Monday, May 11, 2020
Writing in today's Chronicle of Philanthropy, Susan N. Dreyfus and John MacIntosh opine that during the current COVID-19 crisis and its aftermath, many medium-sized nonprofit organizations will not survive unless the federal government provides them more much-needed support. Dreyfus is CEO of the Alliance for Strong Families and Communities; MacIntosh is managing partner of SeaChange Capital Partners, an organization that helps nonprofits facing complex financial challenges. In their thought-provoking article in today's Chronicle, they argue that while
[n]onprofits of all kinds provide critical help to communities across the United States, . . . it is the medium-sized ones that make a critical difference — those with at least 500 employees. Their workers operate food pantries, and homeless and domestic-violence shelters. They manage and staff residential facilities for young people with mental illnesses. They offer in-home and residential services for older Americans and people with disabilities. During the Covid-19 pandemic, their work is more urgent than ever.
Yet, the authors state, even as these organizations face various challenges -- challenges as daunting as those faced by their smaller counterparts -- they "are not receiving the government support they need to survive." For example, the "federal Paycheck Protection Program excludes nonprofits with more that 500 employees from obtaining the forgivable loans that would allow them to retain and compensate their employees and continue to deliver essential services during this public-health crisis."
What, then, can we do? As the article points out, at "a time when many nonprofits are at a breaking point, we [cannot] afford to leave those with more than 500 employees out of support programs that are keeping smaller organizations afloat."
According to the article,
A new analysis of New York City’s larger nonprofits found that under normal circumstances, most have just two weeks of cash on hand. Without immediate assistance, the report projects that some won’t survive through May and that few, if any, will be in a position to continue services during the Covid-19 crisis and its aftermath. Most of these organizations lack meaningful endowments and have limited access to credit. Their operating margins are razor thin (an average of 1 percent), even before taking into account the reduction in revenue and increase in expenses associated with the pandemic. Most importantly, their philanthropy, which covers less than 5 percent of expenses, cannot make up for a reduction in funding and contracts during the health crisis.
The article continues:
This situation is not unique to New York. A 2018 report on the financial stability of community-based human-services organizations found that 40 percent of the larger nonprofits had less than one month of cash reserves. Those providing housing and shelter-related services faced significantly greater financial stress.
Critics may be quick to argue that the challenges confronting these nonprofits are the result of their own inefficiency and poor management. Not so, argue Dreyfus and MacIntosh. They specifically state that:
The challenges confronting these nonprofits are not the result of inefficiency or poor management. Most government funding and philanthropy traditionally does not cover the full cost of providing services. Government contracts for essential services also create cash-flow problems since, unlike with grants, payments are not made until after the work is completed and can be subject to long and unpredictable delays. Cash, as a consequence, is an ongoing issue. But unlike large for-profits, these organizations do not have access to capital markets, cannot easily unlock illiquid assets, and are unable to use bankruptcy to restructure while continuing to deliver services. Any increase in costs, reduction in revenue, or delay in cash receipts could put some of them permanently over the edge.
So just what is the solution? The authors call for Congressional action:
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.
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
Friday, April 17, 2020
ANSWER FOUND: Why the $300 Above-the-Line Charitable Contribution Is Only Available for Tax Years Beginning in 2020
Thanks to a sharp-eyed reader of this blog (NYU Professor Harvey Dale), I now have the answer to why the $300 above-the-line charitable contribution deduction is only available for contributions made during taxable years beginning in 2020. The relevant section of the CARES Act (2204) adds a paragraph to Internal Revenue Code section 62(a) that says the following (emphasis added):
(22) CHARITABLE CONTRIBUTIONS.—In the case of taxable years beginning in 2020, the amount (not to exceed $300) of qualified charitable contributions made by an eligible individual during the taxable year.”.
So while the effective date language only says "shall apply to taxable years beginning after December 31, 2019," the above quoted language limits the deduction to taxable years beginning in 2020. For the vast majority of individuals, the taxable year that begins in 2020 will be the 2020 calendar year. However, individuals are in some circumstances able to choose a non-calendar fiscal year for tax purposes (see IRS Publication 538, p. 4). So the Joint Committee on Taxation scoring publication was not completely accurate in describing the deduction as "sunset 12/31/20".
