Friday, June 12, 2020
One helpful service that government agencies can provide is issuing reports summarizing their activities, saving researchers and practitioners the work of gathering such information piecemeal based on reviewing every pronouncement and ruling that is issued. Two recently issued summaries relating to nonprofit law are particularly helpful in this regard, one relating to state enforcement efforts and the other to federal charitable contribution deduction disputes.
First, the National Association of State Charity Officials (NASCO) has issued a report detailing the activities of state officials with respect to charities from January 2019 to March 2020. From the introduction:
The contents of this report are a representative sample of cases and other initiatives from January 2019 to March 2020 in the areas of: I. Deceptive Solicitation; II. Governance and Breach of Fiduciary Duties; III. Trust & Estate Issues; IV. Health Care; and V. Other, including Registration, Legislation, and Guidance. Descriptions were provided by the relevant state, and questions regarding particular cases should be directed to that state. Contact information for state regulators can be found at www.nasconet.org.
Second, the Office of Chief Counsel, Internal Revenue Service has released an internal memorandum (CCA 202020002) that summarizes the issues and holdings in 121 federal court decisions from 2012 through mid-April 2020 relating to the charitable contribution deduction under Internal Revenue Code Section 170.
IRS Update: Executive Compensation Tax Proposed Regs, Donor Disclosure Final Regs, Silos & NOLs FAQs, and Group Exemptions
First is the Internal Revenue Service, which over the past month or so has been relatively productive even given remote working and COVID-19 related responsibilities:
- IRC 4960 (Tax on Excess Tax-Exempt Organization Executive Compensation) Proposed Regulations: Earlier this month the Service issued much-anticipated proposed regulations relating to this new tax. enacted by Congress in 2017. For the most part the regulations are consistent with earlier Notice 2019-19 that provided interim guidance for this section. This includes with respect to the tax not reaching many government-related entities, including most notably public universities and colleges, as Ellen Aprill has detailed. The most significant aspect of the proposed regulations is that they create a couple of exceptions to help related taxable organizations avoid being subject to the tax if their employees provide limited services to a covered tax-exempt organization but without any compensation being paid, directly or indirectly, by the tax-exempt organization. For more coverage, see The National Law Review and the numerous accounting and law firm summaries that can be found through a Google search.
- IRC 6033 Donor Disclosure Final Regulations: To probably no one's surprise, late last month the IRS issued final regulations relating to disclosure to the IRS of donor identifying information on Schedule B to the Form 990 & 990-EZ with no substantive changes from the proposed regulations. While the regulations address a variety of disclosure issues, the most (only) controversial issue was the elimination of the requirement that tax-exempt organizations other than 501(c)(3) and 527 entities report the names and addresses of their substantial donors to the IRS. For more coverage, see The Hill, The National Law Review, and The NonProfit Times.
- IRC 512(a)(6) Silos and Net Operating Losses FAQs: The CARES Act provision that temporarily allows the carrying back of net operating losses (NOLs) to earlier tax years raised a question for tax-exempt organizations with NOLs from their unrelated business activities - how does this provision interact with the siloing requirement of Section 512(a)(6), which going forward limits the use of NOLs generated in one unrelated business silo to future taxable income generated in that silo? The IRS has now answered the question in a series of FAQs: carried back NOLs can be applied against aggregate unrelated business taxable income (UBTI) in taxable years beginning before January 1, 2018, but for later years can only be applied against UBTI from the same silo that generated the NOL.
- Group Exemptions Proposed Revenue Procedure: In Notice 2020-36, the IRS provided a proposed revenue procedure that would modify and supersede Revenue Procedure 80-27 (as modified by Revenue Procedure 96-40 with respect to where group annual reports should be filed). The new revenue procedure is intended to be a comprehensive resource for the more than 440,000 organizations currently subject to the more than 4,000 outstanding group exemption letters, as well as future central and subordinate organizations. It reflects recent statutory changes, specifically the automatic revocation requirement for failure to file required annual returns and the section 501(c)(4) organization notice requirement. It also adds a number of new requirements, including that a new group exemption letter will be issued only if there are a least five subordinate organizations and will be maintained only if there is at least one subordinate organization, that subordinate organizations must both all be under the same 501(c) paragraph (which can be different from the central organization's classification) and if 501(c)(3)s must all be public charities, not private foundations, and that subordinate organizations must have both the same or similar purposes and a uniform governing instrument. Some of these requirements will not apply to existing subordinate organizations, but will apply to any future ones (including under existing group exemption letters). Comments are due by August 16, 2020.
