Federal Tax Update April 8, 2014 Kristina Rasmussen Deloitte Tax LLP Minneapolis, MN (612) 397-4178 krasmussen@deloitte.com Anne Fulton Deloitte Tax LLP Chicago, IL (312) 486-5006 anfulton@deloitte.com Kristina A. Rasmussen Kristina is a senior manager in the Minneapolis office of Deloitte Tax, LLP. Kristina has more than 15 years of experience working with not-for-profit clients, including public and private foundations, health care organizations, higher education institutions, and other public charities as well as related taxable entities. She has assisted a diverse group of clients working on a variety of issues related to the notfor-profit industry, including unrelated business income issues, tax-exempt status qualifications, IRS Coordinated Examination Program (CEP) audit issues, and tax risk assessments. Kristina recently spent three years supporting Deloitte’s Washington National Tax Practice as a specialist in tax matters related to tax-exempt organizations. Kristina received her bachelor’s degree from the University of St. Thomas and her M.B.A. from the University of St. Thomas. She is an associate member of the American Institute of Certified Public Accountants Tax-Exempt Organizations Tax Technical Resource Panel. Kristina has spoken on tax-exempt matters at conferences including the American Institute of Certified Public Accountants, the National Association of College and University Business Officers, and the Central Association of College and University Business Officers. 2 Anne K. Fulton Anne is a manager in the Chicago office of Deloitte Tax, LLP and is currently supporting Deloitte’s Washington National Tax Practice as a specialist in tax matters related to tax-exempt organizations. Anne has over seven years of experience serving tax-exempt clients, including health care organizations, public and private foundations, medical research organizations and higher education institutions, as well as related taxable entities. Anne has consulted with clients on a variety of tax issues related to the not-for-profit industry, including unrelated business income issues, taxexempt status qualifications and IRS examinations. Anne earned her B.B.A. in Accounting and Master of Accountancy at The University of Iowa. 3 Agenda • • • • • • • 4 Treasury-IRS Priority Guidance 2013-2014 IRS Initiatives and Updates Legislative Activities Regulatory Update Rulings and Cases of Note IRS Information Concluding Comments Treasury-IRS 2013-2014 Priority Guidance Treasury-IRS 2013-2014 Priority Guidance • Exempt Organizations: • Revenue Procedures updating grantor and contributor reliance criteria under IRC §170 and §509. • Revenue Procedure to update Revenue Procedure 2011-33 for EO Select Check. • Guidance under §501(c)(4) relating to measurement of an organization's primary activity and whether it is operated primarily for the promotion of social welfare, including guidance relating to political campaign intervention. • Proposed regulations were issued in November 2013 providing guidance for tax-exempt social welfare organizations on candidate-related political activities • Final regulations under §501(r) and §6033 on additional requirements for charitable hospitals as added by the PPACA. Proposed regulations were published on June 26, 2012 and April 5, 2013. • Additional guidance on §509(a)(3) supporting organizations. Final and temporary regulations were published 12/28/12. • Notice 2014-4 was issued in January providing interim guidance regarding Type III organizations supporting a governmental entity 6 Copyright © 2014 Deloitte Development LLC. All rights reserved. Treasury-IRS 2013-2014 Priority Guidance (cont.) • Guidance under §4941 regarding a private foundation's investment in a partnership in which disqualified persons are also partners. • Final regulations under §4944 on program-related investments. Proposed regulations were published on April 19, 2012. • Guidance regarding the new excise taxes on donor advised funds and fund management as added by §1231 of the Pension Protection Act of 2006. • Regulations under §6011 and §6071 regarding the return and filing requirements for the §4959 excise tax for community health needs assessments failures by charitable hospitals as added by §9007 of the PPACA. • Final and temporary regulations were issued in August 2013 regarding the excise tax • Guidance under §6033 on returns of exempt organizations. • Final regulations under §6104(c). Proposed regulations were published on March 15, 2011. • Final regulations under §7611 relating to church tax inquiries and examinations. Proposed regulations were published on August 5, 2009. 