Thursday, April 16, 2020
Coronavirus Nonprofit Law Additional Roundup: Chronicle on Philanthropy Coverage; JCT Scoring; DAFs & Private Foundations; State Guidance
Chronicle of Philanthropy Coverage: The Chronicle of Philanthropy is providing a series of articles to help nonprofits deal with the coronavirus crisis. Notable entries relating to legal topics include:
- How the New $300 "Universal" Deduction Works (flagging not only the uncertainty about how long the deduction is available but also whether a married couple filing jointly can claim a $600 deduction)
JCT Scoring of CARES Act: See the numbers below for the projected revenue effects of the CARES Act charitable contribution deduction provisions from Joint Committee of Taxation publication JCX-11-20. Perhaps most importantly, and as flagged by a commentator on my initial roundup, JCT takes the position that the $300, above-the-line charitable contribution deduction sunsets on 12/31/2020, although I still have not found statutory language to this effect.
Provision Effective 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2020-25 2020-30
4. Allowance of partial above
the line deduction for charitable tyba 12/31/19 -310 -1,241 --- --- --- --- --- --- --- --- --- -1,551 -1,551
contributions (sunset 12/31/20)
5. Modification of limitations
on charitable contributions tyea 12/31/19 -1,080 -3,748 2,403 741 367 45 179 --- --- --- --- -1,272 -1,093
[Millions of Dollars; Years are Fiscal Years; tyba = taxable years beginning after; tyea = taxable years ending after]
DAFs and Private Foundations: As many nonprofits and particularly charities brace for a sharp downturn in donations, numerous commentators are calling on advisers and sponsoring organizations for donor-advised funds and management for private foundations and other funders to increase and modify their giving. Examples from the Chronicle of Philanthropy include:
- David Biemesderfer, Grantmakers Must Put Equity at the Forefront of the Coronavirus Response
- Alan Cantor, Save Lives Now, Grant Makers and Donors
- Terry Mazany, The Coronavirus Outbreak Could Prove Why Donor-Advised Funds Serve Society
- Lauren Smith, How to Help the Most Vulnerable Through the Pandemic
State Guidance: The New York Attorney General's Charities Bureau has issued Guidance for Charitable Nonprofit Organizations Facing the Challenges of the COVID-19 Pandemic. Topics covered include:
- How the Charities Bureau Can Help
- Registration with the Attorney General's Charities Bureau
- Additional Extensions of Times to File
- IRS Extended IRS Form 990 Filing Date
- Reserves, Restricted Assets, and Use of Endowment Funds
- Filing a Complaint with the Charities Bureau
- Resources for Charities
Wednesday, April 15, 2020
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.
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.
Thursday, January 30, 2020
IR-2020-23, January 28, 2020
WASHINGTON – The Internal Revenue Service wants tax-exempt organizations to know about recent tax law changes that might affect them. The Taxpayer Certainty and Disaster Tax Relief Act, passed on December 20, 2019, includes several provisions that may apply to tax-exempt organizations' current and previous tax years.
Repeal of "parking lot tax" on exempt employers
This legislation retroactively repealed the increase in unrelated business taxable income by amounts paid or incurred for certain fringe benefits for which a deduction is not allowed, most notably qualified transportation fringes such as employer-provided parking. Previously, Congress had enacted this provision as part of the Tax Cuts and Jobs Act, effective for amounts paid or incurred after December 31, 2017.
Tax-exempt organizations that paid unrelated business income tax on expenses for qualified transportation fringe benefits, including employee parking, may claim a refund. To do so, they should file an amended Form 990-T within the time allowed for refunds. More information on this process can be found at IRS.gov.
Tax simplification for private foundations
The legislation reduced the 2% excise tax on net investment income of private foundations to 1.39%. At the same time, the legislation repealed the 1% special rate that applied if the private foundation met certain distribution requirements.
The changes are effective for taxable years beginning after December 20, 2019.
Exclusion of certain government grants by exempt utility co-ops
Generally, a section 501(c)(12) organization must receive 85% or more of its income from members to maintain exemption.
Under changes enacted as part of the Tax Cuts and Jobs Act, government grants are usually considered income and would otherwise be treated as non-member income for telephone and electric cooperatives. Under prior law, government grants were generally not treated as income, but as contributions to capital.