Thursday, April 30, 2020
The Independent Sector in an April 29, 2020 letter asked Congress to suspend the UBIT silo rule under section 512(a)(6) for 2019 and 2020. They estimate it would provide an average of $15,000 per impacted nonprofit.
"6. Suspend the “Siloing” Requirement for Unrelated Business Income for 2019 and 2020. Nonprofit organizations currently are struggling to comply with new, artificially strict accounting rules that prevent them from off-setting income with business losses. The CARES Act made it significantly easier for many for-profit businesses to reduce their taxes with losses while doing nothing to mitigate this unfair treatment of nonprofits. Suspending this provision will free-up an average of $15,000 per year in flexible funding that impacted nonprofits desperately need to keep their doors open and meet rising community needs."
In section 2203 of the CARES Act Congress suspended limits on net operating losses that it had imposed in the 2017 Tax Act. That has freed up capital for many wealthy individuals and businesses in a way that has been criticized in the popular press. Nonprofits too can take advantage of this relaxation to seek refunds from prior years where they were limited in taking NOLs against unrelated business taxable income. However, there is some difficulty in figuring out how to apply the UBIT siloing rules in this situation. Suspending those rules would give clarity to that problem and free up more dollars consistent with what Congress presumably intended in relaxing this rule for businesses.
Though it's not clear to me that this would free up money where it is desperately needed, because I was not a fan of the provision to begin with, I am inclined to think Congress ought to do this. It was not an essential addition to the taxation of exempt organizations, and it might free some money up that allows some nonprofits to make it to the other side of this health and financial crisis.
Still, I think the most important thing Congress can do is to get dollars to nonprofits through either the PPP or directly through grants where the nonprofits are carrying out important activities in helping Americans through this Pandemic.
They also urge Congress to increase the temporary universal charitable contribution deduction that Congress included in the CARES Act from $300 per taxpayer to $4,000 for single and $8,000 for married filing jointly above the line charitable contribution deduction. I am skeptical of these universal charitable contribution deductions. I fear the efficiency here is small. A Penn Wharton analysis of the $300 deduction suggested it would enhance charitable giving by only 5 cents on every tax dollar. Additionally, the IRS is not set up to police fraud. Though it might get some needed dollars to charitable institutions, I fear the extra deduction would be abused in way taxpayers would know and would undermine American belief in the honesty and fairness of our system.
The Independent Sector letter was similar but different than one put out by the National Council of Nonprofits signed by a broad group of nonprofits. Broadly though there is national agreement that nonprofits need the help of the federal government.
Wednesday, April 29, 2020
Thought today I would go over the unemployment provisions of the CARES Act. Though not necessarily focused on nonprofit organizations, some aspects open these provisions up to use by the nonprofit community. Additionally, like any business nonprofit leaders need to inform themselves of all the different sources of money out there to help patch us through this unprecedented crisis.
Most significantly for the nonprofit community Congress created Pandemic Unemployment Assistance in section 2102 of the Act. It is available to those not eligible for regular UI, such as the self-employed, the gig-economy, contract work or those who have already used up unemployment eligibility. It is available for 39 weeks, ending December 31, 2020.
This provision is important to the nonprofit community because charitable nonprofits, for instance, are exempt from the unemployment insurance system and often do not pay into the system. One that some have worried would not be covered include churches and clergy. But the Department of Labor seems to indicate clergy are covered.
The Department of Labor has stated: The CARES Act was designed to mitigate the economic effects of the COVID-19 pandemic in a variety of ways. The CARES Act includes a provision of temporary benefits for individuals who have exhausted their entitlement to regular unemployment compensation (UC) as well as coverage for individuals who are not eligible for regular UC (such as individuals who are self-employed or who have limited recent work history). These individuals may also include certain gig economy workers, clergy and those working for religious organizations who are not covered by regular unemployment compensation, and other workers who may not be covered by the regular UC [unemployment compensation] program under some state laws. To access this benefit, the individual needs to show some Covid-19 impact on their work history.
Ultimately though you will have to check with your state as to whether your nonprofit's situation is covered.
The other major change that makes the unemployment provision particularly useful at building a bridge to when we can get back to work is that the weekly benefit has been increased by $600. This is on top of whatever amount the state already paid. This increase as currently scheduled runs from as early as March 29th through July 31, 2020. Some Democrats are working on getting that end date extended. Note that the start date of these new benefits is dependent upon your state.