7 Copyright © 2014 Deloitte Development LLC. All rights reserved. IRS Initiatives and Updates Colleges & Universities Compliance Initiative • September 2008, 400 questionnaires were sent to public and private four-year colleges and universities inquiring about • Unrelated business income • Endowments • Executive compensation • Interim report was published May 2010 • Final report issued April 25, 2013 focusing on: • UBTI • 34 were examined as a result of survey responses • Closed 31 or 34 examinations of schools, overwhelming majority had adjustments • Total Adjustments were $90 million • Disallowed $170 million in NOLs • Reasons: Improper Expense Allocations and Lack of Profit Motive 9 Copyright © 2014 Deloitte Development LLC. All rights reserved. Colleges & Universities Compliance Initiative • Most common UBTI activities • Fitness, Recreation centers and sports camps • Advertising • Facility Rentals • Arenas, and • Golf Other items of note in the Report: 1. Average Total Compensation of ODTKE: $623,267 2. Executive Compensation: About 20% failed to meet rebuttable presumption due to failure of comparability data to be similarly situated or have selection criteria documented or specify whether amounts were salary or other types of compensation. 3. Wage adjustments of $36 million with taxes and penalties of $7 million 10 Copyright © 2014 Deloitte Development LLC. All rights reserved. IRS Compliance Check Project: IRC Section 457(b) Plans • 400 questionnaires will be sent in FY13-14 to non-governmental plan sponsors • 457(b) plans are sponsored by a state or local government or an organization exempt under IRC Section 501(c) • Participation is limited to highly compensation employees or groups of executives, managers, directors or officers • Project is designed to: • • • • 11 Learn more about the operation of non-governmental 457(b) plans Verify that the plans comply with the IRC requirements Identify noncompliance issues Recommend ways to remove any barriers to compliance Copyright © 2014 Deloitte Development LLC. All rights reserved. Automatic revocation of exempt status • Revenue Procedure 2014-11 • Four new procedures to apply for reinstatement of exempt status after auto revocation • Streamlined retroactive reinstatement for small organizations within 15 months of revocation (for 990-EZ or 990-N filers) • Retroactive reinstatement within 15 months of revocation (for 990 filers) • Retroactive reinstatement more than 15 months after revocation • Reinstatement from post-mark date • Must file Form 1023 application for exemption and demonstrate reasonable cause for failure to file • New procedures may apply to applications currently pending 12 Copyright © 2014 Deloitte Development LLC. All rights reserved. Health FSA • IRS issued Notice 2013-71 on October 31, 2013 • Allows an employer to amend its flexible health spending arrangement (Health FSA) to permit an employee to carry a balance of up to $500 forward to the next plan year • Carryover does not affect the maximum salary reduction for the next plan year • New carryover option is an alternative to the current grace period rule • Employers must amend their Section 125 plan documents accordingly to adopt the carryover option 13 Copyright © 2014 Deloitte Development LLC. All rights reserved. Foreign reporting • FBAR • FinCEN Form 114 (formerly Form TD F 90-22.1) • Foreign bank account report due annually by June 30 • Form must be e-filed starting July 1, 2013 through the BSA E-File system • FATCA • Requires foreign financial institutions to register for global intermediary identification numbers and to perform 30% withholding on payments to nonU.S. entities that do not certify their compliance with FATCA or disclose their substantial U.S. owners • FATCA broadly defines foreign financial institutions to include any foreign entity that accepts deposits; holds financial assets for the account of others as a substantial part of its business; or engages primarily in the business of investing or trading securities, commodities, partnerships or any interests in such positions • Form 8966 “FATCA Report” is used by foreign financial institutions and withholding agents to report information on U.S. accounts • FATCA compliance deadlines start April 2014 14 Copyright © 2014 Deloitte Development LLC. All rights reserved. Legislative Activities Chairman Camp’s tax reform discussion draft • Draft tax reform proposal issued by House Ways and Means Committee Chairman Dave Camp (R-Mich.) • Draft includes proposals affecting