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EXEMPT ORGANIZATION TAX AND LEGAL UPDATE YEE LEE LO, CPA SUZANNE - - PDF document
EXEMPT ORGANIZATION TAX AND LEGAL UPDATE YEE LEE LO, CPA SUZANNE - - PDF document
EXEMPT ORGANIZATION TAX AND LEGAL UPDATE YEE LEE LO, CPA SUZANNE TAYLOR, CPA WILLIAM S. MANNE, ATTORNEY May 16, 2014 PDXDOCS:2028767.5 TABLE OF CONTENTS Page I. IRS SCANDAL, OPERATIONAL AND PROCEDURAL ISSUES ................................ 1
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C. Determination Letters Classifying Type III SOs (TEGE-07-0213-01) ............... 22 VII. QUALIFIED PLANS....................................................................................................... 22 A. The Public Good IRA Rollover Act ..................................................................... 22 B. Cafeteria Plans "use it or lose it" ......................................................................... 23 C. The Cooperative and Small Employer Charity Pension Flexibility Act of 2014 (HR 4275) ................................................................................................... 23 D. Compliance Checks on 457(b) plans ................................................................... 23
- VIII. OREGON
......................................................................................................................... 23 A. Oregon State Bar committee working on revisions to ORS Chapter 65 .............. 23 B. Evergreen Aviation and Space Museum and Captain Michael King Smith Educational Institute "no action" letter issued by Oregon Attorney General ...... 23 C. Oregon hybrid business entities now a reality ..................................................... 23 D. HB 4039 confirms property tax exemption to nonprofit corporations for property that was offered, occupied, or used as low-income housing and granted exemption by county ............................................................................... 24 E. ORS 128.760 allows Attorney General to disqualify a charitable
- rganization.......................................................................................................... 24
IX. WASHINGTON .............................................................................................................. 24 A. Senate Bill 6405 outlines how nonprofit tax-exempt property may be used without jeopardizing the property's tax-exempt status ........................................ 24 B. RCW 23B.25 established "social purpose corporations" ..................................... 24 X. ADDITIONAL UPDATES FROM IRS RE EXEMPT ORGANIZATIONS ................. 25 A. Revenue Procedures updating grantor and contributor reliance criteria under §§ 170 and 509 ........................................................................................... 25 B. Revenue Procedure to update Revenue Procedure 2011-33 for EO Select Check ................................................................................................................... 25 C. Guidance under § 4941 regarding a private foundation's investment in a partnership in which disqualified persons are also partners ................................ 25 D. Final regulations under § 4944 on program-related investments ......................... 25 E. Guidance regarding the new excise taxes on donor advised funds and fund management, as added by § 1231 of the Pension Protection Act of 2006 ........... 25 F. Regulations under §§ 6011 and 6071 regarding the return and filing requirements for § 4959 excise tax for community health needs assessments failures by charitable hospitals as added by § 9007 of ACA ........... 25
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G. Guidance under § 6033 on returns of exempt organizations ............................... 25 H. Final regulations under § 6104(c) ........................................................................ 25 I. Final regulations under § 7611 relating to church tax inquiries and examinations ........................................................................................................ 25
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EXEMPT ORGANIZATION TAX AND LEGAL UPDATE YEE LEE LO, CPA SUZANNE TAYLOR, CPA WILLIAM S. MANNE, ATTORNEY May 16, 2014 I. IRS SCANDAL, OPERATIONAL AND PROCEDURAL ISSUES A. IRS Scandal and New Players at the IRS 1. Scandal involving the IRS's improper handling of certain applications for exempt status under Section 501(c)(4). 2. Treasury Inspector General for Tax Administration ("TIGTA") released a May 14, 2013 report that finds, "inappropriate criteria were used to identify tax-exempt applications for review." Criteria used included Tea Party and other organizations, based upon their names or policy positions (instead of indications of potential political campaign intervention). Inappropriate criteria were in place for more than 18 months, resulting in substantial delays in processing certain applications as well as unnecessary information requests being issued. Of 296 applications reviewed by TIGTA as of December 17, 2012, 108 had been approved, 28 had been withdrawn, none had been denied, and 160 were open from 206 to 1,138 calendar days. 3. Acting IRS Commissioner Steven Miller resigned, Director of EO Division, Lois Lerner, was placed on administrative leave (she later retired). 4. On August 21, 2013, Representative Chris Van Hollen, Democracy 21, Campaign Legal Center, and Public Citizen file suit against IRS, in the United States District Court for the District of Columbia, "to compel agency action unlawfully withheld and unreasonably delayed, and to set aside agency action that is contrary to law." The suit alleges IRS has violated IRC for many years by allowing tax-exempt social welfare
- rganizations to expend substantial sums on electoral activity without
requiring disclosure of contributor's identities (disclosures otherwise required under § 527). (See, http://www.democracy21.org/wp- content/uploads/2013/08/Complaint-August-20-final-for-filing.pdf) 5. In late December, 2013, new IRS Commissioner John Koskinen was confirmed; a new TE/GE Commissioner, Sunita Lough, and a new EO Division Director, Tamera Ripperda, were named; and it was announced that Karen Schiller, who had been serving as acting director of EO rulings,
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was moving to lead the Small Business / Self-Employed Division as its commissioner. a.