Also, significantly, the CARES Act extends unemployment insurance for 13 weeks. In most states this makes unemployment run 39 weeks - 26 weeks for regular + 13 extra weeks.
The CARES act also provides federal funds to support work-sharing arrangements.
If you are interested in looking further, I have looked at a lot of online descriptions of the unemployment provisions, I found this document by the Jewish Federations of North America to be particularly useful.
Monday, April 27, 2020
Because the new universal charitable contribution (above the line) deduction of $300 is per eligible individual, defined in Section 62(f) of the Code as an individual who does not elect to itemize deductions, some have suggested that married individuals might be able to deduct $600 rather than just $300. One of our longtime readers, NYU Professor Harvey P. Dale, pointed out there is strong reason to believe legislators did not intend that, and that the IRS and the Treasury Department will not likely interpret the Internal Revenue Code that way.
The Staff of the Joint Committee on Taxation released its “Description of the Tax Provisions of Public Law 116-136, the Coronavirus Aid, Relief, and Economic Security (‘CARES’) Act,” JCX-12R-20 (April 23, 2020). Footnote 76, on page 22, reads as follows: “The $300 limit applies to the tax-filing unit. Thus, for example, married taxpayers who file a joint return and do not elect to itemize deductions are allowed to deduct up to a total of $300 in qualified charitable contributions on the joint return.” In the text it also states that the universal deduction is only available in 2020. While neither of these statements is an ultimate legal authority, the Joint Committee description is a highly persuasive authority for the IRS and the Treasury Department. [N.B. I believe the temporary nature of the universal charitable contribution deduction is well textually supported as has been noted on here before because it is only available for tax years beginning in 2020.]
Also worth noting that in one study by the Penn Wharton Budget Model, very little of the tax dollars given up here are expected to spur charitable giving. They estimate that though the deduction will cost $2 billion, it will induce only an extra $110 million in charitable giving.
Friday, April 24, 2020
I'm going to end the week where I started it: with the Paycheck Protection Program.
Remember, the CARES Act created the PPP, which expands the SBA's loan program. Under the PPP the government can make or guarantee forgivable loans to small businesses--and, in an expansion or its previous mandate, small nonprofit organizations--provided those organizations use the funds for permissible purposes, including critically, for compensation.
The president signed the CARES Act into law on March 27. One week later, the SBA issued a FAQ dealing with the PPP and faith-based organizations. In essence, the FAQ clarified that the PPP was available to faith-based organizations under essentially the same terms as it was to any other nonprofit. That is, as long as the faith-based organization met the size limitations and used the money for purposes, it could participate in the PPP.
(It turns out that the SBA differentiated faith-based organizations from other nonprofits in one critical manner: while the law applies the same affiliation rules to nonprofits as it does to for-profit borrowers, the SBA announced that it will not look at the relationship between faith-based organizations where that relationship is based on religious teachings or other religious commitments. In regulations, the SBA went on to explain that applying the affiliation rules to religions that had doctrinal reasons for affiliating would impose a substantial burden on the organizations' free exercise, raising First Amendment and RFRA questions. Thus, the SBA said, it would take faith-based organizations at their word if they claimed their affiliation was based on religious requirements.)Ariz
Interestingly, in its April 3 FAQ, the SBA explicitly states that "loans under the program can be used to pay the salaries of ministers and other staff engaged in the religious mission of institutions" (emphasis mine).
Thursday, April 23, 2020
Some context: 2017's TCJA added section 512(a)(6) to the Code. That section says that, where a tax-exempt organization has multiple unrelated trades or businesses, it has to calculate unrelated business taxable income separately for each. Moreover, under that calculation, an organization's UBTI can't be negative. Effectively, then, the TCJA siloed UBTI losses. A tax-exempt organization could carry them forward to future years, but couldn't use them to offset UBTI from a separate trade or business.
The proposed regulations relax that siloing a little. Under the proposed regulations, a tax-exempt organization will determine the first two digits of the North American Industry Classification System for each of its separate unrelated trades or businesses.
Broadly speaking, the NAICS uses six-digit numbers to classify the economy hierarchically. The first two digits represent one of 20 sectors; the third digit designates the subsector, the fourth digit the industry group, etc. By focusing solely on the first two digits rather than digging deeper down the NAICS codes, the IRS lets tax-exempt organizations to treat a wider breadth of unrelated businesses as being the same, and thus makes it more possible for a tax-exempt organization to offset UBTI in one endeavor with losses from another.
