The following are some of the highlights from Day One of the WCTEO 2019.
- Sunita Lough (IRS, Deputy Commissioner for Services and Enforcement and former commissioner of the Tax Exempt and Government Entities division) discussed the IRS’s shift to enforcement with better data analytics (to select the “right” cases). As an example, she noted the audit of more than a dozen tax-exempt organizations involved in syndicated conservation easements. She also noted that the IRS Criminal Investigation uncovered, through its examination of virtual currency (Bitcoin) transactions, a huge international child trafficking ring. Sunita defended use of the Form 1023-EZ, emphasizing the importance of taxpayer experience but minimizing the added risks of undeserved recognition of exemption based on minimal information. She also mentioned in closing the electronic Form 1023 that will go into effect in 2020.
- Amber MacKenzie (Office of Chief Counsel, IRS) noted the requirements under the Taxpayer First Act of 2019 to file Form 990-series electronically and the possibility of transition relief for organizations that can file the Form 990-EZ (gross receipts less than $200,000 and assets less than $500,000) , which the IRS is considering. She also discussed provisions of the 2019-2020 Priority Guidance Plan applicable to exempt organizations, including regulations to implement the “TCJA” laws around (1) UBIT silos; (2) UBIT on qualified transportation fringe benefits (such as employee parking); (3) IRC 4960 excise taxes on the amount of remuneration in excess of $1 million and any excess parachute payment paid by an applicable tax-exempt organization to a covered employee (see Notice 2019-09); and (4) the excise tax on net investment income of certain private colleges and universities under IRC 4968 (see Proposed Rule).
- Alex discussed an Omnibus bill when Rupublicans led the House which included $54 billion of tax policy modifications that would include:
- repeal of the nonprofit parking tax (cost of $1.776 billion over 10 years);
- expansion of $1 million compensation to state colleges and universities; and
- modification of the Johnson Amendment to allow organizations to make political statement in ordinary course of carrying out its tax exempt purpose (cost of $7.686 billion over 10 years).
Western States Update
- Ingrid Mittermaier moderated.
- Audrey Rowe (FTB, Lead Auditor, Exempt Organizations Division) noted that the FTB receives about 13,000 exemption applications per year. 60% of the Form 3500 applications are for reinstatement. 10% of the Form 3500A applications are for reinstatement, which results in instructions to file the Form 3500. California generally does not conform to IRS provisions regarding the TCJA changes. It’s not known yet whether California will conform to the UBIT silo rules. Audrey also discussed the voluntary dissolution process in which the FTB may abate unpaid taxes and missing returns on the condition the organizations file Form 3502 (2,300 received, of which 1,240 successfully dissolved, over 600 denied or timed out, the remainder are in process or approved but not yet dissolved). With respect to the administrative (involuntary) dissolution process, almost 78,000 identified, over 500 objected, and only 181 were actually revived. Over 77,000 were dissolved.
- Marisa Meltebeke (Davis Wright Tremaine) discussed Oregon’s conformance to the federal tax Code as of 12/31/17. Washington has no individual or corporate income tax (so conformity with the TCJA is not a significant issue), but the state has a gross receipts tax that applies to nonprofits on the same basis as other businesses. Marisa also discussed other Oregon-specific matters.
- Michael Durham (Kirton McConkie) discussed Utah’s rolling conformity to continue to match with the federal tax Code, but noted that this did not mean that Utah’s forms have changed or that its lawmakers know about the changes. Michael also discussed other Utah-specific matters, including the Utah Benefit Limited Liability Company (BLLC).
- Tania Ibanez (Senior Assistant Attorney General in charge of the Charitable Trust Section of the California Attorney General’s Office) discussed the AG’s communications with other state agencies and the FTC regarding compliance matters. She noted the Donate with Honor, Cancer Fund of America, and Viet Now collaborative crackdowns. She also discussed gift in kind administrative actions by the AG’s Registry of Charitable Trusts, including on Food for the Poor. Tania noted that Schedule B was pivotal in understanding the contributions from pharmaceutical companies. She also stated that the AG’s website has been revamped to include many more resources for charities, including a webinar on dissolution. On February 1, 2020, filers will need to file new AG Forms that will be released on January 31, 2020. The big change is new Form CT-TR1 for small nonprofits that don’t file a Form 990 or Form 990-EZ. Form CT-1 and Form RRF-1 have also been changed. Note that the Form RRF-1 (Registration Renewal) can be filed online (there was a soft launch earlier this year).
TCJA on the Ground
- Laverne Woods (Davis Wright Tremaine) moderated, Ofer Lion (Seyfath Shaw) and Debi Heiskala (EY) presented.
- The panel discussed the Section 4960 excise tax on executive compensation (in excess of $1 million, not tied to inflation, and to a top 5 highest compensated employee). Notice 2019-9 and the ABA Taxation Section Comments on Section 4960, Notice 2019-9 and Volunteers Providing Services to Tax-Exempt Organizations seem to imply that volunteers (particularly if they are officers who might fall within the definition of an employee) could be hit by the tax if receiving such compensation from a related organization. Sec. 4960(c)(4)(A) provides in pertinent part: “Remuneration of a covered employee by an applicable tax-exempt organization shall include any remuneration paid with respect to employment of such employee by any related person or governmental entity.”
- The panel further discussed the complications with a change in control and with a shared employment arrangement (which might involve employee leasing companies, professional employer organizations (PEOs), common paymasters).