corporate, passthrough, and individual taxpayers, including tax-exempt organizations: UBI – Losses would be computed separately for each activity and would not be allowed to offset income from other UBI activities, even if within the same legal entity. Colleges & Universities – impose a 1% excise tax on net investment income of private colleges and universities Supporting organizations – Type II and Type III entities would no longer qualify as exempt. Intermediate sanctions – eliminate rebuttable presumption of reasonableness and replace with “due diligence procedures” FICA – repeal student FICA exemption and FICA exemption for certain foreign workers Compensation – Impose a 25% excise tax on compensation in excess of $1 million paid to any tax-exempt organization’s five highest compensated employees E-filing – require all Form 990 series returns to be e-filed Charitable contributions – impose a 2% floor on an individual taxpayer’s charitable deduction, and move AGI limitations from 50% to 40% for donations public charities and from 30% to 25% for donations to most other organizations Corporate tax rate – reduce corporate rate from 35 to 25% and repeal AMT 16 Copyright © 2014 Deloitte Development LLC. All rights reserved. Legislative Update • IRC Sec. 512(b)(13) • Pension Protection Act provided for an exclusion from UBI for interest, annuities, rents and royalties received from a controlled entity if: • The payments received were less than FMV • There was a written, binding contract in place as of August 17, 2006 • This exception had been extended through 12/31/2013 • Veterans Work Opportunity Tax Credit Available • Incentives for employers that hire unemployed veterans as a credit against payroll taxes • Notice 2013-14 • Applies to qualified veterans who began work after November 21, 2011 and before January 1, 2014 • Exempt organizations claim the credit on Form 5884-C 17 Copyright © 2014 Deloitte Development LLC. All rights reserved. Regulatory Update Temporary Regulations for PFIC reporting • Temporary & proposed regulations issued December 31, 2013 under the passive foreign investment company (PFIC) rules of IRC Sections 1291-1298 • Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund • For most taxpayers, Form 8621 will be required annually for each investment in a PFIC for tax years ending on or after December 31, 2013 • Tax-exempt entities will NOT be required to file Form 8621 unless the entities would otherwise be taxable on the PFIC income as UBI 19 Copyright © 2014 Deloitte Development LLC. All rights reserved. Proposed guidance for tax-exempt social welfare organizations • Proposed regulations issued November 29, 2013 • Guidance on the requirements to qualify as a tax-exempt social welfare organization under IRC Section 501(c)(4) • Define the term “candidate related activity,” including: • Communications that expressly advocate for a political candidate or party • Communications within 60 days of a general election • Certain grants and contributions to political organizations • Voter registration drives • Clarifies that the promotion of social welfare would not include this type of activity 20 Copyright © 2014 Deloitte Development LLC. All rights reserved. Final tangible property regulations • Issued on September 13, 2013 • Guidance on application of Section 263(a) to amounts paid to acquire, produce, or improve tangible property • Materials and supplies • Dispositions and general asset accounts • Effective for tax years beginning on or after January 1, 2014 • Taxpayers permitted to adopt for tax years beginning on or after January 1, 2012 • Certain safe harbor and de minimis elections are available 21 Copyright © 2014 Deloitte Development LLC. All rights reserved. 501(r) proposed regulations • IRC Section 501(r) was added to the Code as part of the Patient Protection and Affordable Care Act enacted March 23, 2010 • IRC Section 501(r) imposes additional requirements for hospital organizations: Community Health Needs Assessment (CHNA) (IRC Section 501(r)(3)) Must be conducted at least once every three years Written report and implementation strategy made available to the public Financial Assistance Policy (IRC Section 501(r)(4)) Limitation on Charges (IRC Section 501(r)(5)) Billing and Collection Requirements (IRC Section 501(r)(6)) 22 Copyright © 2014 Deloitte Development LLC. All rights reserved. 