- Mr. Koskinen came from the private sector.
b.
- Ms. Lough was previously the director of the IRS’s Office of Pre-
Filing and Technical Guidance and had also held leadership roles in EO. c.
- Ms. Ripperda has been with the IRS for more than 20 years, most
recently as director of the IRS’s Global High Wealth Industry Office within the IRS’s Large Business and International Division. 6. Most guidance functions of TE/GE Division will be moved to IRS Office
- f Chief Counsel; specifics to be announced at a later date.
7. In an April 2, 2014 letter, House Republicans urged leaders of the House Appropriations Committee to bar bonuses for TE/GE employees in the 2015 budget. 8. On April 9, 2014, the House Ways and Means Committee voted 23-14 to send the Attorney General the findings of its investigation and told the Justice Department that Lois Lerner may have broken the law by depriving conservative groups of their constitutional rights, impeding
- fficial investigations, and putting confidential taxpayer information at
- risk. The Department of Justice had previously declined requests to
appoint a special prosecutor. 9. On April 10, 2014, the House Oversight and Government Reform Committee voted 21-12 to hold Lois Lerner in contempt of Congress. B. Taxpayer Advocate's 2013 Annual Report to Congress (dated as of December 31, 2013 and released January 9, 2014) 1. "Most Serious" EO problem (#15) is the continuing struggle with revocation processes and erroneous revocations of exempt status. 2. Inventory backlog of applications stands at about 66,000 cases, more than the number of initial applications the IRS usually receives in an entire year, four times the 2010 level, and more than triple the 2011 level. 3. EO erroneously notified thousands of organizations that their exempt status had been revoked. (550,000 organizations no longer exempt and 9,000 of these notifications being in error.) a. Programming errors keyed on date of EIN (versus date of determination).
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b. IRS is not changing that process. c. IRS does not inform organizations how the process might affect them. 4. Single largest category of public charities delivers human services such as food and shelter. C. "Streamlined" Retroactive Reinstatement Process (Rev. Proc. 2014-11, January 2, 2014) 1. Modifies and supersedes procedures described in Notice 2011-44. 2. Process for organizations whose tax-exempt status was automatically revoked for failing to file required 990 series for three consecutive years. 3. Streamlined process explains four procedures to apply for reinstatement: a. streamlined retroactive reinstatement process for small
- rganizations (within 15 months of revocation):
i. available to organizations eligible to file 990-EZ or 990-N for the three years that caused their revocation; ii. may have tax-exempt status retroactively reinstated if they had not been previously revoked; iii. submit Form 1023 or 1024 with the appropriate user fee; iv. section 6652(c) penalties will not be imposed for failure to file annual returns for the three years that caused revocation if org is retroactively reinstated under this procedure and files paper Forms 990-EZ for all such taxable years. (For any year org was eligible to file 990-N, org is not required to file a prior year 990-N or 990-EZ to avoid penalties.) b. retroactive reinstatement process (within 15 months): i.
- rganizations that cannot use the streamlined process can
follow this process if within 15 months they, (A) submit Form 1023 or 1024 with appropriate user fee not later than 15 months after revocation; (B) include statement establishing reasonable cause (described in the revenue procedure) for failure to file annual return for at least one of the three consecutive years;
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(C) include a statement confirming that it has filed required returns for those three years and subsequent years, and before the post-mark date of application; (D) file paper annual returns for the three consecutive years that caused the revocation and any following
- years. (Note: returns are not to be submitted with
the application; they are required to be mailed to a different address). ii. Section 6652(c) penalties will not be imposed for failure to file annual returns for the three years that caused revocation if org is retroactively reinstated under this procedure. c. retroactive reinstatement process (after 15 months): i. satisfy all of the requirements described in "Retroactive reinstatement process (within 15 months)" procedures EXCEPT that reasonable cause must be established for all three consecutive years in which the organization failed to file; ii. section 6652(c) penalties will not be imposed for failure to file annual returns for the three years that caused revocation if org is retroactively reinstated under this procedure. d. post-mark date reinstatement: i. apply for reinstatement effective from the post-mark date of application by submitting Form 1023 or 1024 with the appropriate user fee. 4. Organizations that applied for and previously were reinstated from the date of application (the "Post-Mark Date") before the date of the revenue procedure, that would have satisfied #1 above, will be retroactively reinstated with no further action. 5. Organizations previously reinstated from the Post-Mark Date that would have satisfied either #2 or #3 above, may reapply for retroactive recognition under Rev. Proc. 2014-11 on or before May 2, 2014. 6. Organization remains on the Auto-Revocation List even after tax-exempt status is reinstated. 7. TEGE-07-0414-0010, issued April 16, 2014, amends and supersedes processing guidelines issued in prior guidance (TEGE-07-0314-0003) with respect to determining the effective date of exemption of organizations
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who have failed to file annual information returns for three consecutive years while their application is pending. D. Tips For Moving Applications Along 1. Request for Expedited Processing still valid. (Rev. Proc. 2014-19, modifying Rev. Proc. 2014-4.) 2. Must have a compelling reason, including the following: a. a pending grant, where failure to secure grant will have an adverse impact on organization's ability to continue operations; b. a newly created organization providing emergency disaster relief to victims; c. IRS problems have caused undue delays in issuing determination letter. 3. As of April 17, 2014, "the average date of pending applications is June 2013." (See "Where's My Exemption Application" at IRS.gov) E. Group Rulings and Exemptions 1. IRS asked more than 2,000 randomly-selected central organizations to complete the Group Rulings Questionnaire. 2. IRS sometimes recognizes a group of organizations as tax-exempt if they are affiliated with a central organization. Avoids the need for each
- rganization to apply for exemption individually. (See Publication 4573)
3. Treatment of revoked subordinate or central organization in a group ruling: a. subordinate in group ruling was automatically revoked, then subordinate can only be reinstated by applying for exemption on its
- wn;
b. subordinate in a group ruling who was automatically revoked, applied for, and received reinstatement of tax-exempt status, does not need to ask for group ruling holder to add them back into its group exemption; c. central organization was automatically revoked. Group exemption letter ceases to have effect. Subordinates may have to file its own income tax return, if it was included in the central organization's return and a subordinate that wishes to be recognized as tax- exempt must file an application for exemption.