The 2019 legislation provided that certain government grants made to tax-exempt 501(c)(12) telephone or electric cooperatives for purposes of disaster relief, or for utility facilities or services, are not considered when applying the 85%-member income test. Since these government grants are excluded from the income test, exempt telephone or electric co-ops may accept these grants without the grant impacting their tax-exemption.
This legislation is retroactive to taxable years beginning after 2017.
Wednesday, January 29, 2020
The Congressional Research Service recently published The Charitable Deduction for Individuals: A Brief Legislative History. Here is a short summary of the publication:
This report provides a brief history of the major legislative changes to the charitable deduction that have occurred over the past 100 years, focusing on changes to the amount that taxpayers could deduct. Over the past 100 years, Congress has generally increased the amount that eligible taxpayers can deduct for their charitable donations. These changes are summarized in the below table.
As Congress has expanded the amount that can be deducted by those who claim the deduction, policymakers have debated the deduction’s effectiveness at increasing charitable giving and the broader role of government subsidies for the philanthropic sector—a discussion that continues to this day
Ellen Aprill (Loyola-LA) posted The Private Foundation Excise Tax on Self-Dealing: Contours, Comparisons, and Character (forthcoming, Pittsburgh Tax Review) to SSRN. Here is the abstract:
This paper considers section 4941, the private foundation excise tax on self-dealing, on the occasion of its fiftieth anniversary. Part I gives background on section 4941. Part II compares the rules of section 4941 to the parallel ones applicable to public charities, including the special rules for supporting organizations and donor advised funds. The fiftieth anniversary of the private foundation excises taxes is also an appropriate time to confront two foundational questions, and Part III does so. It first asks whether we can view the private foundation taxes in general and section 4941 in particular as constitutional exercises of Congress’s taxing power under the tests announced in National Federation of Independent Businesses v. Sibelius. Second, it considers whether we should characterize the section 4941 excise tax as a Pigouvian tax – a hot category among economists but less familiar to lawyers. It answers “maybe not” to the first and “yes but” to the second.
Inconsistent Congressional treatment of self-dealing by section 501(c)(3) organizations and the low level of enforcement lead me to question the effectiveness of our current self-dealing rules. Thus, this examination concludes by suggesting a number of possible changes to the excise taxes applicable to tax-exempt organizations. The conclusion not only considers in detail a relatively small but potentially significant change – expanding abatement rules for first-tier excise taxes to section 4941, but also endorses a large one – the suggestion that approaches outside of the Internal Revenue Service be considered for regulating the charitable sector.
Thursday, January 9, 2020
In a tax package agreed to on December 17, 2019, last year, Congress repealed a provision of the code widely known as the church parking tax. I wrote about it on Surly Sub Group when it was enacted in 2017 concerned about its massive probably unintended effect on nonprofits. It caused massive havoc in that world, and nonprofits, led by churches mounted a massive effort to get the provision repealed. It took two years, but they were successful.
Thus, even though the IRS spent significant time providing guidance on how to comply, and presumably large nonprofits around the country adjusted their parking situation dramatically, nonprofits and the IRS must now act as if none of that ever happened. Many nonprofits like universities and hospitals likely paid large 21% rate taxes on parking fringe benefits that they continued to provide to their employees.
What now? IRS needs to figure out how to expeditiously issue refunds.
Congress members just issued a letter to the IRS asking it to issue guidance as quickly as possible to let nonprofits know how to obtain these refunds.
Monday, November 4, 2019
Where are we on the regulation of charity fifty years after Congress passed the Tax Reform Act of 1969? My colleague Tony Infanti and I along with our Pitt Law Students of the Pitt Tax Review hosted six scholars and two practitioners as commenters on Friday November 1 to consider that question. The symposium was entitled The 1969 Tax Reform Act and Charities: Fifty Years Later
Natural questions arise: (1) What was that act’s goal with respect to Charity? With respect to tax? (2) Did it accomplish these goals? (3) Are those goals still relevant today? (4) What goals might suggest themselves today? (5) Do we have the ability to make those changes that are needed? In our conversations we did not answer all of those questions, but we sure tried.
Pittsburgh as a city strikes me as a fit and proper place to ask these questions. Why do I say this? Pittsburgh, city of the rust belt, but also city of Carnegie, Frick, Mellon, Heinz, city of steel, coal, banking, and ketchup and now city of higher ed, tech, and cutting edge health care. It provides the natural and social landscape for investigating private wealth and its philanthropic use. At the beginning of the 20th Century Pittsburgh generated an enormous amount of the GDP of the US particularly through its manufacture of steel. That industrial choice brought great wealth to a few, and supported the careers of many, but also caused great damage to the environment for the long term. Pittsburgh as a city crashed in the 1980s (I have heard different dates, but place it there as that is when many of the steel mills seem to have closed down), and it has struggled to come back from the loss of the steel industry ever since.
