donor disclosure, particularly for politically active groups, were more successful in the courtroom recently. California Attorney General Xavier Becerra successfully appealed to the Ninth Circuit the granting of as applied challenges by the Thomas More Law Center and the Koch brothers-affiliated Americans for Prosperity Foundation that had exempted the Center and APF from the state requirement to provide an unredacted copy of its Schedule B to the Attorney General's office (but not for public disclosure). The Ninth Circuit in 2015 had rejected a facial challenge to this requirement. Of course with the above change by the IRS, only section 501(c)(3) organizations (such as the Center and APF) will have Schedule Bs to submit. Coverage: ABA Journal (collecting links to coverage by major news outlets).
Possibly of even greater consequence, the U.S. District Court in the District of Columbia in CREW v. FEC vacated a longstanding FEC regulation that had permitted organizations that are not political committee but make independent expenditures (defined as expenditures to pay for communications that expressly advocate the election or defeat of a federal candidate and which are not done in coordination with any federal candidate or political party) to avoid disclosure of their significant donors to the FEC as long as the donors had not earmarked their donation to support a particular, reported independent expenditure. The court reasoned that the relevant statute instead required such disclosure if the funds provided were for the purpose of supporting independent expenditures generally. The court stayed the vacator for 45 days from the date of the decision (August 3, 2018) to give the FEC time to issue an new, interim regulations, although it is far from clear the FEC can or will do so in that time period. Attempts to obtain a further stay of the District Court's order from the Supreme Court failed, however, leaving it somewhat uncertain what rules would apply to groups making such independent expenditure in the run-up to the 2018 general election. Coverage: The Atlantic; Politico. According to Election Law expert Rick Hasen, the ruling may not have as dramatic an effect as some seem to think, however.
Wednesday, September 26, 2018
CORRECTION: The original post said Form 4720 draft Schedules N and O were not yet available, which was incorrect. They are available, on the same page as Schedule M, through the link initially provided. The post has been corrected to reflect this fact.
In its August 2018 Update for the 2017-18 Priority Guidance Plan, Treasury and the IRS identified only two exempt organization specific items from the Tax Cuts and Jobs Act (TCJA) as needing guidance this fiscal year: "computation of unrelated business taxable income for separate trades or businesses under new § 512(a)(6)" and "certain issues relating to the excise tax on excess remuneration paid by 'applicable tax-exempt organizations' under § 4960." This was in addition to the already issued Notice relating to the calculation of net investment income for purposes of the new § 4968 excise tax applicable to certain private colleges and universities, which I previously blogged about, as well as the interaction of charitable contributions and state and local tax credits (discussed earlier this week) and a number of continuing projects unrelated to the TCJA.
True to their word, Treasury and the IRS have now issued a Notice providing initial guidance under § 512(a)(6) and draft instructions for reporting both excess compensation under § 4960 and net investment under § 4968 on IRS Form 4720 (draft for 2018, but not including the relevant schedules yet). Perhaps the most interesting (and reassuring) aspect of the Notice is that it allows tax-exempt organizations with unrelated trades or businesses to use "a reasonable, good-faith interpretation" of §§ 511-514 "considering all of the facts and circumstances" to determine if they have multiple such trades or businesses that would therefore require calculating net unrelated trade or business income for each such trade or business under § 512(a)(6). What at least requires further consideration is the suggestion that Treasury and the IRS might use the North American Industry Classification System (NAICS) 6-digit codes to determine what constitutes a separate trade or business. That is because while exempt organizations have in theory used this system to classify all of their revenue streams, including from unrelated trades or businesses, on their annual Forms 990 for many years, up until now it has not had much if any tax significance and so the NAICS' fit with actual exempt organizations activities has not been rigorously tested. For example, I noticed that my home institution's latest Form 990 included a significant amount of unrelated trade or business income under code 900099, which is not an actually NAICS code but instead the number the Form 990 instructions say to use if none of the NAICS six-digit codes "accurately describe the activity." This raises the question of whether many other tax-exempt organizations will have similar difficulty using the NAICS codes to determine their separate unrelated trades or businesses. The Notice also addresses a host of other issues, and wisely seeks comments before the issuance of any proposed regulations.
The draft Form 4720 instructions provide details for reporting excess compensation (draft Schedule N, on same page as Schedules M and O) and net investment income (draft Schedule O, on same page as Schedules M and N). One issue they do not appear to address, however, is whether the Form 4720 generally and these schedules specifically are subject to public disclosure (current law appears to be that the Form 4720 is only subject to public disclosure for private foundations). So while the public will know these schedules have been submitted (because of related questions on the publicly available Form 990), it is not clear the public will have access to the detailed information required on the Form 4720 schedules. (Hat tip to EY for identifying this issue.)
Monday, September 24, 2018
Charitable Contributions, State Tax Credits, and Return Benefits: IRS Proposed Regs, IRS Announcement, and Much Commentary
The Treasury and IRS proposed regulations to address the attempts by states to create a way for their residents to get around the cap on the state and local tax (SALT) deductions by facilitating charitable contributions that would qualify the donors for state tax credits. The proposed regulations would treat the state tax credits as return benefits, thereby requiring a reduction in any otherwise available charitable contribution deduction. The proposed regaultions raise a range of issues, including:
- whether this approach should apply more broadly to all third-party-provide benefits not just state tax credits (see comments of Lawrence Zelenak (Duke); hat tip: TaxProf Blog);
- whether a substance-over-form approach would have been better (see a pre-proposed regs article by Joseph Bankman (UCLA) and Darien Shanske (UC Davis); Zelenak also flagged this issue);
- how to treat the state tax credits if they are later sold or expire (see comments by Andy Grewal (Iowa));
- administrative concerns (see a pre-proposed regs article by David Gamage (Indiana University)), which are partially addressed by a de minimis exception for both state tax credits of up to 15% and state tax deductions resulting from charitable contributions; and
- political issues, in that the proposed regulations do not differentiate the recent SALT cap workaround efforts from the 100 or more pre-tax legislation state programs that provided state tax credits in exchange for contributions to certain types of charities (see a pre-proposed regs State Tax Notes article (subscription required) by eight tax academics that includes an appendix listing those existing programs).
Earlier articles raising these and other issues include: Joseph Bankman et al., Caveat IRS: Problems with Abandoning the Full Deduction Rule, State Tax Notes (2018); Roger Colinvaux (Catholic), Failed Charity: Taking State Tax Benefits Into Account for Purposes of the Charitable Deduction, 66 Buffalo Law Review 779 (2018); and Andy Grewal, The Charitable Contribution Strategy: An Ineffective Salt Substitute, Virginia Tax Review (2018).
An added wrinkle is that shortly after the issuance of the proposed regulations the IRS issued an announcement stating that "[b]usiness taxpayers who make business-related payments to charities or government entities for which the taxpayers receive state or local tax credits can generally deduct the payments as business expenses." While meant as a clarification, this announcement may not in fact have clarified very much or may indeed have created a significant loophole, as Andy Grewal has noted.