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II. 501(c)(4) A. Streamlined Option for some 501(c)(4) (TEGE-07-1213-24, December 23, 2013) 1. Optional expedited process was available for certain 501(c)(4) applications (120 days old as of May 28, 2013) where the organization's activities involve possible political campaign intervention or issue advocacy, organization may receive a Letter 5228, Application Notification of Expedited 501(c)(4) Option. (TEGE-07-0613-08, June 25, 2013) 2. As of December 23, 2013, this optional, expedited processing is being
- ffered to all 501(c)(4) applicants whose application indicates
involvement in political campaign intervention or providing private benefit to a political party. 3. If organization receives Letter 5228, self-certify that your organization: a. devotes 60 percent or more of both spending and time to activities that promote social welfare; b. devotes less than 40 percent of both spending and time to political campaign intervention; c. ensures the above thresholds apply for past, current, and future activities. 4. Option provides an approved determination letter granting them 501(c)(4) status within two weeks after signing and returning the form (within 45 days of its date). B. Proposed 501(c)(4) Guidance 1. Current statute requires that a social welfare organization must be "operated exclusively for the promotion of social welfare." However, IRS applied a rule that requires organizations to operate "primarily for the promotion of social welfare." 2. Current IRS regulations provide that the "promotion of social welfare" does not include "direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public
- ffice." (Regulation § 1.501(c)(4)-1(a)(ii), 1959, amended 1990)
3. Proposed guidance defines "candidate-related political activity" and would amend current regulations by eliminating (B), above, and stating that the promotion of social welfare does not include this type of activity. 4. "Candidate-related political activity" includes:
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a. a public communication that: i. expresses a view (whether for or against) the selection, nomination, election, or appointment of a clearly identified candidate of a political party; ii. is made within 60 days of a general election (or within 30 days of a primary election) and clearly identifies a political party (general election) or a candidate; and iii. must be reported to the Federal Election Commission. b. a grant or contribution: i. that is recognized under federal, state, or local campaign finance law as a reportable contribution to a candidate (includes loans, subscription, advances, and deposits); ii. grants to § 527 political organizations and other tax-exempt
- rganizations that conduct candidate-related political
activities. c. activities closely related to elections and candidates: i. voter registration drives and "get-out-the-vote" drives; ii. distribution of materials prepared by or on behalf of a candidate or by a § 527 organization; iii. preparation or distribution of voter guides that refer to candidates or political parties; iv. holding an event within 60 days of a general election (or within 30 days of a primary election) at which a candidate appears as part of the program. 5. IRS requested comments on the proposed regulations, including what portion of a 501(c)(4) organization's activities must promote social welfare (arguably, the most important question). Comments were due February 27, 2014. a. The Center for Equal Opportunity has warned that the proposed rule violates the First and Fifth amendments by impermissibly penalizing the political speech of section 501(c)(4) organizations. b. Clean Water Action expresses concern that the regs overreach because they treat some activities as political regardless of whether they are conducted on a partisan or nonpartisan basis.
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c. The New York City Bar has cautioned Treasury against adopting the regs in their present form because they are both overinclusive and underinclusive. 6. On January 15, 2014, Representative Dave Camp introduced legislation (the "Stop Targeting of Political Beliefs by the IRS Act of 2014") to block issuance of final regulations for one year. The bill passed the House of Representatives on February 26, 2014, and a similar bill was introduced in the Senate on February 11, 2014. The White House issued a statement that President Obama would veto the bill if it passed both houses. 7. On April 14, 2014, IRS Commissioner John Koskinen stated that the agency will likely scrap the proposed regulations and start over. On April 17, 2014, he stated that the IRS still plans to hold a public hearing this summer on the current proposal. On April 2, in a speech to the National Press Club, he had advised that the IRS was unlikely to complete the process before the end of the year, because they had received more than 150,000 comments; more than double all the comments received on all the Treasury and IRS draft proposals made over the last seven years. 8. On April 8, 2014, IRS issued administrative guidance limiting the types of cases and issues that are transferred to the Technical Unit for processing, including cases involving optional expedited processing for section 501(c)(4) applications. III. INDUSTRY SPECIFIC UPDATES A. Final Report on Colleges and Universities Compliance Project: 1. A questionnaire was sent to 400 randomly-selected public and private colleges and universities. 34 institutions were selected for subsequent audit, based on their responses to the questionnaire. 2. Final report released in April 2013 focused on the results of these examinations, especially unrelated business income and executive compensation. 3. UBTI: a. increase in UBTI for 90 percent of colleges and universities examined, totaling about $90 million; b. disallowance of more than $170 million in losses and NOL. 4. Primary reasons for these UBTI adjustments:
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a. disallowance of expenses not connected to unrelated business activities, including losses claimed for activities that did not qualify as a trade or business due to lack of profit motive; b. improper expense allocation; c. errors in computation or substantiation with NOLs (predominantly, lack of a profit motive); d. misclassification of unrelated activities as exempt. 5. Executive compensation: a. 20 percent of schools failed to use appropriate comparability data in compensation. 6. Employment taxes: a. all of the examinations of employment tax returns resulted in adjustment of wages leading to the assessment of tax and, in some cases, penalties. 7. Retirement plans: a. problems with retirement plan reporting in half of colleges where plans examined resulted in increased wages and assessment of taxes and penalties. 8. IRS 1098-T a.