Samuel D. Brunson
Wednesday, April 22, 2020
And the pandemic has been devastating to the arts world, a world that quite frequently relies on public performance both to raise revenue and to encourage donors. The novel coronavirus has devastated the jazz world (which is my love), killing jazz legends and shutting down performance spaces.
And then there's dance, an art form perhaps less-well-known and less appreciated than jazz. In Illinois alone, dance companies expect to lose $4.5 million in revenue through April 30, and more if (as is likely) the shutdown lasts longer. Hubbard Street Dance Company, for instance, ended up cancelling the last week of its Decadence tour in Italy in February and then, hours before it opened the performance in Chicago, Gov. Pritzker ordered closed gatherings of more than 1,000 people, closing the performance before it opened.
So how do arts organizations survive? Fortunately, the federal government has provided some help, including the Paycheck Protection Program and $75 million to be distributed by the National Endowment for the Arts.
State and local governments have been stepping up too. Chicago and Illinois have joined together with the Arts for Illinois Relief Fund, which provides grants to artists and arts organizations. The Fund is funded by the city, the state, and private philanthropy (of both the wealthy and the ordinary person type).
Still, the ability of arts organizations to weather this storm, while backstopped by state and philanthropic money, is, at best, tenuous. Once we get past the current crisis, arts organizations may need to rethink their funding models.
In the meantime, while I'm familiar with the steps Chicago and Illinois are taking to protect nonprofit arts organizations, I am less aware of what other cities and states are doing. Does anybody have examples of COVID-19-related support that their city or state is undertaking to protect and shore up the arts?
Samuel D. Brunson
Tuesday, April 21, 2020
Yesterday I blogged about the Paycheck Protection Program. In short, as part of the CARES Act, Congress expanded the SBA's loan-making authority. The SBA could, under the CARES Act, guarantee loans made to small businesses, loans that, if used for appropriate purposes, could potentially be forgiven. In addition, the CARES Act expanded the scope of borrowers to include not only small businesses, but also small nonprofit organizations.
Yesterday's discussion was largely academic, though. It turns out that in a short 13 days, borrowers had exhausted the full $349 billion Congress allocated to the PPP. With no money left, borrowers (for- or nonprofit) were out of luck.
But maybe they're not out of luck after all: The Hill is reporting that Congress and the president have reached a deal to provide more money to the PPP. While we don't have details yet, but expectations are that it will include another $310 billion, available to small businesses and nonprofits. That number will apparently include $75 billion for hospitals (and I'll be interested in seeing if there's any specific amount allocated to nonprofit hospitals, or if the $75 billion is for all hospitals).
Anyway, it's all questions for now, but this is good news for small nonprofits that hadn't yet gotten a PPP loan.
Samuel D. Brunson
Monday, April 20, 2020
Last week, Lloyd mentioned three sections of the CARES Act of particular interest to the nonprofit community. One of those three sections is the Paycheck Protection Program, created under section 1102 of the Act.
Broadly speaking, the PPP expands the Small Business Administration's authority to make loans to small businesses either directly or indirectly. Under the PPP, essentially, the SBA guarantees 100% of covered loans. A borrower can only use these loans for specific purposes, including (among other things) payroll costs, mortgage interest, rent, and utilities.
Critically, to the extent a borrower spends the borrowed money in qualifying ways (payroll costs, mortgage interest, rent, and utilities), the loan will be forgiven.
And, while the SBA loan program traditionally applied only to small for-profit businesses, the PPP explicitly includes nonprofits.
However, qualifying nonprofits face the same requirements as for-profit businesses, including a cap on the number of employees. Like a small business, a nonprofit only qualifies if it employs 500 or fewer people. And, like, a small business, nonprofits are subject to the SBA's affiliation rules.
Because SBA loans have historically only been available to for-profit entities, the affiliation rules focus largely on ownership and control (especially of stock). This is, at best, an imperfect match for nonprofits, which generally lack equity owners.
Presumably, in looking at affiliation in nonprofits, the SBA will look at the final two criteria: affiliation based on management or on identity of interest.
I'm hesitant to be too critical of a program thrown together quickly to deal with a worldwide pandemic. It inevitably is going to face unexpected problems, and grafting nonprofits onto a for-profit loan program seems almost built to raise those problems. As a result, I'll be interested in seeing how it ends up applying the affiliation rules to nonprofits. Still, this loan program will provide a lifeline to small nonprofits, making it easier for them to keep their employees and keep their physical spaces.
