The 2018 Western Conference on Tax Exempt Organizations (WCTEO) is currently taking place in Los Angeles. Here are some selected running highlights.
- IRS 2018-2019 Priority Guidance Plan – Implementation of the Tax Cuts and Jobs Act (Items 21, 34, 39, 40, 58); Exempt Organizations (pp. 16-17); General Tax Issues (Item 11)
- Average processing time of exemption applications other than the Form 1023-EZ – 100 days (trending up); average processing time for the Form 1023-EZ – 40 days
- Exempt application overage inventory (270+ days) – < 2 percent
- IRS Tax Exempt & Government Entities Fiscal Year 2019 Program Letter
- Helpful IRS Resources – Issue Snapshots; Podcasts – Starting Out, Existing Organizations
- Notice 2018-55 – Calculation of Net Investment Income for Purposes of the Section 4968 Excise Tax Applicable to Certain Private Colleges and Universities
- Substantiation and Reporting Requirements for Cash and Noncash Charitable Contribution Deductions
- Notice 2018-67 – Calculation of Unrelated Business Taxable Income under § 512(a)(6) for Exempt Organizations with More than One Unrelated Trade or Business
- Draft Form 990-T – Exempt Organization Business Income Tax Return, Draft Instructions to Form 990-T, and Draft Schedule M
- Rev. Proc 2018-38 – modifying the information to be reported to the IRS by organizations exempt from tax under § 501(a) of the Internal Revenue Code (Code), other than organizations described in § 501(c)(3), that are required to file an annual Form 990 or Form 990-EZ information return (names and addresses of their contributors on the Schedule B)
- Tax Cuts and Jobs Act impact on charitable giving may not be fully understood until another year has passed when we have more confidence that many donors who used to be able to take a charitable contribution learn that their contributions are no longer deductible (perhaps only 9% of taxpayers will get the benefit of the charitable contribution deduction).
New Tax Law – UBIT
- [Background Reading – IRS Guidance on UBIT Silos – 512(a)(6) – PART I and PART II]
- Siloing separate trades or businesses will be a major challenge, partly because what the IRS may now consider separate businesses may have always been treated as one business.
- Change in UBIT rates will harm small organizations (which may have moved from a 15% marginal tax rate to the 21% UBIT rate).
- Change in UBIT rates may cause charitable trust to consider “converting” to a corporation (37% UBIT rate to 21% UBIT rate).
- UBIT on qualified transportation fringes for fiscal year (not calendar year) filers may be difficult to qualify because of the change i the UBIT rates.
- Net Operating Losses – went back for 2 years and forward for 20 years; now can’t go back but can go forward indefinitely (so long as the activity continues – though they may not be lost – still question marks).
- UBIT Blocker / NOL Coagulator – could move multiple lines of UBTI-producing businesses into a separate taxable subsidiary in order to allow for “cross-pollination” of expenses and income (no silo treatment).
New Tax Law: Executive Compensation
- See Draft 2018 Form 990 adds questions regarding Section 4960 and 4968 excise taxes (Ernst & Young) re: Section 4960
- See American Bar Association, Section of Taxation Comments on guidance regarding sections 512(a)(7) and 4960 (August 28, 2018)
- See Section 4960’s Failure to Tax Governmental Entities (Ellen Aprill)
- Draft Form 4720 – Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code
Keynote by Rob Reich
- Read Just Giving: Why Philanthropy Is Failing Democracy and How It Can Do Better, subject of a future blog post
- One recommendation: a commission to peer review (on a volunteer basis) long-term foundation funding of democracy-supporting experiments (the type of giving foundations should principally focus on)
Donor Advised Funds
- Notice 2017-73 – Request for Comments on Application of Excise Taxes With Respect to Donor Advised Funds in Certain Situations
- IRS Provides Some Limited Guidance on Donor Advised Funds (Adler Colvin)
- Congress intended donor-advised funds to be owned and controlled by the sponsoring organization, not by the donors or any donor-advisors, but 2017-73 seems to contain an inconsistency with such premise regarding how a donor’s pledge might be fulfilled by a DAF grant (don’t ask, don’t tell rule).
- DAF “investments” that would qualify as a PRI are not distributions, but if private foundation-like distribution rules are ever adopted, will the PRI rules also apply on an individual DAF basis?
- $100 billion in DAFs, but just 6 questions about DAFs in the Form 990: total number of DAFs, aggregate values of contributions to, aggregate value of grants from, aggregate value at end of the year, and 2 yes or no questions about informing donors.