- Reg. § 1.6050S-1 requires colleges and universities to annually
submit Forms 1098-T for students, with or without a Taxpayer Identification Number. During 2013, a number of institutions received 972CG notices from the IRS, penalizing them for submitting Forms 1098-T without the student's TIN. b. The regulations require institutions to annually solicit TINs from enrolled students for whom they need to generate Forms 1098-T. (Institutions do not need to report on continuing education students
- r nonresident aliens, unless specifically requested to do so.)
c. If your institution has received an IRS penalty notice and it can demonstrate that it has solicited TINs in a "responsible manner" in accordance with the rules, penalties should be waived.
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B. Proposed Revenue Procedure for Hospitals (Notice 2014-3, December 30, 2013) 1. Outlines how hospitals disclose and fix failures to meet § 501(r)(1) and (2)(B) requirements that would otherwise disqualify them under § 501(c)(3). The comment period closed on March 14, 2014. 2. Prior related notices of proposed rulemakings were issued on June 26, 2012 (regarding requirements under §§ 501(r)(4),(5), and (6)) and on April 5, 2013 (regarding requirements under § 501(r)(3) and the consequences of failing to meet any of the § 501(r) requirements). 3. To provide an incentive for hospital organizations to take steps not only to avoid failures but to remedy and disclose them when they occur, the 2013 proposed regulations specify that, for purposes of §§ 501(r)(1) and 501(r)(2)(B), a hospital organization's failure to meet one or more of the requirements described in § 501(r) and § 1.501(r)–3 through § 1.501(r)–6 that is neither willful nor egregious will be excused if the hospital
- rganization corrects the failure and makes disclosure in accordance with
the rules set forth in additional guidance to be issued by the Treasury Department and the IRS. This notice provides a proposed revenue procedure that, if adopted, contains that additional guidance. C. IRS Appeals Decision Holding Clergy Housing Allowance Exclusion Unconstitutional 1. On April 2, 2014, the government filed a brief in the Seventh Circuit Court of Appeals arguing that a district court erred when it held that the § 107(2) exclusion of rental allowance paid to a minister was an unconstitutional violation of the establishment clause. 2. In Freedom from Religion Foundation Inc. v. Lew (No. 11-CV-626-BBC, 2013 WL 6139723 (W.D. Wis. Nov. 22, 2013), the Federal District Court
- f Western Wisconsin held that the § 107(2) parsonage allowance
exclusion from income (for rental allowance) violates the establishment clause of the First Amendment, because it provides preferential treatment to religious leaders without providing a similar benefit to secular individuals or groups, and issued an order enjoining its further
- enforcement. (Judge Barbara Crabb stayed her decision, however,
pending outcome of the anticipated appeal.) Note that, technically, the decision does not impact § 107(1) (the rental value of a home furnished to a minister) because that part of the suit was dropped after defendants claimed plaintiff had no standing to challenge that provision. 3. What now? Two authors suggest that: (a) the financial impact on religious organizations and their ministers was an estimated $2.3 million in 2002-2007; (b) § 119 might still be available to exclude some employer-provided housing; (c) the analysis used in the case could have
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additional application in recent church pension litigation involving challenges to the church plan exemption applied to separately incorporated 501(c)(3) organizations that are not actual churches (such as hospitals, schools, colleges, universities, nursing homes, thrift shops, or other charities); and (d) the analysis might also apply to distributions from church pension plans that can be designated as parsonage allowance and to rules that treat employed ministers as subject to self-employment taxes (versus FICA) and allow exclusion of the rental allowance from those taxes. D. IRS Issues Guidance on § 501(c)(14) Credit Union UBIT 1. IRS has decided not to appeal two cases (Bellco Credit Union v. United States, 735 F. Supp. 2d 1286 (2010) and Community First Credit Union v. United States, No. 08-cv-0057 (E.D. Wis. May 15, 2009), ECF No. 84), and on March 24, 2014, issued a statement modifying procedures used by IRS examiners to comply. (TEGE-04-0314-0005.) 2. "Both Bellco and Community First found that the sale of credit life and credit disability insurance to members was not subject to UBIT. Additionally, Bellco found that the sale of accidental death and dismemberment insurance was not subject to UBIT (excluded from UBI as royalty income). Also, Community First found that the sale of Guaranteed Auto Protection (GAP) insurance was not subject to UBIT." 3. According to the memorandum, the following income-producing activities are not subject to UBIT: a. sale of checks/fees from a check printing company; b. debit card program’s interchange fees; c. credit card program’s interchange fees; d. interest from credit card loans; e. sale of collateral protection insurance; f. credit life and credit disability insurance sold to members; g. GAP auto insurance sold to members; h. ATM "per-transaction" fees from members. 4. According to the memorandum, income from marketing the following insurance products and certain ATM fees are subject to UBIT: a. automobile warranties;