However, today the city has transformed itself with Carnegie Mellon and Pitt driving a high tech economy, UPMC engaging in cutting edge health care connected with the University of Pittsburgh, and a robust provision of higher education. It almost surely survived to another day as a result of major philanthropic capital from the robber barron days from the likes of the Mellon, Heinz, Pittsburgh, and Hillman foundations. These private foundations led an effort to clean up the city and transform it into the more vibrant place that it is today.
Congress in the 1969 Tax Reform Act responded to a concern about the type of wealth harnessed in foundations like those in Pittsburgh. In fact, as discussed by Jim Fishman in his presentation about the history of the 1969 Tax Act the Mellon Foundation played a big role. Congress at the time was deeply concerned that wealthy individuals were abusing money put into charitable solution and decided it was important to stop those abuses. These papers consider both the origins of these rules and whether these rules still have relevance today.
The first panel considered the topic of Investing for Charity. Ray Madoff presented The Five Percent Fig Leaf critiquing the five-percent payout rule that the 1969 Tax Act imposed on private foundations. Professor Madoff's paper was paired with Dana Brakman Reiser's contribution Foundation Regulation in Our Age of Impact. Professor Brakman considered the placement of program related investments and mission related investments within the current regulatory context and found the rules wanting in many ways.
The second panel was entitled Origins of Private Foundation Rules and their Meaning for Today. Jim Fishman provided great historical insight leading up to the Act in Does the Origin of the 1969 Private Foundation Rules Suggest a Match for Current Regulatory Needs? Interestingly, Professor Fishman thinks the Act really helped in creating the positive attitude many feel towards private foundations today. He thinks there is a real problem though with smaller private foundations where compliance is likely low. Khrista McCarden focused on a category we had not yet considered that of private operating foundations, which are treated a little better than typical private foundations in her piece entitled Private Operating Foundation Reform & J. Paul Getty. She is concerned about private art museums particularly because of their lack of broad community access.
Finally panel 3 considered Regulating Charitable Actors. Ellen P. Aprill presented The Private Foundation Excise Tax on Self Dealing: Contours, Comparison and Character. It usefully compares the general ethic of the different self-dealing rules that exist within the charitable context particularly that of section 4941 and 4958. However, more interestingly she considers both whether NFIB v. Sebelius might suggest that the 4941 excise tax is a penalty rather than a tax, and whether the tax might be able to serve as a Pigouvian tax. Finally, Elaine Wilson presented her paper Is Consistency Hobgoblin of Little Minds? Co-Investment under Section 4941. The paper focuses on certain PLRs that allow private foundation donors to "co-invest" with their related private foundation, seemingly in violation of the section 4941 self-dealing rule. It then shows why it is valuable from a securities regulation perspective for the private foundations to be provided this leeway from the IRS, and asks why the IRS would have twisted the seemingly clear meanings of the self-dealing exise tax.
I hope to blog about each panel in more depth the rest of this week.
Friday, October 4, 2019
In a follow-up to a March blog entry regarding Congressional scrutiny of syndicated conservation easements, Senate Finance Committee Chairman Chuck Grassley and Ranking Member Ron Wyden announced in mid-September that subpoenas were issued for documents relevant to their bipartisan investigation of syndicated conservation-easement transactions. Wyden stated in the announcement:
As we’ve both said all along, conservation easements have very legitimate purposes. We need to protect those purposes and protect the American taxpayer. If a handful of folks can game the system for profit, then we’re all left holding the bag. We expect fulsome cooperation with our investigation, and it’s unfortunate we’ve had to resort to compulsory process. Ultimately, when Congress makes an inquiry, it needs to be answered. It’s not optional.
Let’s say a man named John donates a conservation easement on his farm to a land trust. His appraiser valued the farm at $3 million before the easement and $2 million after the easement. Therefore, the easement is worth $1 million, which would be the amount of the tax deduction available for the donation. John doesn’t have sufficient income to use this deduction. He wants to sell the deduction to someone who can use it.