Samuel D. Brunson
Saturday, April 18, 2020
IRS Guidance for Syndicated Conservation Easement Exams (and Another Federal Appellate Court Victory)
Late last month the IRS publicly released an Interim Guidance Memorandum for Syndicated Conservation Easement Examinations. The memo focuses on how IRS Small-Business/Self-Employed Division and Large Business and International Division employees working on such examinations should handle situations where the statute of limitations has less than eight months left to run. Hat tip: EO Tax Journal.
And just last week, the IRS had another court victory in a qualified conservation contribution deduction case, this time in the U.S. Court of Appeals for the Sixth Circuit. In Hoffman Properties II, LP v. Commissioner, the court upheld the disallowance of a $15 million claimed deduction because the contributor retained certain rights that allowed it to make changes to the facade and airspace at issue unless the recipient of the donation objected within 45 days. The court found that this provision meant the "perpetuity" requirement for a deductible contribution was violated and so the deduction failed.
A year ago, two posts by Professor Darryll K. Jones appeared in this space criticizing the decision by the IRS to revoke the tax-exempt status of the Panera Bread Foundation. One post focused on the commerciality doctrine, the other focused on private benefit. No sign if IRS officials read those posts, but late last month the IRS signed a stipulated decision in the Foundation's Tax Court declaratory judgment action, agreeing that the Foundation qualified as an organization described in Internal Revenue Code section 501(c)(3). Alas, the stipulated decision also reveals that the Panera Cares Cafes ceased to operate in February 2019 and the Foundation does not intend to renew their operations. It is not clear to what the extent that fact drove the IRS' decision to enter into the agreement, given that it was the operation of the Cafes that fueled the IRS' concerns.
Hat tip: Russell Willis
Wednesday, April 15, 2020
Last month IRS Tax-Exempt and Government Entities (TE/GE) released its Fiscal Year 2019 Accomplishments Letter. Here are the Exempt Organizations highlights:
- Examinations: "Exempt Organizations completed examinations of 3,675 returns in FY19, including the Form 990 series (990, 990-EZ, 990-PF, 990-N, 990-T) and their associated employment and excise tax returns. We proposed revocations (without protest) for 60 tax-exempt entities as a result of these examinations."
- "Exempt Organizations initiated and continued several compliance strategy examinations to address noncompliance in this sector, including: IRC 501(c)(7) entities . . . ; Previous for-profit . . . ; Private benefit and inurement . . . ; IRC Section 4947(a)(1) Non-Exempt Charitable Trust (NECT) organizations . . . ."
- Continuing several data-driven compliance examinations.
- Examining entities that filed and received exemption using Form 1023-EZ.
- Continuing review of approximately 3,000 tax-exempt hospitals (on a rolling, three-year basis) for compliance with Internal Revenue Code section 501(r), with 812 reviews completed and 53 hospitals referred for examination (49 for possible Affordable Care Act noncompliance, with the most common issues being a lack of a Community Health Needs Assessment and a lack of financial assistance policies).
- Determinations: "Exempt Organizations closed 101,880 determination applications in FY19, including over 92,000 approvals, approximately 86,000 of which were approvals for 501(c)(3) status."
- Staffing: Approximately 550 Exempt Organizations employees, with the overall workforce for TE/GE having increased nearly 5% over the prior year.
This blog has been on hiatus as its contributors have dealt with moving their courses to online delivery, supporting students facing many stressful situations, and of course dealing with the personal impacts on us and our families of the pandemic. It therefore seems appropriate to start with an initial roundup of nonprofit law-related coronavirus topics before turning to other recent nonprofit law developments.
CARES Act: Many provisions of the CARES Act (Pub. Law No. 116-136) could be relevant to most nonprofits, but three provisions stand out in particular:
- Partial Charitable Contribution Deduction for Individual, Non-Itemizers (section 2204): Modifies Internal Revenue Code section 62 by adding paragraph (a)(22) and subsection (f) to allow individuals who do not itemize their deductions to deduct, above-the-line, cash charitable contributions (as defined in section 170(c)) of up to $300 total made in taxable years beginning after December 31, 2019. Supporting organizations and donor-advised funds are not eligible recipients, but private foundations are.
- Temporary Elimination or Increase of Limits on Certain Charitable Contribution Deductions (section 2205): Modifies IRC section 170 by eliminating the contribution base percentage limit on charitable contributions by individuals and increasing the taxable income percentage limit on charitable contributions by corporations from 10 percent to 25 percent for cash contributions made during the 2020 calendar year. Again, supporting organizations and donor-advised funds are not eligible recipients, but private foundations are.