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b. dental insurance; c. cancer insurance; d. accidental death and dismemberment insurance; e. life insurance; f. health insurance; g. ATM "per-transaction" fees from nonmembers; h. credit life and credit disability insurance sold to nonmembers; and i. GAP auto insurance sold to nonmembers. 5. The internal memorandum opens the door for refunds of past UBIT payments, some of which have already been pending after the cases were decided. IV. FEDERAL LEGISLATIVE UPDATE A. Exempt Organization Provisions in Ways and Means Chairman's Tax Reform "Discussion Draft" (unveiled February 26, 2014, not yet introduced to Congress) 1. Repeal of law authorizing Type II and Type III supporting organizations (Act § 5304). a. Requires donor-advised funds fully distribute contributions within 5 years of receipt, or pay a 20% penalty for amounts not distributed (Act § 5203). 2. Provisions impacting UBTI: a. name and logo royalties would be treated as UBTI (Act § 5002); b. taxation of all § 501(a) UBI, even if exempt under another IRC provision, including state and local entities exempt under § 115 (Act § 5001); c. UBTI separately computed for each trade or business activity (Act § 5003); d. introduction of parity re charitable contribution deduction limitation used in computing taxable UBI; limitation would be 10% for corporations and trusts (Act § 5005); e. increased specific deduction for UBTI from $1,000 to $10,000 (Act § 5006);
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f. 5% penalty on managers ($20,000 maximum) for substantial understatement of unrelated income (Act § 5102). 3. All exempt organizations would be required to file form 990 series electronically (Act § 6004). 4. Penalties for failure to file or comply with public inspection would increase (Act § 5101). a. EO's under $1 million, from $20 to $40 per day. b. EO's over $1 million, from $100 to $200 per day. c. Manager's failure to comply from $10 to $20 per day. 5. Narrowing scope of qualified sponsorship rules (Act § 5008). 6. Repeal of exemptions for: a. professional sports leagues, under IRC §501(c)(6) (Act § 5301); b. qualified property and casualty companies (Act § 5302); c. qualified health insurers (ibid.). 7. Intermediate sanctions (§ 4958) and self-dealing (§ 4941) excise taxes. a. Excise tax of 10% on excess benefit on tax-exempt organization (Act § 5201) and 2.5% (10% in case of compensation) on private foundation self-dealing (Act § 5202). b. Application of excess benefit transaction excise tax rules to § 501(c)(5) and (c)(6) organizations (ibid.). c. Elimination of rebuttable presumption of reasonableness (§ 4958) and professional advice reliance safe harbor ( §§ 4958 and 4941) for managers (Act §§ 5101 and 5102), and expansion of definition
- f disqualified persons (§ 4958) to include athletic coaches and
investment advisors (Act § 5201). 8. Colleges and Universities. a. Larger organizations subject to 1% excise tax on net investment income (Act § 5206). b. Repeal of college athletic event seat rights charitable deduction (§170(l)) (Act § 1403). c. See item 7(c), above.
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9. Private Foundation provisions: a. new 2.5% tax on foundations for self-dealing; elimination of professional advice reliance safe harbor for managers (Act § 5302); b. reduces net investment income tax to 1% and repeals exemption for operating foundations (Act § 5204); c.
- perating foundations would become subject to excise tax for
failing to distribute income (Act § 5205). 10. §501(c)(4). a. Existing organizations would also be required to file notice with IRS (Act § 6001). b. Mandatory termination of IRS employees taking official actions for political purposes (Act § 6006). c. One year stay of final regulations concerning social welfare
- rganizations' involvement in political activities; retain facts-and-
circumstances test in interim (Act § 6011). (This bill was previously introduced in early February 2014; President Obama has stated he would veto.) 11. Individual charitable income tax deduction changes: a. could deduct charitable contributions made before April 15 in prior year (Act § 1403); b. change current 50%/30% AGI limitations to single 40% limit, and current 30%/20% limitations to single 25% limit (ibid.); c. new 2% AGI floor for deducting charitable gifts (ibid.); d. limit deduction to donor's adjusted basis for most gifts (ibid.); e. percentage limitations for conservations easement gifts by farmers/ranchers becomes permanent (ibid.); f. intellectual property contributions no longer deductible under § 170(m) (ibid.); g. see item 8(b), above. 12. Provisions are generally effective for tax years beginning after 2014.