- Ofer discussed a strategy of creating a UBIT coagulator in a taxable subsidiary to get around the UBIT silo problem. This works when the unrelated businesses are already separate from the exempt activities, but it gets more complicated if they are all intertwined with multiple employees working on both exempt and non-exempt activities.
- Notice 2018-67 addresses in part income from partnerships, which raises additional issues regarding UBIT silos and differentiating among trades and/or business. See IRS Guidance on UBIT Silos – 512(a)(6) – PART II.
- See new Form 990-T. It includes Block H which requires reporting of the number of unrelated trades or businesses, and if more than one, Schedule M for naming each additional trade or business. There are also changes to reflect new NOL limitations. Prior to the TCJA, NOLs could be carried back 2 years; now, carrybacks of NOLs incurred in 2018 and beyond are prohibited. Prior to the TCJA, NOLs could be carried forward 20 years; now, they can be carried forward indefinitely.
- Ofer also discussed the broader application of Newman’s Own Exception than originally expected. See Newman’s Own Gets a New Life. Exception only for private foundations, not for Type III non-functionally integrated supporting organization.
Stress Points in Exempt Organization Compliance
- Debi Heiskala moderated.
- Shannon M. Paresa (Rodriguez, Horii, Choi & Cafferata) discussed California agency stress points. She started with AG registration issues, including for foreign charitable entities with sufficient nexus to California. If the AG issues a cease and desist order, an attorney may need the AG’s written consent to disburse any assets, including to pay compliance costs. The options in such case are to appeal, register, or dissolve. Shannon noted that if an entity’s tax-exemption is revoked by the IRS or FTB or it is suspended or revoked by the Secretary of State, the entity must notify the AG in writing within 10 days of such change. Shannon also discussed the $2 million independent audit requirement and the possibility of receiving an audit requirement waiver from the AG in the event of dissolution or an unusual event unlikely to be recurring. She then discussed FTB filing issues and the impact and options related to revocation of the state tax-exempt status.
- Cathy Livingston (Jones Day) discussed employment tax and compensation stress points. Note that for federal tax purposes, corporate officers are deemed by statute to be employees of the corporation (so you don’t go to the common law standard). IRC 3401(c), 3121(d)(1), 3306(i). She further discussed the issue of multiple employers and issues including FUTA and 501(c)(3) organizations paying FUTA as a common paymaster for itself and another non-501(c)(3) organization (that is subject to FUTA since a 501(c)(3) organization is exempt). Cathy also discussed other third party arrangements other than common paymaster: payroll service provider, reporting agent, Section 3504 agent, and Section 3401(d)(1) employer. Cathy then discussed accountable plan requirements, generally including substantiation, business connection, and return of excess. Reimbursing expenses without satisfying the accountable plan requirements could create an excess benefit transaction issue. Documentation is critical. Another stress point to review is tracking paid taxable fringe benefits and ensuring proper withholding and employer share payments have been completed.
- Jocelyne Miller (EY) discussed foreign activities and IRS forms that may be required, which generally are not based on entity type or exempt status. She spoke about Form 5471 and its expanded application since tax reform, Form 926, Form 8991, among several other topics.
You CAN Fight the IRS: A Roadmap for EO Controversies
- Doug Mancino (Seyfarth Shaw) and Steven Toscher (Hochman Salkin Toscher Perez) presented.
- Doug discussed changing environment where litigation has become more common. Steven noted that there’s a feeling within the IRS that the fewer resources for regulation, the greater the noncompliance.
- Doug noted audit focus areas and types of examinations (including audits and compliance checks).
- Steven said the first thing they do in representing a client is Google them and get a sense of what’s going on with the client. He highly recommended the IRS Audit Technique Guides for Exempt Organizations.
- The presenters discussed statute of limitations, possible extension requests, and how an extension for one one purpose does not always result in an extension for another purpose.
- Doug discussed Fast Track Settlements, which are mediations. He said that in his experience, they are not useful for legal issues but are useful for factual issues.
- Steve stated that technical advice (i.e., advice or guidance in the form of a memorandum) from the Office of Chief Counsel in Washington, D.C. can be a tool, but if denied, it may hurt in appeals. He emphasized: “avoid litigation like the plague.”
Innovation Centers in the Nonprofit World
- Terri Wagner Cammarano (Cedars Sinai) introduced the topic of innovation centers (i.e., incubators and accelerators, which typically precede venture capital). She emphasized the need for a mission and culture that can be comfortable with saying no and letting go. About one-third succeed, one-third fail, and one-third hang on. Nonprofits must be careful about their executive compensation if it looks like carry tied to the profit of incubated companies, creating incentives to favor those that have the best commercial potential and scale, as opposed to those that might have a limited market but a meaningful impact on a limited underserved community.
- Cathy Livingston talked about investments beyond technology transfers, including formations of for-profit subsidiaries or joint ventures that will develop and sell a product or service, and formation and participation in investment funds that will be passive investors in other people’s new businesses. Investments could be recruitment and retention incentives and could be in funds to spur innovation in health care. The tax issues for nonprofits making such investments include: implications on their tax-exempt status, potential private benefit or excess benefit transaction issues, required disclosures on Form 990, potential unrelated business income, and private use of bond-financed facilities. Keeping the nonprofit from the for-profit (in which the nonprofit made an investment) separate is critical. Among the factors evidencing separation: observing corporate formalities, limiting board overlap, and providing adequate capitalization. For charities, following the requirements for a program-related investment (PRI) can help mitigate the risks of engaging in prohibited private benefit transactions. Providing access to capital where there is a lack of access to capital and business may further evidence a charitable purpose and targeted charitable class.