501(r) proposed regulations • In June 2012, proposed regulations were issued regarding financial assistance, limitation on charges, and billing and collection • Prop. Reg. 1.501(r)-4 to 6 • In April 2013, proposed regulations were issued regarding CHNA and related excise tax and reporting obligations • Prop. Reg. 1.501(r)-3 and 1.6033-2(a)(2)(ii)(l) • Prop. Reg. §1.501(r)-3 may be relied upon for any CHNA conducted or implementation strategy adopted before the date that is six months after final or temporary regulations are published in the Federal Register • In August 2013, final and temporary regulations were issued regarding method and timing for reporting and paying $50,000 excise tax under Section 4959 for failure to meet CHNA requirements 23 Copyright © 2014 Deloitte Development LLC. All rights reserved. 501(r) proposed regulations • Notice 2014-2 • Confirms that hospitals may rely on the proposed regulations pending the publication of final or temporary regulations • Notice 2014-3 • Contains a proposed revenue procedure that provides correction and disclosure procedure for certain failures to meet the requirements of Section 501(r) • Final or temporary regulations issued for §1.501(r)-1 through §1.501(r)-6 will be immediately effective • IRS and Treasury plan to issue final or temporary regulations for both CHNA and the 2012 regulations at the same time. 24 Copyright © 2014 Deloitte Development LLC. All rights reserved. Supporting Organizations – Proposed, Temporary and Final Regulations for Type III Supporting Orgs • Treasury released regulations 1.509(a)-4 & -4T on December 28, 2012 • Type III - Operated in connection with the publicly supported organization. Type III SO’s may be “functionally integrated” or “non functionally integrated” • Final Regulations Require each Type III supporting organization to satisfy three criteria as part of that test: (1) a notification requirement; (2) a responsiveness test; and (3) an integral part test. 25 Copyright © 2014 Deloitte Development LLC. All rights reserved. Supporting Organizations – Proposed, Temporary and Final Regulations for Type III Supporting Orgs • Notification requirement for all Type III Supporting Organizations, including parent organizations and other supporting organizations • Annual requirement • Due by the last day of the 5th month after the tax year end of the supporting organization • Transition for first tax year ending after December 28, 2012 – notification due the due date of the supporting organization’s tax return, including extensions • Can be provided in electronic or paper format • Type and amount of support provided by the supporting organization to the supported organization • Copy of the supporting organization’s most recently filed Form 990 • Schedule B can be redacted • Copy of governing documents, including amendments 26 Copyright © 2014 Deloitte Development LLC. All rights reserved. Supporting Organizations – Proposed, Temporary and Final Regulations for Type III Supporting Orgs • Two subcategories of Type III supporting organizations: “functionally integrated” and “non-functionally integrated.” • “Functionally integrated” Type III supporting organizations are not subject to an annual distribution requirement • “Non-functionally integrated” Type III supporting organizations, in contrast, are subject to an annual distribution requirement • If not “functionally integrated”, Org must distribute Greater of (1) 85 percent of the supporting organization’s adjusted net income (as defined in Code Section 4942(f)) for the immediately preceding tax year; or (2) three and a half percent of the fair market value of all of the supporting organization’s non-exempt-use assets for the immediately preceding tax year. (Final regulations refer to Temporary Regulations) • 27 Notice 2014-4 providers interim guidance for Type III organizations supporting a governmental entity Copyright © 2014 Deloitte Development LLC. All rights reserved. Rulings and Cases of Note Contributions to SMLLC • Notice 2012-52 • Provided long-awaited guidance that contributions of assets to a SMLLC owned by a charitable organization would be treated as a charitable contribution • Applies to assets such as real estate and other property commonly housed in a SMLLC • Contribution treated as if it was made directly to the charity itself • INFO 2013-0006 • SMLLC owned by a section 501(a) organization is disregarded for federal tax purposes and receives the benefits of its owner’s tax-exempt status • Not required to pay federal tax or file a federal tax or information return, with the exception of employment returns. • Describes LLCs’ treatment with regard to employer identification numbers, transactions that might affect exempt status, organizational documents, and election to be