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B. President Obama's 2015 Budget Proposal 1. Caps all itemized deductions, including charitable deductions, at 28% for high-income earners (individuals with income over $200k; over $250k for joint filers). This is the sixth time the president has made this proposal. 2. Establishes a "Buffett Rule" 30% minimum effective tax rate for joint- filing taxpayers on income in excess of $1 million. The charitable deduction would be the only deduction permitted. 3. Proposes permanently setting the estate tax at 2009 levels ($3.5 million individual exemption; 45% top rate). 4. Proposes a single, 1.35% excise tax on private foundation net investment income. 5. Includes a proposal to phase in a requirement that all tax-exempt
- rganizations file form 990 electronically and would require IRS release
the date in a machine readable format, in a timely manner, to enable donors and foundations to access the data more easily and make it easier to perform analyses. 6. Increases the standard mileage rate for automobile use by volunteers to 23.5 cents per mile (from 14 cents). 7. Makes permanent a series of taxpayer incentives for granting conservation easements that expired at the end of 2013. 8. To ensure that all nonprofits who receive federal funds are appropriately reimbursed for indirect costs, OMB has recently issued revised guidance (Title 2 Part 200-"Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards") that provides a minimum reimbursement rate of 10% of modified total direct costs, available to recipients who have not negotiated a rate. Applies to awards issued on or after December 26, 2014. 9. Modifies amounts required to be reported on form 1098-T by institutions
- f higher learning to be what was paid (versus billed), and sets a $500
threshold for reporting by issuers of scholarships or grants not processed
- r administered by an institution of higher learning.
C. H.R. 4454 would reinstate (and make permanent) the s corporation basis adjustment rule for charitable contributions that expired at the end of 2011. (§ 1367(a)(2)(B).) Introduced April 10, 2014, by House Ways and Means Committee member David Reichert, R-Washington. It would be effective as of January 1, 2014.
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V. CHANGES TO FEDERAL FORMS A. Draft form 1023-EZ and instructions released for comment (March 31, 2014, and updated and re-released April 23, 2014). 1. Not available for: a. an organization with projected annual gross receipts expected to exceed $200,000 in any of the next three years or has had annual gross receipts that exceeded $200,000 in any of the past two years; b. an organization with total assets in excess of $500,000; c. a foreign organization; d. an organization that is a successor to, or controlled by, an entity suspended under 501(p); e. a limited liability company; f. a successor to a for-profit entity; g. a previously revoked organization or a successor to a previously revoked organization (other than automatic revocation for failure to file form 990); h. a church or a convention or association of churches described under IRC 509(a)(1) and 170(b)(1)(A)(i); i. a school, college, or university described under IRC 509(a)(1) and 170(b)(1)(A)(ii); j. a hospital or medical research organization under IRC 509(a)(1) and 170(b)(1)(A)(iii); k. an organization applying for exemption as a cooperative hospital service organization under § 501(e); l. an organization applying for exemption as a cooperative service
- rganization of operating educational organizations under § 501(f);
m. an organization applying for exemption as a charitable risk pool under § 501(n); n. a supporting organization described under IRC 509(a)(3);
- .
an organization with a substantial purpose of its activities to provide assistance to individuals with credit counseling activities
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such as budgeting, personal finance, financial literacy, mortgage foreclosure assistance, or with other consumer credit areas; p. an organization investing or that plans to invest more than 5% of its assets in hedge funds; q. an organization that participates in joint ventures, including partnerships or limited liability companies treated as partnerships, in which it shares profits and losses with partners other than § 501(c)(3) organizations; r. an organization that sells or intends to sell carbon credits or carbon
- ffsets;
s. a health maintenance organization; t. an accountable care organization (ACO), or an organization with activities that include ACO activities; u. a sponsoring organization as defined in section 4966(d)(1) that maintains or intends to maintain one or more Donor Advised Funds; v. an organization organized and operated exclusively for testing for public safety and requesting a foundation classification under IRC 509(a)(4). 2. Treasury initially asked for comments by April 30, 2014. 3. At an April 23, 2014 news conference, the IRS disclosed that the list of eligible types of entities may be expanded. B. Interactive Form 1023 1. The IRS's Exempt Organizations (EO) office has updated its paper version
- f Form 1023, Application for Recognition of Exemption under 501(c)(3).
(Notice 1382 [Rev. October 2013]; new form 1023 dated December 2013.) 2. The down-loadable pdf is populated with the same Prompting Boxes that the Interactive Form 1023 (the "i1023") uses to remind preparers of key preparation points. 3. The paper form has also been updated to reflect the current user fees— $850 for all but the smallest organizations. 4. Note that the i1023 should be used by self-preparers: it is user-friendly and the IRS is continuing to improve it with suggestions from practitioners and the public.
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5. To access the module in which Form i1023 appears see http://www.stayexempt.irs.gov/StartingOut.aspx. C. Form 990: 2013 Significant Changes. 1. The General Instructions: a. clarify that a short period return cannot be filed electronically unless it is an initial or final return for which the "Initial return" or "Terminated" box is checked in Item B of the Form 990 Heading; b. explain that if a Form 990-N filer changes its accounting period, it must report this change either on Form 990/990-EZ or Form 1128,
- r by sending a letter to the IRS;
c. clarify that organizations that change their accounting period must report any adjustment required by section 481(a) in Parts VIII through XI of Form 990 and in Schedule D (Form 990), Parts XI and XII, as applicable. 2. Instructions for Heading. Items A-M: a. clarify what documentation must be attached to Form 990 to support an organization's name change; b. clarify what documentation must be attached to Form 990 by an
- rganization that has terminated, dissolved, merged, or had its
exemption revoked by the IRS. 3. In Part IV, Checklist of Required Schedules: a. Line 2 instructions clarify when an organization can exclude from Schedule B contributors that fall below the greater-than-$5,000/2% threshold; b. Line 25b instructions clarify when an organization needs to answer "Yes" to report that it became aware of an excess benefit transaction with a disqualified person in a prior year; c. Line 26 is revised to clarify that the organization must file Schedule L, Part II, if it reported any amounts on Part X, line 5, 6,
- r 22 for receivables from or payables to interested persons.