- Small Business Administration Loans: Section 501(c)(3) organizations, including religious ones, are eligible to participate in the Paycheck Protection Program (sections 1101-1106) if they satisfy number of employee (usually 500 or less) and other requirements, and all private nonprofits are eligible to participate in the Emergency Economic Injury Grants program (section 1110) if they satisfy that program's number of employee (usually 500 or less) and other requirements. For more details about these programs, see the SBA website; there is also an informative webinar on the Pittsburgh Foundation's website (dated April 10th) on this topic, as well as additional webinars on other coronavirus, nonprofit-related topics.
Coverage: Independent Sector; National Council of Nonprofits. Interestingly, these summaries state that the above-the-line deduction provision applies to contributions made in 2020, but the statutory language appears to make this provision permanent in that it applies "to taxable years beginning after December 31, 2019" without any expiration date and so it should be available for cash contributions made after 2020 as well. An analysis by the University of Pennsylvania's Wharton School, which states the above-the-line deduction is only available for contributions made in 2020 (I believe incorrectly), predicts that deduction will cost $2 billion but will only increase charitable contributions in 2020 by $110 million.
Extended IRS and State Filing Deadlines: In Notice 2020-23, the IRS explicitly extended to July 15, 2020 the deadline for filing (and paying any related tax owed) Form 990-PF, Form 990-T, Form 990W, and Form 4920 if they otherwise would have been due on or after April 1, 2020 and before July 15, 2020. In addition, by cross-reference to Revenue Procedure 2018-58 (see Section 10) the IRS also also extended to July 15, 2020 the deadline for filing a wide range of forms relating to tax-exempt organizations, including Form 990, Form 990-EZ, Form 990-N, Form 1023, Form 8871, Form 8872, and Form 8976 if they otherwise would been due during the same time period. For an analysis of this cross-reference, see this post by Laura J. Kenney of Blum Shapiro. Hat Tip: EO Tax Journal.
The IRS has also announced in a memorandum that it is permitting examination agents and managers to use "an increased reasonable application of business judgment" when applying the otherwise applicable deadlines for responding to information document requests and follow-ups during enforcement actions. This "temporary deviation" from the otherwise applicable requirements for enforcing such deadlines is in effect through July 15, 2020.
Finally, states are extending deadlines for required filings by nonprofits. For example, the New York Attorney General's Charities Bureau has announced it will grant an automatic six-month extension for annual financial reports originally due after February 15, 2020.
More updates to follow. Stay safe.
Friday, March 13, 2020
With the challenges we will all face from the CoronaVirus Pandemic, I thought it would be useful to have the IRS Disaster Relief publication handy.
"This publication is for people interested in assisting victims of disasters or those in
emergency hardship situations through tax-exempt charities. Charitable organizations
have traditionally been involved in assisting victims of disasters such as floods, fires, riots,
storms or similar large-scale events. Charities also play an important role in helping those
in need because of a sudden illness, death, accident, violent crime or other emergency
hardship. This publication includes:
advice about helping to provide relief through an existing charitable organization,
information about establishing a new charitable organization,
guidance about how charitable organizations can help victims,
documentation and reporting requirements,
guidance about employer-sponsored assistance programs,
information about tax treatment of disaster relief payments,
information about gifts and charitable contribution rules, and
reference materials and taxpayer assistance resources.
By using this publication as you begin to plan your relief efforts, you will be able to ensure
that your program will assist victims in ways that are consistent with the federal tax rules
that apply to charities."
Friday, February 7, 2020
Speakers List For Today's Hearing on Eliminating Schedule B Identification of Donors for Non-Charitable 501(c)s
Today is the public hearing on the proposed regulations (REG-102508-16) that would eliminate the requirement that non-charitable section 501(c) organizations provide certain identifying information annually to the IRS on Schedule B to the Form 990/990-EZ for significant donors. The hearing is scheduled to be held in the IRS Auditorium at 1111 Constitution Avenue NW in DC, starting at 10:00 a.m. The second link provided above is to the regulations.gov website that includes not only the text of the proposed regulations but also all of the 8,387 comments received to date on them. Finally, here is the list of speakers from the agenda for the hearing:
- Noah Wall, Freedom Works Inc.