treated as separate from the owner 29 Copyright © 2014 Deloitte Development LLC. All rights reserved. Other Rulings of Note • PLR 201319031 • IRS denies 501(c)(4) exempt status to organization formed to promote health care reform and conduct research on health care system • Operated in commercial manner and primarily for benefit of members rather than community, so not a social welfare organization • PLR 201331008 • IRS denies exempt status to research organization • Funded primarily by membership dues. Members received discounts on nutritional supplements sold by related entity. Organization also provided “grants” funding research by for-profit entities. • IRS held that organization operated for non-exempt purpose of marketing supplements • PLR201328035 • IRS determines that an organization's interest in a for-profit Scorporation, together with the the flow-through allocation of the entity’s “S” tax items subject to unrelated business income tax, would have no effect on tax-exempt status 30 Copyright © 2014 Deloitte Development LLC. All rights reserved. Other Rulings of Note (cont.) • PLR 201328020 • Scholarship v. compensation issue • IRC Section 501(c)(3) organization operates college scholarship program for middle and high school students who meet certain academic and community service requirements • IRS rules that community service aspect does not result in benefit to grantor organization and scholarship is not compensation for services rendered under IRC Sec 117(c) • PLR 201306023 • IRS rules that IRC Section 512(b)(5) capital gains exemption will apply to a series of proposed sales of condominium interests • Found that the taxpayer did not hold the property with the primary intent of selling the property to customers in the ordinary course of a trade or business; not subject to UBI 31 Copyright © 2014 Deloitte Development LLC. All rights reserved. Other Rulings of Note (cont.) • PLR 201251019 • IRS rules that annual read-aloud program directed at children was a trade or business, was regularly carried on, and was substantially related to organization’s exempt purpose of promoting literacy, reading and imagination in children • Found to be “regularly carried on” even though event only conducted on weekends during two months prior to Christmas for a total of 11 days per year 32 Copyright © 2014 Deloitte Development LLC. All rights reserved. Certain Cases of Note The Vancouver Clinic, Inc. v. US (2013 ) • Federal District Court in Washington State concluded that advances paid by a clinic to new physicians constituted compensation rather than loans at the time of payment despite the requirement of repayment with interest if they did not remain at the clinic for five years; the Court concluded that the parties did not intend repayment and that the requirement functioned essentially as a liquidated damage provision • Loan Agreement required 5 year employment • Over $1.5M was advanced from 2007-2009 with an overwhelming majority forgiven 33 Copyright © 2014 Deloitte Development LLC. All rights reserved. Certain Cases of Note (cont.) U.S. v. Quality Stores, Inc., (Sup Ct 03/25/2014) 113 AFTR 2d 2014-604 • U.S. Supreme Court held that severance payments were subject to FICA taxes, reversing the Sixth Circuit Court of Appeals decision • Case addresses severance payments made to workers who were involuntarily terminated as part of a Chapter 11 bankruptcy, which were not attributable to rendering of any particular employment services • Supreme Court concluded that severance payments fell within Code Sec. 3121's broad definition of “wages” for FICA tax purposes • Court rejected taxpayer's argument that payments' tax treatment was altered by a special withholding provision in Code Sec. 3402 regarding supplemental unemployment compensation benefits 34 Copyright © 2014 Deloitte Development LLC. All rights reserved. Certain Cases of Note (cont.) Ramirez v. Commissioner (T.C. Summ. Op. 2013-38) • Tax Court finds that employee of Univision radio station is an independent contractor with regard to earnings from off-air appearances for third party sponsors • Tax Court analyzed “degree of control” exercised by the principal over the details of work • Court cited two university cases regarding “degree of control”: • Reece v. Commissioner (T.C. Memo. 1992-335) – university professor also taught corporate seminar classes on his own time. Professor = employee, seminars = independent contractor • Robinson v. Commissioner (T.C. Memo. 2011-99) – vocational instructor at university who prepared own course materials = independent contractor 