4. In Part VI, Governance, Management, and Disclosure: a. Line 8 instructions clarify what compensation from a management company to interested persons should be reported in Schedule O.
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5. Instructions for Part VII, Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees, and Independent Contractors: a. clarify that directors' compensation for non-director independent contractor services to the organization and related organizations must be reported in Part VII, Section A; b. clarify that compensation from a management company to one of the organization's officers, directors, trustees, key employees, or highest compensated employees is generally not reportable in Part VII, Section A. 6. In Part VIII, Statement of Revenue: a. Line 1 instructions clarify that discounts on services cannot be reported as contributions; b. Line 10b instructions clarify how to report the cost of donated goods on this line. 7. In Part IX, Statement of Functional Expenses: a. Line 11 instructions clarify how to report expense payments and reimbursements to contractors. 8. The Glossary: a. clarifies that "contributions" include neither donations of services nor discounts provided on sales of goods in the ordinary course of business; b. includes a new definition of "domestic individual;" c. clarifies when a VEGA is reported as a "related organization" by its contributing employers and sponsoring organizations. 9. Appendix D, Public Inspection of Returns: a. Clarifies that public inspection requirements apply to both original and amended returns. 10. Appendix E, Group Returns: a. clarifies how to determine, for purposes of group returns, whether a diversion of a subordinate's assets meets the 5%/$250,000 reporting threshold for Part VI, Line 5;
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b. clarifies when to report business transactions of subordinates and their interested persons in Schedule L, Part IV. 11. Appendix F, Disregarded Entities and Joint Ventures-Inclusion of Activities and Items: a. clarifies when to treat a single-member LLC as a disregarded entity
- f its sole member/owner.
D. Form 990-T: 2013 Significant Changes. 1. The Internal Revenue Service (IRS) has released the 2013 Form 990-T, Exempt Organization Business Income Tax Return, and instructions. The IRS updated the instructions to clarify certain reporting requirements. 2. A discussion of the passive loss and at-risk limitations under Sections 469 and 465 pertinent to certain filers has been added under Part I (unrelated trade or business income) instructions. 3. A discussion of the rules for recognition of gain or loss upon disposition
- f property received from a taxable subsidiary and used in unrelated
business under Section 337 has been added under Line 4a (capital gain net income) instructions. 4. Ordering rules for reporting of income reportable under more than one line item have been added to Line 5 (income or loss from partnerships and s corporations). 5. Instructions have been added to Line 6 (rent income), Line 7 (unrelated debt-financed income), and Line 8 (interest, annuities, royalties, and rents from controlled organizations). E. Use Form 8822-B to notify IRS of a change of responsible party information. 1. Effective January 1, 2014, taxpayers must use Form 8822-B to notify the IRS of a change of address or the identity of a responsible party. Form 8822-B must be filed within 60 days of the change. An updated Form 8822-B is available on IRS.gov. There is a box on the form that exempt organizations must check. (Form can also be used, on a voluntary basis, for changes of address of the taxpayer.) VI. TYPE III SUPPORTING ORGANIZATIONS A. IRS Issues Final and Temporary Regulations for Type III Supporting Organizations (TD 9605, 2013-11, IRB 587, December 28, 2012.) 1. Requirements to qualify as a Type III SO.
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2. All SOs must continue to meet an organizational test, an operational test, a disqualified person control test, and a relationship test. 3. Final Regulations revise the relationship test for Type III SO by requiring each Type III SO to (i) not be disqualified by accepting donations from controlling donors, and (ii) satisfy three criteria: a. a notification requirement; b. a responsiveness test; and c. an integral part test. 4. A non-functionally integrated Type III SO must: a. annually distribute the greater of 85% of adjusted net income or 3.5% of the FMV of SO's exempt use assets; and b. meet an attentiveness requirement. 5. To be "functionally integrated" Type III SO, must: a. engage in activities substantially all of which directly further the tax-exempt purposes of one or more supported orgs to which it is responsive; b. be the parent of each of its supported orgs; or c. satisfy certain requirements related to supporting a governmental
- rganization.
6. Type III SO Notification Requirement: Final regulations require all Type III SO to provide an annual reporting notification package to each of its supported organizations. The package includes: a. a written notice addressed to a "principal officer" of the supported
- rganization describing amount and type of support provided;
b. a copy of the SO's most recently filed Form 990; and c. a copy of the SO's governing documents, including any amendments. The notification package is due by the last day of the fifth calendar month following the close of the SO's taxable year.