- Must ask where money going to DAFs would otherwise go if new rules are adopted. Even if a big portion went to operating charities, if they go to the big charities (e.g., universities, hospitals), they might just sit in the investment funds of the big charities which have no spending requirement.
501(c)(3) and Its Relation to (c)(4)
- 501(c)(3) / 501(c)(4) affiliated organizations – Look for pathways and opportunities. For example, consider asking donor for less, but direct the donation to the 501(c)(4) instead of the 501(c)(3). And think about maximizing the charity’s lobbying expenditures through grants to the 501(c)(4) even if the 501(c)(4) has no plans to spend it in that year for strategic purposes.
- Considerations have to do with protecting the 501(c)(3) from (1) being attributed with activities of the 501(c)(4) that would be prohibited if conducted within the 501(c)(3). and (2) subsidizing activities of the 501(c)(4) that would be prohibited if conducted within the 501(c)(3). 501(c)(3) prohibited activities include, but are not limited to, electioneering and excessive (“substantial”) lobbying. The 501(c)(3) may also need to be careful about prohibited private benefit violations and state self-dealing laws.
Ethics of Opinion Writing
- Contexts for rendering exempt organizations tax opinions – Chapter 42 Excise Tax Protection Opinions, Tax Consequences Opinions (e.g., whether income is UBTI, whether one line of business is in the same “silo” as another), Contractual Condition Opinions (e.g., no adverse impact on 501(c)(3) status), Third-Party Inducement / Escape Hatch Opinions (e.g., right to terminate JV with for-profit if counsel opines that exempt status of exempt partner is at risk), Borrower’s Counsel in Tax-Exempt Bond Financings, ASC 740-10 (formerly FIN 48) Opinions (disclosure of uncertain tax positions – more likely than not)
- Opinions can allow for foundation managers (including board members) to rely on reasoned written opinion of counsel or “appropriate professionals” (for 4958 excess benefit transactions)
- A written opinion is not reasoned if it does nothing more than recite the facts and express a conclusion.
- Circular 230: “A practitioner must possess the necessary competence to engage in practice before the Internal Revenue Service. Competent practice requires the appropriate level of knowledge, skill, thoroughness, and preparation necessary for the matter for which the practitioner is engaged.”
- Circular 230: Requirements for Written Advice on Federal Tax Matters: must be based on reasonable factual and legal assumptions, including assumptions as to future events; reasonably consider all relevant facts and circumstances that the practitioner knows or should know; use reasonable efforts to identify and ascertain relevant facts; and relate applicable law and authorities to facts; AND must not rely on representations of the taxpayer or others if reliance would be unreasonable; and not take into account the possibility that a tax return will not be audited, or that a matter will not be raised on audit.
- Opinion Comfort Levels: will/is, should, more likely than not, substantial authority, realistic possibility of success, reasonable basis, frivolous
- Tax Cuts & Jobs Act – Effect on Nonprofits: Charities estimated to lose $17.2 billion in donations in 2018 alone per American Enterprise Institute estimate; 21 million taxpayers will lose ability to claim a deduction; charitable deduction now limited to top 9% of taxpayers; most of loss attributable to combined effect of doubled standard deduction, $10,000 state and local tax (SALT) cap, reduced mortgage interest deduction; some of loss also due to increased estate tax exemption.
- Tax Reform 2.0 – Current draft incorporates 3 bills and includes additional incentive for cash gifts to public charities, amending Section 170(b)(1)(G)(iii) to allow donors to give 50% of adjusted gross income (AGI) in property and 10% in cash. House likely to pass but probably not Senate (though could pass a rewritten version).
- 2018-2019 Priority Guidance Plan includes guidance on 512(a)(6), 512(a)(7), 4960
- TE/GE continues partnership with IRS data analytics team known as Research, Applied Analytics, and Statistics (RAAS) to build compliance models based on Form 990 and other tax forms filed by nonprofits.
- Compliance areas of focus using data analytics include: private benefit/inurement, officer business partnerships, underreported credit card income, related employees and for-profit partnerships.
- Rev. Proc. 2018-15 – The IRS generally will not require a new exemption application from a domestic section 501(c) organization that changes its form or place of organization.
- TAM 201837014 – Discussed whether a 501(c)(6) organization received unrelated business taxable income from advertising under the terms of an agreement with Publisher in connection with publishing a Journal. Did not discuss joint venture rules. Concluded no UBTI.
And Much More
- Breakfast roundtables on a variety of subjects
- Breakout sessions on California FTB and AG Developments, Cryptocurrencies, and Private Foundation Hot Topics
- Charitable Giving Update