- Allen Dickerson, Institute for Free Speech
- Hans A. von Spakovsky, The Heritage Foundation
- Jenny Beth Martin, Tea Party Patriots Action
- James Bopp, Jr., James Madison Center for Free Speech
- Ryan Mulvey, Americans for Prosperity
- Carol Platt Liebau, Yankee Institute for Public Policy
- Catherine Suvari, State of New York Office of the Attorney General
- Brendan Fischer, Campaign Legal Center
- Scott Walter, Capital Research Center
- Eric Peterson, Pelican Institute for Public Policy
- Ann Stillman, Church Alliance
- G. Daniel Miller, Conner & Winters, LLP
- Mark Brnovich, Office of the Arizona Attorney General
- Ashley Varner, Freedom Foundation
- Robert Alt The Buckeye Institute
Thursday, February 6, 2020
Even though President Trump appears to have finally settled the legal issues arising out of his private foundation with the payment of the $2 million in damages owed late last year, other charity-related issues have arisen for organizations and individuals associated with him. These include renewed allegations that one of the President's impeachment lawyers and his family improperly benefitted from a network of charities to the tune of $65 million, a lawsuit by the District of Columbia Attorney General against the section 501(c)(4) 58th Presidential Inaugural Committee and for-profit entities owned by Mr. Trump and his family for alleged private inurement, reports that a section 501(c)(3) charity is giving away amounts totaling tens of thousands of dollars to hoped-for African American Trump supporters, which may not be a charitable activity, and a megachurch hosting a Trump political rally, raising questions about whether doing so violated the section 501(c)(3) prohibition on political campaign intervention.
But President Trump and those around him are far from the only political actors to engage in allegedly questionable behavior when it comes to charities, as Jack Siegel documented more than 10 years ago in The Wild, The Innocent, and the K Street Shuffle: The Tax System's Role in Policing Interactions Between Charities and Politicians (subscription required). Here is an undoubtedly incomplete list of such stories from across the political spectrum:
- As Florida House Starts Investigating Domestic Violence Nonprofit, Exec Has No Answers (Miami Herald): This investigation grew out of earlier reports questioning the high compensation paid to the CEO of this politically connected charity, which state law requires be contracted with by the Florida Department of Children and Families.
- Lawmaker Accused of Theft From Charity Announces Resignation (U.S. News/AP): A Pennsylvania state representative stepped down in the wake of the state Attorney General filing criminal charges against her, alleging that she stole more than $500,000 from a charity she operated.
- Minnesota Attorney General's Suit Accuses Former Ramsey County Commissioner of Mismanaging Charity's Funds (Star Tribune): The lawsuit alleges that the former Commissioner and others at a now-defunct veterans charity had mismanaged government funds, including through engaging in self-interested, related party transactions.
- Sloppy Accounting, Funding Debts: A Look at Maya Rockeymoore Cummings's Charity (Washington Post): This story documents a close financial relationship between a charity run by the widow of Elijah Cummings (and now candidate for his congressional seat) and her for-profit consulting firm, a relationship that was apparently not fully reported on the charity's IRS returns.
- State AG Probes Lawmakers' Charity Over Failed Minority Student Scholarships (N.Y. Post): The New York Attorney General's office has reportedly launched an investigation into whether a charity associated with a number of state lawmakers failed to pursue its stated mission of providing scholarships to needy minority students, instead focusing on events for its lawmaker members and other activities.
Wednesday, February 5, 2020
One almost certainly unintended casualty of the cap on state and local tax (SALT) deductions contained in the 2017 tax reform legislation were the numerous pre-existing state and local tax credit programs designed to favor a number of initiatives, but primarily school choice efforts (as identified in this paper). While Treasury and the IRS have taken certain steps to limit the impact of the cap on these programs, as detailed in the background and explanation of the most recent set of proposed regulations implementing the cap, the relief provided has been far from complete.
Which brings us to last night's State of the Union address. In it, President Trump touted a proposal long-supported by Education Secretary Betsy DeVos: establishing a program to allow states to provide federal tax credits to individuals and businesses that contribute to K-12 scholarship organizations. (See U.S. News coverage.) As proposed in the Education Freedom Scholarships and Opportunity Act, donations to state-identified scholarship-granting section 501(c)(3) organizations that satisfy certain requirements would give the donor a federal tax credit equal to the amount of their donation, up to 10% of their adjusted gross income for individuals and up to 5% of taxable income for corporations.
While the chance of Congress enacting this proposal during the current session, especially given the Democratic control of the House, is almost certainly negligible, the high profile support of this measure appears to be at least in part an attempt to mollify the school-choice supporters who were blindsided by the effect of the SALT cap. And of course a future Congress could enact a tax credit along these lines.