35 Copyright © 2014 Deloitte Development LLC. All rights reserved. IRS Information Legal Same-Sex Marriages Recognized for Federal Tax Purposes • IRS and Treasury ruled that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes • Revenue Ruling 2013-17 issued on August 30, 2013 • Notice 2013-61 issued on September 23, 2013 • FAQs for Registered Domestic Partners and Individuals in Civil Unions • http://www.irs.gov/uac/Answers-to-Frequently-Asked-Questionsfor-Registered-Domestic-Partners-and-Individuals-in-Civil-Unions • FAQs for Individuals of the Same Sex Who Are Married Under State Law • http://www.irs.gov/uac/Answers-to-Frequently-Asked-Questionsfor-Same-Sex-Married-Couples 37 Copyright © 2014 Deloitte Development LLC. All rights reserved. Form 990: 2013 significant changes • Part IV, Line 2 clarifies that an organization filing Schedule B can limit the contributions it reports on Schedule B using the greater-than-$5,000/2% threshold only if it checks the box on Schedule A, Part II, Line 13, 16a or 16b. • Part VIII, Line 1 clarifies that “contributions” include neither donations of services nor discounts provided on sales of goods in the ordinary course of business. • Schedule A clarifies the requirements for functionally integrated and non- functionally integrated Type III supporting organizations, including the transition rules for how those organizations can meet the integral part test for tax year 2013. • Schedule H, Part I, line 7 community benefit table instructions now require that restricted grants received by the hospital to be used for community benefit must be reported as direct offsetting revenue in Part I, line 7, column (d). • Schedule H, Part I instructions clarify that financial assistance does not include self-pay or prompt pay discounts. • Schedule J, Part I, Line 4a clarifies that a severance payment includes a payment pursuant to a separation agreement voluntarily entered into by the parties. (Not just involuntary separation agreements.) • Schedule L clarifies that investment management or service fees, but not the value of investments, are reportable as business transaction amounts in Part IV. 38 Copyright © 2014 Deloitte Development LLC. All rights reserved. Form 990: 2013 significant changes • For a full list of changes, refer to the IRS website: • http://www.irs.gov/Charities-&-Non-Profits/CharitableOrganizations/2013-Form-990-and-990-EZ:-Significant-Changes 39 Copyright © 2014 Deloitte Development LLC. All rights reserved. Form 990-T: 2013 significant changes • 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. • A discussion of the rules for recognition of gain or less upon disposition of 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. • 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). • 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). • Clarification that an organization need not file a Form 990-T in order to preserve an NOL carryover has been added under Line 31 (net operating loss deduction). • Information regarding electronic filing of FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), has been added under Part V, Line 1 40 Copyright © 2014 Deloitte Development LLC. All rights reserved. IRS Information Form 1023 sample questions • Sample questions used by IRS Exempt Organization specialists for review of Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code • http://www.irs.gov/Charities-%26-Non-Profits/CharitableOrganizations/Exempt-Organization-Sample-Questions Public disclosure requirements • IRS released FAQs regarding public disclosure requirements for annual returns and exemption applications • http://www.irs.gov/Charities-&-Non-Profits/Exempt-OrganizationPublic-Disclosure-and-Availability-Requirements 41 Copyright © 2014 Deloitte Development LLC. All rights reserved. IRS Website Links • Charitable and Nonprofit Entities • http://www.irs.gov/Charities-&-Non-Profits • Exempt Organization Newsletter • http://www.irs.gov/Charities-&-Non-Profits/Current-Edition-ofExempt-Organizations-Update • Workshops and webinars • http://www.irs.gov/Charities-&-Non-Profits/Calendar-of-Events • Government Entities • http://www.irs.gov/Government-Entities/Federal,-State-&-LocalGovernments 42 Copyright © 2014 Deloitte Development LLC. All rights reserved. QUESTIONS? 43 About this presentation This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation. 44 About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting. Copyright © 2014 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu Limited Copyright © 2014 Deloitte Development LLC. All rights reserved.