Federal tax law does not allow the donor of a conservation easement, or of any other property for that matter, to transfer the deduction generated by the donation to someone else. A federal tax deduction is personal to the donor. If the donor can use the deduction, fine; if not, it disappears. In other words, John can’t sell his deduction.
This is simple. However, some legitimate conservationists, and some not-so-legitimate tax shelter “facilitators,” are using limited liability companies and other so-called “pass-through” entities to try to “syndicate” tax deductions — in essence, to sell them — in ways that an individual, such as John, cannot accomplish. These deals are anything but “simple.”
Lindstrom acurrately points out that not all syndications are "shams," but advocates for syndications that allocate tax deductions to be scrutinized. Syndications that fail to comply with complex allocation rules for pass-through entities and/or utilize inflated easement appraisals, according to Lindstrom, threaten "the viability of the tax benefits for conservation easements and the credibility of the voluntary land conservation effort."
In a follow-up to a previous post this week The NRA and Russia: How a Tax Exempt Organization Became a Foreign Asset, Senate Minority Leader Chuck Schumer and Senate Finance Committee ranking member Ron Wyden called for an IRS examination of the NRA's ongoing tax-exempt status in a October 2nd letter to IRS Commissioner Chuck Rettig. The request comes on the heels of the Senate Finance Democrats' release last week of a report on the organizations's interactions with Russian nationals. Schumer and Wyden stated in the letter: "Given this report's concerning findings and other allegations of potential violations of tax exempt law by the NRA, it is incumbent on the IRS to fully investigate the organization's activities to determine whether the NRA's tax exemption should be disallowed."
The NRA is a tax-exempt under section 501(c)(4) of the Internal Revenue Code as a social-welfare organization. The organization also has affiliated entities that are tax-exempt under sections 501(c)(3) and 527 of the Code.
Schumer and Wyden assert in their letter that the findings of the report raise concerns of whether the NRA's activities violated the statutory social welfare requirements, including the use of tax-exempt resources for non-tax-exempt purposes. "In light of the continued efforts of Russia to undermine American democracy, IRS must use its full authority to prevent foreign adversaries from again exploiting tax-exempt organizations to undermine American interests," Wyden and Schumer wrote. The NRA and Senate Republicans take issue with the report and its findings.
As we previously blogged, the New York and District of Columbia attorneys general are conducting their own investigations about whether the NRA is complying with state tax laws.
Tuesday, October 1, 2019
In September 25 letters to the presidents of Duke, Harvard, and Villanova universities and Sarah Lawrence College, Senate Finance Committee Chair Chuck Grassley raised concerns and sought information on the current culture of academic freedom on their respective campuses. In a recent op-ed published by the Wall Street Journal, Grassley raised concerns about the current state of academic freedom in higher education, opining that students' demand for "safety" from "harm" is eroding academic freedom and the very point of higher education. In each of the letters Grassley elaborated further:
Unfortunately, over the past year I have read a variety of media reports discussing incidents in higher education involving faculty suffering difficulties with or expressing concerns about teaching or researching topics that might challenge or encourage critical thinking about the conventional wisdom or a popular ideology of the day. . . Students who can work and think critically for themselves are best equipped to tackle the most difficult challenges we face and participate fully and effectively in our democracy.
A fundamental piece of this democracy-enabling purpose is that college and university professors should be free to teach and research – and students should be free to learn – to the best of their abilities in defiance of an undiscerning "instinct to believe what others do." The United States’ higher education has long been the envy of the world for its ability to do just that. This letter respectfully requests information regarding the university’s commitment to creating such an educational environment in which its faculty can teach topics and take positions on matters that defy conventional wisdom and challenge orthodoxies in necessary but perhaps uncomfortable ways. . . .
With respect to tax-exempt status, Grassley quoted Bob Jones University vs. United States: "Charitable exemptions are justified on the basis that the exempt entity confers a public benefit -- a benefit which the society or community may not itself choose or be able to provide, or which supplements and advances the work of public institutions already supported by tax revenues." He further agreed with a description of tax-exempt purpose as to higher education being "fundamental to fostering the productive and civic capacity of [the Nation's] citizens."
The requested responses from the four institutions are due by October 25, 2019.
[See also Tax Notes dated September 30, 2019, Tax-Exempt Higher Ed Must Allow Academic Freedom]