Electronic Filing for Applications and Returns Moves Forward, Even as More Form 1023-EZ Issues Emerge
The IRS Exempt Organizations division is rapidly moving into the digital age when it comes to required filings. First, in mid-December the IRS provided details on how it will implement the new congressional requirement that annual information returns and related forms be filed electronically for tax years beginning after July 1, 2019. However and as allowed by Congress, the IRS decided to postpone this requirement for Form 990-EZ filers until tax years ending July 31, 2021 or later. It also will delay until 2021 electronic filing for certain other forms that are not yet available in electronic format, including Form 990-T (for reporting unrelated business taxable income) and Form 4720 (for reporting certain excise taxes).
Second, the IRS has issued guidance on its new requirement that the Form 1023 Application for Recognition of Exemption Under Section 501(c)(3) also be filed electronically. In Revenue Procedure 2020-8 it made clear that electronic submission is the exclusive means of submitting this form after January 31, 2020, except for submissions eligible for a 90-day transition relief period, as well as modifying other aspects of the application process to reflect the electronic filing requirement. The IRS also issued a news release summarizing the changes made by the Revenue Procedure.
But at the same time as the IRS was moving forward with electronic filing, the Acting National Taxpayer Advocate included in her Annual Report to Congress a highly critical Study of the Extent to Which the IRS Continues to Erroneously Approve Form 1023-EZ Applications. Here are the Study's key findings:
In 2015, 2016, and 2017, TAS studied representative samples of articles of incorporation for corporations from 20 states that make articles of incorporation viewable online at no cost and whose Form 1023-EZ had been approved by the IRS during the preceding year. The studies found that between 26 percent and 42 percent of the time, the approved organizations did not meet the organizational test and thus did not qualify for the exempt status the IRS had conferred. In 2019, TAS repeated the study and found that 46 percent of the approved organizations did not qualify for IRC § 501(c)(3) status.
The 2019 study also found that some states provide form, or template, articles of incorporation. Depending on the template, corporations that use the template are virtually guaranteed to meet, or fail to meet, the organizational test. A review of other information that applicants provide on Form 1023-EZ, such as their websites, may provide useful insight about whether the organization qualifies for exempt status.
Form 1023-EZ was revised in 2018 to require applicants to provide a description (in 255 characters or less) of their mission or most significant activities. However, according to IRS procedures, the described mission or activities need only be “within the scope of IRC § 501(c)(3)” to be deemed sufficient. According to the 2019 study results, the IRS made erroneous determinations more frequently after it added the description field.
Another week and another IRS victory in a conservation easement deduction dispute. This week the losing taxpayers were the individuals in Carter v. Commissioner, T.C. Memo. 2020-21. A partnership donated an easement but retained certain rights as to specific parts of the covered property that were inconsistent with the easement's conservation purposes, causing the individual taxpayers who owned the partnership to lose their claimed deductions, which in the aggregate were in the millions of dollars. (The IRS' attempt to impose penalties failed because of a procedural error, however.)
UPDATE: And on Wednesday, the IRS won another conservation easement in Tax Court. In Railroad Holdings, LLC v Commissioner, T.C. Memo 2020-22, the court found that an extinguishment provision failed to ensure that the easement was protected in perpetuity and so the claimed $16 million charitable contribution deduction failed.
This decision came in the wake of an IRS news release late last year that touted the agency's successful challenge of a syndicated conservation easement transaction in TOT Property Holdings, LLC v. Commissioner (U.S. Tax Court, Dec. 13, 2019). In the news release, the IRS "urged taxpayers involved in designated syndicated conservation easement arrangements to consult with their tax advisors following a recent U.S. Tax Court decision and agency plans to continue enforcement efforts in this area."
Yet all may not be as rosy for the IRS as it appears. Last month ProPublica published an article focusing on syndicated conservation easements titled The IRS Tried to Crack Down on Rich People Using an "Abusive" Tax Deduction. It Hasn't Gone So Well. According to the article, the DOJ, IRS, and congressional crackdown on these vehicles "seems to be having, at best, a limited effect." It noted that IRS Commissioner Chuck Rettig testified last April that the deals had not declined. It also reported that there are now three IRS divisions engaged in coordinated examinations relating to 125 identified "high-risk cases" and more than 80 Tax Court cases pending. In addition, the article cited evidence that large-scale deals were still in process as recently as last fall. It therefore remains to be seen whether the IRS' continuing war against improper deductions relating to conservation easements, whether syndicated or otherwise, will in fact be won.