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B. Interim Guidance for Functionally Integrated Type III SO Supporting a Governmental Organization (Notice 2014-4, December 23, 2013.) 1. Transitional rule for qualifying as functionally integrated by supporting a single governmental supported organization. 2. Until the earlier of the date final regulations are published under § 1.509(a)-4(i)(4)(iv) or the first day of the organization's third taxable year beginning after December 31, 2013, Type III SO will be treated as functionally integrated, if it: a. supports at least one supported organization that is a governmental entity to which the SO is responsive (Reg. § 1.509-(a)-(4)(i)(3).); and b. engages in activities for or on behalf of the governmental supported organization that perform the functions of, or carry out the purposes of, the governmental entity and that, but for the involvement of the SO, would normally be engaged in by the governmental organization. 3. In an April 4, 2014 letter to Representative Mike Thompson, responding to his inquiry requesting further clarification on the "functionally integrated" test, Treasury Assistant Secretary for Legislative Affairs advised that providing additional guidance is a top priority under the 2013-2014 "Priority Guidance Plan." C. Determination Letters Classifying Type III SOs (TEGE-07-0213-01, February 4, 2014.) EO Determinations may issue determination letters classifying an organization as either functionally integrated or non-functionally integrated Type III SO if they satisfy the criteria set forth in the final and temporary regulations. VII. QUALIFIED PLANS A. The Public Good IRA Rollover Act 1. Allows tax-free distributions by individuals 70½ or older to all charities (no carve out for donor advised funds, supporting organizations, and private foundations—and no $100,000 annual ceiling). 2. Also allows tax-free distributions from IRAs by individuals 59½ or older to fund unitrusts, annuity trusts, pooled income funds and gift annuities (with no carve out for donor advised funds, supporting organizations and private foundations—and no dollar ceiling that could be rolled over).
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B. Cafeteria Plans "use it or lose it" 1. On November 1, 2013, the IRS released an advance copy of Notice 2013- 71 concerning changes to the "use or lose" rules for § 125 "cafeteria plans." 2. Participants can carryover up to $500 of their unused FSA balances. 3. Salary reduction is unchanged at $2,500. C. The Cooperative and Small Employer Charity Pension Flexibility Act of 2014 (HR 4275) 1. Signed by President Obama April 7, 2014. 2. Extends and makes permanent expiring exemption from the funding requirements of the Pension Protection Act of 2006. 3. Impacts only a small group of co-ops and charities (30 plans / 127,000 active nonprofit employees). D. Compliance Checks on 457(b) plans 1. The IRS has recently begun performing compliance checks on 457(b) plans maintained by tax-exempt employers. According to the IRS, the Employee Plans Compliance Unit (EPCU) will be sending compliance check letters and questionnaires to approximately 200 organizations in fiscal year 2013 (which ends September 30, 2013) and another 200 in fiscal year 2014.
- VIII. OREGON
A. Oregon State Bar committee working on revisions to ORS Chapter 65. B. Evergreen Aviation and Space Museum and Captain Michael King Smith Educational Institute "no action" letter issued by Oregon Attorney General. (http://www.doj.state.or.us/releases/pdf/final_evergreen_report_3-20-14.pdf ) C. Oregon hybrid business entities now a reality. (HB 2296) 1. Signed by Governor June 4, 2013; effective January 1, 2014. 2. Permits creation or conversion of corporation or limited liability company into "benefit company" that has purpose of providing "general public benefit" and possible "specific public benefit." a. Requires approval of equity holders. b. Describes nature of general and specific public benefits.
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c. Prescribes requirements for, and duties of, "benefit governor," and specifies liability limits on governor. d. Requires annual benefit report. D. HB 4039 confirms property tax exemption to nonprofit corporations for property that was offered, occupied, or used as low-income housing and granted exemption by county. Effective for tax years beginning July 1, 2012, sunsets July 1, 2018. Refund requests (without interest) must be filed within 60 days after the effective date of the Act and require a $200 filing fee. Effective date in the bill is the 91st day after the date on which the 2014 regular session adjourns sine die. Legislature's web site says Governor signed on March 3, 2014, and the effective date of the bill is June 6, 2014. E. ORS 128.760 allows Attorney General to disqualify a charitable organization from receiving tax deductible charitable donations (for Oregon income and excise tax purposes) if charity has failed to expend at least 30% of its total annual functional expenses on program services (averaged over the most recent 3 years). 1. Charity may request a hearing within 60 days of notification. 2. Does not impact private foundations, community trysts or foundations, qualified charitable remainder trusts, organizations not qualified to receive charitable deductions, an organization not required to file annual reports with the Attorney General, an organization that receives less than 50% of its total annual revenues from contributions or grants, or an organization that has been in existence for less than four years. 3. Also disqualifies an organization for property tax exemption (under ORS 307.130) for the tax year following the year in which the order went into effect, and for all subsequent years in which the order remains in effect. IX. WASHINGTON A. Senate Bill 6405, recently signed by the Governor, outlines how nonprofit tax- exempt property may be used without jeopardizing the property's tax-exempt
- status. (Amends RCW 84.36.020, 84.36.020, 84.36.030, 84.36.032, 84.36.035,
84.36.037, 84.36.037, 84.36.050, 84.36.060, 84.36.260, 84.36.264, and 84.36.805 and creates a new RCW chapter 199.) B. RCW 23B.25 established "social purpose corporations," effective July 7, 2012.
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